The Timken Company

TKR Details

The Timken Company (NYSE: TKR) is a top global industrial player and is engaged in designing a growing portfolio of engineered bearings as well as power transmission product brands.

Q2FY21 Result Performance (For the Second Quarter Ended 30 June 2021)

• The company has posted record sales of $1.06 billion in Q2FY21, up by 32.3% YoY supported by strong organic growth across most end-market sectors along with the advantage of currency translation and the acquisition of Aurora Bearing.
• It generated an increase in net income to $104.8 million from $61.9 million in the pcp led by the benefits of higher volume as well as favorable manufacturing performance and currency. However, the impact of higher selling, general and administrative expenses, higher material and logistics costs, and unfavourable mix restricted the pace of growth.
• It has generated robust cash from operations of $147 million and a free cash flow of $116 million. The company’s net debt-to-adjusted EBITDA for the quarter stood at 1.7x which reflects a comfortable debt position for a company of capital intensive nature.
• It has declared a quarterly cash dividend of 30 cents per share.

Key Data (Source: Company Reports)

Acquired Intelligent Machine Solutions

The company, on 20 August 2021,  acquired Intelligent Machine Solutions (iMS) that deals in manufacturing industrial robotics and automation solutions. This particular acquisition aided the company in expanding along with complementing its Rollon® linear motion product range in Industrial Robotics with larger and heavy-duty applications that comprise of seventh-axis robotic transfer units (RTUs) and gantry systems.

Outlook

The company expects to achieve earnings per diluted share of $5.00 to $5.30 and adjusted earnings per diluted share of $5.15 to $5.45 in 2021 on a GAAP basis. It has also guided 2021 revenue growth of around 19% at the midpoint in total compared to 2020.  Driven by solid customer demand across most sectors, it is planning to sustain the industrial expansion through 2022. The company is hopeful of delivering record revenue and earnings per share in 2021 despite the expected supply chain and other cost pressures to persist through the balance of the year.

Besides, the company is undertaking targeted investments to boost production capacity as well as expand its product range and enhance productivity for precision drives that finds usage in the solar energy industry.

Key Risks

The bearing industry is highly competitive that could lead to significant pricing pressure on its bearings products and would hurt its financial results. Further, it is exposed to the risk of foreign currency fluctuations as a majority of its net sales, costs, assets and liabilities, are denominated in foreign currencies. Any change in prices of raw materials or the supply or cost of raw materials could adversely hurt its financial performance.

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

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to EV/Sales Multiple (NTM) (Peer Average), considering the solid performance in Q2FY21, decent guidance for 2021, and a strong demand environment.

For the purpose of relative valuation, peers like Federal Signal Corp (FSS.N), Gorman-Rupp Co (GRC.N), among others have been considered.

Considering the aforementioned factors, a “Buy” recommendation has been assigned on the stock at the current market price of $70.41 per share, down by 1.47% on 10^th September 2021.

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.