Company Overview: Timken Company (NYSE: TKR) is engaged in manufacturing power transmission and engineering bearings products. TKR serves various market sectors, including automotive, industrial distribution, renewable energy, aerospace, rail etc.

      

­­­­­­TKR Details

Material Business Updates

TKR Positions Itself in Fast-Growing Solar Energy Industry: On 30 August 2021, TKR announced that Cone Drive (TKR’s subsidiary) has continued building momentum in the solar energy industry’s original equipment manufacturers (OEMs) and subsequently assumed a three-fold demand for solar energy. As a result, TKR expects double-digit top-line growth in the sector for the next three to five years.

TKR Closes Acquisition Deal with Intelligent Machine Solutions (iMS): On 23 August 2021, TKR competed to acquire iMS, a manufacturer in automation solutions and industrial robotics. Apart from diversification of revenue stream, iMS also complements Timken’s Rollon® linear motion product range.

Historical Financial Trend:

TKR illustrated sustainable historical growth while keeping the value proposition intact. The Operating revenues have been growing with consistent growth in net income. Operating revenues grew at a 7.1% CAGR (FY16 – FY20).

Figure 1: Historical Financial Overview

Source: Company Reports, Analysis by Kalkine Group

First Quarter FY21 Performance:

Figure 2: Quarterly Performance

Source: Company Reports, Analysis by Kalkine Group

Full-Year FY20 Performance:

Figure 3: Annual Performance

Source: Company Reports, Analysis by Kalkine Group

Top 10 Shareholders:

The top 10 shareholders together form ~41.27% of the total shareholding. In addition, The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A., hold a maximum stake in the company at ~­­­8.65% and ~6.72%, respectively.

Figure 4: Top 10 Shareholders

 

Key Metrics:

Consistent sales volume growth across most end-market sectors has translated into long-term sustainable growth levels. In addition, operating margins have remained relatively steady at an aggregate level. As a result, TKR’s profitability and return status remain stable despite recent market disruptions.

Figure 5: Key Financial Metrics

Source: Analysis by Kalkine Group

Outlook:

Exponential growth Witnessed in Wind and Solar: In 2020, the wind and solar market inclined exponentially by +50% YoY. Amidst rising demand, TKR plans +US$75 million capital investment through early 2022 into building renewable energy capabilities.

2021 Estimates: TKR guidance suggests ~12% growth in net sales and free cash flow generation of more than US$300 million for FY21. Adjusted EPS estimates are expected to wander in the range of US$4.70- US$5.10/share. Organic revenue is estimated to incline by ~9% in-process and mobile industries.

TKR’s outgrowth initiatives and industry trends: TKR holds an active pipeline of programs with expanding product line in renewables. In addition, the increasing size and installation rate of wind turbines unfold opportunities to showcase market dominance.

Key Risks:

High competition in the bearing industry results in significant price wars for bearing products, which profoundly impacts top-line and profitability. In addition, TKR’s business is capital intensive; hence, any derail in macroeconomic aspects, especially in the Industrial sector, may force TKR to suspend or curtail operations, resulting in high impairment charges and restructuring expenses.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Stock Recommendation:

TKR has delivered 3-month and 6-month returns of ~-17.759% and ~-7.111%, respectively. The stock is trading above the average of the 52-week high price of US$92.39 and the 52-week low price of US$52.51. The company has been valued using the EV/Sales multiple-based illustrative relative valuation method and has arrived at a low double digit-upside target price. The company might trade at some premium compared to its peers’ average EV/Sales (NTM trading multiple), considering high market dominance in the renewable sector and a well-diversified portfolio across process and mobile industries. For the purpose of valuation, few peers like Federal Signal Corp (NYSE: FSS), Gorman-Rupp Co (NYSE: GRC), Flowserve Corp (NYSE: FLS), have been considered. Considering the growth potential in the renewable industry, financial resilience due to product diversification, prudent liquidity position, and valuation, we give a “Buy” recommendation on the stock at the current market price of US$73.54, down by ~2.06%, as on 31 August 2021.

TKR Daily Technical Chart (Source: REFINITIV)

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.