TWI: Titan’s accretive acquisition of Carlstar supports an increase of our price target to $20.00 per share.
NYSE:TWI
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Carlstar Acquisition
On February 29, 2024, Titan (NYSE:TWI) announced the acquisition of Carlstar Group LLC for approximately $296 million in a transaction consisting of cash and stock, which closed on the same day. The transaction price represents a multiple of approximately 4x Carlstar's full year 2023 adjusted EBITDA of $73 Million and is expected to be immediately accretive to earnings per share and operating margins in 2024.
Carlstar is a global manufacturer and distributor of specialty tires and wheels for a variety of end-market verticals including outdoor power equipment, power sports, trailers, and small to midsize agricultural and construction equipment. Carlstar operates three manufacturing facilities in the U.S. and one in China. Carlstar also internally manages twelve distribution facilities on a global basis. Carlstar's total 2023 revenues were approximately $615 million.
Carlstar brings significant new customer relationships in multiple channels, including leading wholesale distributors, national retailers, commercial servicing dealers, and OEMs. The acquisition adds further diversification to Titan's product portfolio, especially in outdoor power equipment, power sports and high-speed trailers, where Titan does not currently have a presence.
The combination of Titan and Carlstar will create what the company believes to be the largest pure play specialty tire manufacturer covering commercial and consumer end markets. Carlstar expands Titan's existing wheel/tire assembly capabilities, providing further value for existing and new customers.
The acquisition also adds four manufacturing facilities - Aiken, SC; Jackson and Clinton, TN; and Meizhou, China – along with twelve internally managed distribution centers in North America and Europe.
Transaction details include:
➢ Purchase price was approximately $296 million which consisted of $127 million of cash and $169 million of TWI equity (approximately 11.9 million shares of Titan's stock). The volume-weighted average price per share for the transactions was $14.43.
➢ To fund the cash portion of the transaction, Titan entered into a new domestic credit facility, effective February 29, 2024. The new credit facility, with Bank of America as agent, was increased to $225 million from $125 million previously. The credit facility has a five-year term with terms similar to those contained in the previous credit facility, as well as other enhancements to further improve availability within the borrowing base.
➢ The acquisition multiple is approximately 4x Carlstar's FY 2023 Adjusted EBITDA and is lower with expected synergies.
➢ Following the closing of the transaction, Titan's proforma net debt to Adjusted EBITDA leverage remained at approximately 1.3x of FY 2023 Adjusted EBITDA for the combined company, allowing the company continued flexibility to pursue its share repurchase program while also prioritizing future debt repayments and growth opportunities.
Titan President and CEO Paul Reitz said, "I am delighted to announce our acquisition of Carlstar, which closed this morning. This is a transformative deal for Titan as it expands our manufacturing and distribution footprint while also further diversifying our product portfolio and key customer relationships, making Titan a "one-stop shop" within the specialty wheel and tire space. Carlstar's exciting catalogue of products are utilized primarily by consumers, which is a much different market than Ag. In outdoor power equipment and power sports, Carlstar wheels and tires can be found on products such as ATV/UTVs, lawn mowers and golf carts. Their tires can also be found on high-speed trailers where performance is a key differentiator. In the Ag market, Carlstar products are typically found on equipment such as backhoes and small skid-steer units, giving Titan a best in class offering.”
Fourth Quarter 2023 Results
Net sales for the 4th quarter ending December 31, 2023, were $390.2 million, compared to $509.8 million in the prior year period in 2022. The decline in sales was across all segments and primarily driven by sales volume decrease caused by elevated inventory levels at our customers in the Americas, particularly OEM customers. In addition, there were lower levels of end customer demand in small agricultural equipment and economic softness in Brazil. Net sales change was also impacted by negative price, primarily due to lower raw material and other input costs, most notably steel, and unfavorable foreign currency translation of (2.0%).
Gross profit for the 4th quarter was $58.3 million, compared to $76.7 million in the comparable prior year period. Gross margin was 14.9%, which was consistent with the 15.0% gross margin in the prior year period. The company was able to maintain margins as a result of lower production input costs and continued productivity initiatives across global production facilities, despite headwinds from the unfavorable impact of fixed cost absorption on a lower revenue base.
Selling, general, administrative, research and development (SGARD) expenses for the 4th quarter of 2023 were $35.2 million, compared to $33.3 million for the comparable prior year period. For the year ended December 31, 2023, SGARD expenses of $147.5 million increased 3.0% from $143.2 million the prior year due to normal inflation within the various businesses.
Operating income in the 4th quarter of 2023 was $20.7 million, or 5.3% of net sales, compared to $40.9 million, or 8.0% of net sales, for the 4th quarter of 2022. The was a net loss of ($2.6) million in the 4th quarter compared to net income of $42.0 million in the prior year period.
However, the company experienced several extraordinary items in the quarter, the largest being a $21.9 million foreign exchange loss related to the Argentinian peso as the company adopted hyperinflation accounting rules. In addition, the company recorded a restructuring charge of $1.6 million related to workforce reductions at a European facility.
Adjusted net income for the 4th quarter was $21.0 million, or $0.34 per share, compared to $27.7 million, or $0.44 per share, in the prior year period. Adjusted EBITDA was $38.1 million compared to adjusted EBITDA of $52.8 million in the 4th quarter of 2022.
On a segment basis for the 4th quarter, Agricultural net sales declined 29.9%, Earth Moving/Construction net sales declined 18.7%, and Consumer net sales declined 1.6%. Gross margins improved in the Agricultural and Consumer segment but declined in the Earth Moving/Construction segment.
The company maintains a safe and liquid balance sheet with cash of $220.3 million and total debt of $426.1 million as of 12/31/23. Working capital was net positive at $504.4 million at the end of 2023. The company continues to generate substantial free cash flow, which totaled $118.4 million for the year. Primary uses of free cash flow include $20.9 million in debt repayments and $32.6 million in share buybacks.
The company’s debt is comprised primarily of $396 million in 7.0% secured notes with a maturity in 2028. Although total debt levels are expected to increase due to the Carlstar acquisition.
Valuation and Estimates
We adjust our 2024 estimates due to the Carlstar acquisition. Our 2024 full year EPS estimate is $1.72, and our total revenue estimate is $2.23 billion. That puts TWI stock selling at 7.1x current year EPS estimates. We have not introduced formal 2025 estimates at this time as we await further management commentary in 2024.
We increase our price target to $20.00 based on the expectations that Carlstar will be an accretive acquisition as well as considering the effects of the reduction of company-wide cyclicality on our Discounted Cash Flow calculation.
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