After last week’s carnage on the equity markets, I wanted to update you on my 15 June prediction that the FTSE 100 would suffer a correction of 10% or more. Clearly the US housing and subprime mortgage markets are in dire straits, but this represents just a fraction (albeit an increasingly significant one) of the global economy. Although future GDP growth rates will be trimmed, they shouldn’t turn negative as continued strong expansion in Asia, together with steady progress in Europe, should offset short-term US weakness. The major indices had run ahead of themselves because of cheap debt, investor complacency and a booming merger and acquisitions market, so they needed to let off steam. If I’m right, the FTSE 100 will continue to soften, but will be supported by economic fundamentals and trade at around 6,000 for the rest of 2007. Hence I suspect this is a painful correction rather than a full-blown crash. Given this cautious – yet not cataclysmic – backdrop, one particular stock appears to be a good investment due to the health of the global mining and construction markets:
Titan Europe (Aim:TSW), tipped as a BUY by Seymour Pierce
Following its transformational e276m acquisition of Italtractor (ITM) in December 2005, Titan is now a leading manufacturer of off-highway wheels and undercarriages for heavy-duty vehicles, such as diggers, crawlers and tractors. Around 70% of revenues are generated from construction and mining, with the rest largely coming from military and agricultural customers. It also owns a 36% stake in Wheels India Ltd.
A reliable leading indicator of Titan’s prospects is provided each quarter by Caterpillar (CAT), which is one of its most important customers, accounting for about 10% of sales. On 20 July, Caterpillar reported record sales, up 7% from the previous year. Although it experienced weakness in North America (notably in residential property), the firm reiterated its full-year guidance and said it was “more confident than ever” of reaching its goal of 15%-20% growth a year in earnings per share to 2010.
This upbeat view was echoed by Titan last week at its pre-close trading statement. It is also feeling the impact of the US slowdown and the weak dollar, but even so, first-half revenues at £201m were still up 4% on 2006, driven by robust demand in other territories. The divisional split was £128m (or 64%) undercarriages and £73m (or 36%) wheels. The board also expects to meet first-half forecasts, with strong profit margins in the second half, and it “looks forward to the future with confidence”. The US accounts for around 12% of turnover.
So far so good, but what are the risks? In the past, construction and mining have been notoriously cyclical, so Titan should be seen as a higher-risk opportunity. But with commodity prices at historically high levels and with Middle Eastern nations still moving ahead in terms of building civil infrastructure, momentum should be maintained. And even though raw material (eg, steel) prices have risen, it is expected that most of this cost inflation will be passed on to customers by the year-end. Finally, while net debt stands at around £120m, interest payments are covered a manageable four times.
Seymour Pierce expects 2007 sales and underlying earnings per share of £385m and 24.7p respectively, rising to £397m and 31.7p in 2008, as further synergies kick-in from the ITM deal. Assuming these targets are met, then the shares trade on a p/e ratio of less than ten; good value for the more adventurous investor. Interim results are due in September.
Recommendation: SPECULATIVE BUY at 231p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments