BUY Recommendation for Titan
23 March 2000
Dirks & Company Initiates Research Coverage With a BUY Recommendation for Titan Motorcycle Company of America
NEW YORK, March 23 The following is being issued by
Dirks & Company, Inc., a member of the National Association of Securities
Dealers, CRD number 42185:
Recent Price: $2 1/4 Market Cap: $40.6 million
52 Week Range: $2 - $5 Insiders Own: 9.9 million shares (56%)
Shares Outstg: 17.1 million Web site: http://www.titanmotorcycle.com
Gross Profit Pretax Mkt Cap to
Year Sales Amt Mgn Income EPS P/E Annual Sales
(mm) (mm) (mm)
1998 $27.9 $4.2 15% $0.2 $0.01 n/m 1.5 times
1999 (e) 29.0 2.9 10% (4.0) (0.25) n/m 1.4 times
2000 (e) 55.0 10.0 18% 2.0 0.10 24 times 0.7 times
2001 (e) 80.0 18.5 23% 7.5 0.30 8 times 0.5 times
2002 (e) 100.0 26.0 26% 11.5 0.50 5 times 0.4 times
2003 (e) 120.0 34.0 28% 18.0 0.75 3 times 0.3 times
Change 2003 over 1998:
35% 50% 90 times 75 times
--per annum--
Summary & Investment Conclusion
Titan Motorcycle Company of America is a premier
manufacturer & distributor of high-end (expensive), heavyweight
(over 650 cc engines), custom-built motorcycles worldwide. The Company's
90 dealerships, a problem-free and expanded production facility, and a robust
industry environment all combine to augur well for operating results in 2000
and beyond. Our earnings model (page 4) projects Titan increasing top-line at
20% to 25% per annum, and bottom-line (EPS) climbing at least 50% per annum.
The number of registrations for heavyweight motorcycles increased
16% per annum from 1993 to 1998 and is forecast to increase about 13% per
annum from 1999 to 2003, when 1 million new vehicles are expected to be
registered worldwide, a record (see Table III). Titan should fully participate
in these positive industry fundamentals, as the Company continues to garner
awards and international product recognition at motorcycle trade shows in
North America, Europe and Japan, and continues to establish key corporate
sponsorships with companies that possess the same demographics as Titan.
Our target stock price for Titan is $5/share in the short term (within six
months), with a longer term stock price objective of $10/share. At
$5/share, Titan's market valuation of $85 million approximates one-times next
year's sales... and a P/E ratio of merely 17 times that year's EPS. Moreover,
at a $5/share price, the universe of potential institutional investors
enlarges considerably, which brings us to the longer-term price objective of
$10/share. Even at our longer-term price objective, a $10 stock price
translates into $170 million market capitalization, or two-times next year's
sales and 33 times earnings. These are defensible valuations for a Company
whose EPS is increasing at 50% per annum and whose Return on Equity
approximates 30%.
History & Nature of Business
Titan Motorcycle of America is a designer and manufacturer of high-end,
custom-built heavyweight motorcycles, selling to individuals and motorcycle
dealerships worldwide. The Company's principal demographic is simple:
35 to 55 year old males whose annual income is at least $70,000. Hence, a
truly global market awaits Titan.
The genesis of Titan Motorcycle Company of America dates to 1994 and is
based upon the business strategy of customizing standard-issue motorcycles by
manually upgrading with higher performance (and in some cases specifically
engineered) parts. In order to commercialize this business strategy, in 1994,
Patrick Keery, now Titan's President, custom-built six prototype motorcycles,
upgrading standard, "off-the-shelf" and mass-produced motorcycles that he
would then resell for $30,000 to $50,000 apiece, post-upgrade. These six
Prototypes were displayed at a California Motorcycle Trade Show that year
where most motorcycles on display were in the $15,000 to $20,000 price range.
Mr. Keery returned from this trade show with more than two dozen orders
for custom built, heavyweight motorcycles. Titan was incorporated the
following year. Mr. Keery's father, Frank, joined Titan as its Chairman and
CEO (and the Company's initial banker). A full-time Chief Financial Officer,
Robert Lobban, was recruited in 1997. As illustrated in Table I below, from
those six units in 1994, growth in both unit production and sales volume has
been impressive.
Table I
Units Produced Sales # of Distributors Facility Size
(mm) worldwide (USA)
1994 6 -- -- --
1995 24 $0.6 2,000
1996 181 5.0 15,000
1997 500 13.1 40,000
1998 1,001 27.9 60,000
1999 (e) 1,200 29.0 72 (62) 90,000
2000 (e) 2,450 55.0 90 (65) 120,000
2001 (e) 3,600 80.0 120,000
2002 (e) 4,600 100.0 120,000
2003 (e) 5,500 120.0 120,000
Last year was a foundation year for Titan, for three reasons:
1. The Company was in the process of expanding into a considerably larger
facility, which disrupted production;
2. While the Company was in the process of ramping up for a higher level
of unit production, it was discovered that several critical suppliers,
previously able to accommodate Titan's smaller unit production volumes,
were unable to deliver at higher product volumes -- either on time, or
in the quality Titan needed;
3. In March 1999, the Company introduced the Phoenix line of motorcycles,
whose average selling price is $20,000 per unit (versus $30,000 average
per unit price for the premium lines).
Market research indicated that demand existed for a Titan custom-built
motorcycle in the $20,000 range... less expensive than Titan's Premier lines
but at the upper end of the more hotly competitive mid-price ranged
motorcycles. Indeed, Titan even had a backlog of orders to produce the
less-expensive Phoenix model configuration. The Phoenix Launch
(in March 1999) was timed to ramp up smartly by the summer. Instead, however,
the Phoenix-Launch converged with disrupted production lines and inadequate
supplies of parts.
Titan utilized these 1999-events to dramatically upgrade its
sources-of-supply chain... in some cases purchasing from overseas
suppliers... and at the same time, standardize portions of its customized
manufacturing process without sacrificing Titan's "hand-built" image. To
accommodate the latter, Titan developed a "cell manufacturing process" wherein
a small team of "artisans" build the custom vehicle, largely assembling parts
purchased from outside suppliers, thereby reducing time-to-manufacture as well
as improving inventory utilization. Titan's principal suppliers are listed in
Table II below.
Table II
Principal Suppliers
Vendor (supplier since) Location Parts Purchased
S&S Cycle (1995) Viola, WI Motors & motor parts
Daytec (1995) Hesperia, CA Frames & sheet metal
Custom Chrome (1995) Morgan Hill, CA Misc. Parts
Performance Machine (1995) La Palma, CA Wheels, rotors, brakes
Jim's USA (1997) Camarillo, CA Transmissions & motor
parts
Allied (1999) Phoenix, AZ Metal fabrication parts
Urschel Mfg. (1996) Scottsdale, AZ Forward controls & pegs
Zodiac Int'l (1996) ROC (Taiwan) Tin parts (gas & oil
tanks)
Alum Co (1997) Phoenix, AZ Machined aluminum parts
Metzler (1999) Seattle, WA Tires
Forecast of Operating Results
Overall, we believe Titan has the ability to achieve longer-term annual
sales growth of 20% to 25%, and EPS growth of 50% per annum. This outlook is
built upon a challenging 1999. We estimate that the Company incurred at least
$1 million in one-time expenses in 1999 associated with its move into larger
production facilities, an unavoidable expense in order for the Company to ramp
up to the $100 million in sales level. In addition, we estimate that another
$2 million represents foregone gross profit by virtue of sales lost or delayed
due to parts outages. Taken together, these account for most of the $4 million
in losses expected for 1999, on approximately flat sales volume ($30.0 million
vs. $27.9 million). With production and supply glitches now corrected, and a
greatly expanded (and international) dealership network in place, sales are
projected to almost double this year to $55 million, increasing another 45% in
2001, then 20% - 25% per annum thereafter.
Gross Profit Margins consequently suffered from those 1999 events,
dropping to an estimated 10% in 1999. Gross Profit Margins are projected to
rebound smartly to 18% in 2000, then reach the mid-20% range beyond. We expect
Overhead Expenses in 2000 to increase less dramatically (by 15%, to
$7 million from $6 million) reflecting the already higher level of overhead
incurred in 1999. Beyond, Overhead Expenses are projected to increase about in
line with Sales growth. Bottom line, we project EPS of $0.20 in 2000, and
increasing thereafter at the rate of 50% per annum.
Earnings Model for Titan Motorcycle of America
* Amounts in millions, except per share figures and percentages
---------------Projected---------------
1998 1999 2000 2001 2002 2003
Sales
Premium $25.2 $19.0 $19.0 $25.0 $31.0 $36.0
Phoenix -- 7.0 29.0 41.0 47.0 53.0
Internat'l 1.7 2.0 3.5 8.0 12.0 14.0
Parts/Acc's 1.0 1.0 2.0 3.0 4.0 5.0
e-commerce -- -- 1.5 3.0 6.0 12.0
Total 27.9 29.0 55.0 80.0 100.0 120.0
GP Mgn 15% 10% 18% 23% 26% 28%
Amount 4.2 2.9 10.0 18.5 26.0 34.0
Overhead 3.5 6.0 7.0 10.0 13.5 15.0
EBIT 0.7 (3.1) 3.0 8.5 12.5 19.0
Interest 0.5 0.9 1.0 1.0 1.0 1.0
P-tax Inc 0.2 (4.0) 2.0 7.5 11.5 18.0
Tax Prov. -- -- -- 2.0 3.0 5.0
Net Inc 0.2 (4.0) 2.0 5.5 8.5 13.0
EPS $0.01 ($0.25) $0.10 $0.30 $0.50 $0.75
Titan's Balance Sheet highlights appear below. The Company reports a hard
book value (i.e. no Goodwill) of almost $0.50 per share as of last October.
Based upon our earnings model, this increases to $0.70 per share this year,
and to over $1.00 per share next year. At a current stock price of almost
$2.50 per share, such a valuation represents two and one half times next
year's book value -- a defensible valuation for a Company whose EPS is
increasing at least 50% per annum. Net Working Capital, which increased 50% in
the first nine months of 1999, is more than double Shareholders' Equity.
Return on Equity over each of the next five years approximates 30%-35%, and is
reflected in our earnings model.
Balance Sheet Highlights (Amounts in millions)
Year End 1998 October
(1/2/99) 1999
Current Assets $17.2 $23.8
Current Liab's 4.7 6.0
Net Working Capital 12.5 17.8
Fixed Assets 1.1 2.0
Other Assets 0.1 0.1
Total Net Assets 13.7 19.9
Represented By:
Long Term Debt 8.2 11.5
Shareholders' Equity 5.5 8.4
Total Capitalization 13.7 19.9
==================================================================
Industry Environment & Outlook
The market for heavyweight motorcycles has increased, on average, 16% per
annum for most of this decade. Almost 586,000 heavyweight motorcycles were
registered worldwide in 1998, increasing 13% to an estimated 660,000 units in
1999. Beyond, based on worldwide growth of 13% per annum, worldwide
registrations appear poised to surpass the 1 million unit level by 2003
(see Table III).
Given that motorcycle expenditures in the upper-end price ranges are
clearly discretionary consumer expenditures, demand for this particular
discretionary purchase has steadily increased throughout this decade-long
economic expansion. Growth in the USA market has been the most consistent,
however, the Japan/Australia market underwent a sharp structural upward move
in 1997, just before the economic collapse in a number of Asian countries.
Europe is expected to exhibit a slower, single-digit long-term growth, with
the USA market eventually surpassing Europe (in terms of the absolute number
of units registered).
Table III
New Heavyweight Motorcycle Registrations Worldwide (in thousands of Units)
North Japan/
America Europe Australia Total
% Chg % Chg % Chg % Chg
1993 109.5 19% 129.8 1% 31.8 13% 271.1 9%
1994 124.9 14% 128.7 (1%) 34.0 7% 287.6 6%
1995 140.3 12% 139.9 9% 35.5 4% 315.7 10%
1996 178.5 27% 224.7 61% 37.4 5% 440.6 40%
1997 205.4 15% 250.3 11% 58.9 57% 514.6 17%
1998 246.2 20% 270.2 8% 69.2 17% 585.6 14%
1999 (e) 280.0 300.0 80.0 660.0 13%
2000 (e) 320.0 330.0 95.0 745.0 13%
2001 (e) 360.0 370.0 110.0 840.0 13%
2002 (e) 410.0 410.0 130.0 950.0 13%
2003 (e) 470.0 450.0 150.0 1,070.0 13%
Sources: Harley Davidson 10-K's (1993-1999); Estimates courtesy of
Ray Dirks
Average Annual Growth:
1993 - 1998 18% 15% 17% 16%
1999 - 2003 (e) 14% 8% 17% 13%
Management
Frank Keery (age: 57) is Titan's Chairman and CEO. Mr. Keery has an
engineering degree from the University of Detroit (1966) and an MBA from
Western New England University (1966). Prior to Titan, Mr. Keery was a
Principal in The Company Store, a mail order company with $80 million is
annual sales (that business was sold prior to joining Titan, however, the key
point is that managing a multi-million dollar business is not new to the
Company's CEO). For the previous 17 years, Mr. Keery was employed by
Rogers Corp, an AMEX-listed company, involved in the manufacture and marketing
of specialty materials and components to the automotive and electronics
industries.
Robert Lobban (45) is Titan's Chief Financial Officer. He received an
engineering degree from Northeastern University (1977) and an MBA from Harvard
(1981). After Harvard, Mr. Lobban's first job was with Rogers Corp.,
eventually becoming Corporate Controller. From 1988 to 1994, Mr. Lobban was a
consultant with Gemini Consulting, eventually becoming a Principal of that
company. Most of Mr. Lobban's client-base consisted of Fortune 500 companies.
Pat Keery (31), son of Frank Keery, is Titan's President. He is a 1992
graduate of Arizona State University, where he obtained a degree in finance.
After a brief term as a financial analyst with a consulting company, in 1993,
Pat Keery became the owner/ operator of Paragon Custom Cycles in Phoenix,
Arizona. Paragon was an assembler and rebuilder of heavyweight motorcycles,
and formed the commercial basis that eventually launched Titan's business
strategy in 1995.
Important Note: The opinions expressed herein reflect the judgment of the
author and are subject to change. Facts have been obtained from sources
believed to be reliable, but are not guaranteed. Neither the information nor
any opinion expressed herein constitutes a solicitation by Investor's Almanac
for the purchase or sale of any securities. Investor's Almanac, its principals
and employees may, from time to time, have a short or long position in the
securities of companies mentioned herein. Investor's Almanac is not a
broker/dealer.
CONTACT: Ray Dirks of Dirks & Company, Inc., 212-832-6700, or
800-774-0778, or fax, 212-486-4857, or ray@raydirks.com.