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Farm related companies will perform strongly MBA student predicts

Sunday, May 3, 2009

Some of the best balance sheets in the country are right here in the heartland.

The global economy is struggling to shed debt, but farmers are in a much better position, said Nathan Henderson, a graduate student at the University of Wisconsin-Madison.

Debt represents only about 10% of farmers' assets, a historic low, according to the U.S. Department of Agriculture.

"If the economy stays weak, agriculture will be pretty stable - people need to eat," said Henderson, who is pursuing an MBA in finance and is participating in the Applied Security Analysis Program at the Wisconsin School of Business.

If the economy strengthens, farm-related stocks may not be the top performers, but they should do well in an environment where a weakening dollar pushes commodity prices higher, Henderson said.

Meanwhile, farmers aren't having trouble getting credit for seed, fertilizer and equipment because farm equipment company financing arms and community banks are fighting for their business, he said.

That bodes well for companies that sell to farmers.

Titan International Inc. (TWI), Quincy, Ill., makes wheels and tires for agricultural, construction and mining equipment.

Its shares traded as high as $37.99 last summer, and dropped as low as $3.04 amid declines in prices of commodities like oil, copper and corn.

But, Henderson says, Titan is better positioned than many whose fortunes are tied more directly to commodities markets.

"As long as the farmers are farming their fields, Titan doesn't care if the price of corn is $7 or $4 a bushel. It will sell its tires," he said.

The markets have slowed for some of Titan's products, like smaller tractors and construction equipment.

The company also had an equipment malfunction in the fourth quarter that stalled production of its relatively new 63-inch tires for mining trucks.

Titan's costs have dropped because oil and steel prices declined, and as much as 65% of its revenue comes from its more stable aftermarket business, Henderson said.

Increases in gold and copper prices have helped boost sales to related industries, and sales to big agricultural equipment makers have risen, he said.

"Titan's agricultural sales will be up in 2009, and it will have a better mix because it's selling more higher-margin products," he said.

The higher-margin, 63-inch tires should help that trend continue. They're used on trucks that producers in Canada's vast oil sands use for moving sand to and from production areas. Falling oil prices have halted capacity expansion in the oil sands, but Suncor, one of the biggest producers there, has said it will increase production by 32% this year, Henderson said.

The biggest risks Henderson associates with Titan shares are the possibility of continuing equipment problems or the threat that bad weather might reduce crop production, he said.

He and his classmates hold these shares in the Applied Security Analysis Program's portfolio, and he says they could go as high as $12 in the next three to six months.