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 and power transmission product brands.

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

• Strong organic growth across most end-market sectors, along with the advantage of currency translation and the acquisition of Aurora Bearing, has resulted in 3% YoY growth in sales to $1.06 billion in Q2FY21.
• Due to the benefits of higher volume and favourable manufacturing performance and currency, net income rose to $104.8 million in Q2FY21 from $61.9 million in Q2FY20.
• It generated a free cash flow of $116 million in Q2FY21.
• The company raised the quarterly dividend by 3% to $0.30 per share.

Key Data (Source: Company Reports)

Outlook

On 15 September 2021, the company highlighted that due to the impact of the unabating customer, supply chain disruptions, manufacturing-related inefficiencies, and sustained inflationary pressures across the enterprise, it expects to post lower sales and earnings H2FY21 against its earlier expectations. However, it expects a solid industrial market environment for the rest of 2021 and in 2022 due to underlying solid customer demand and end-market momentum across most sectors. The company intends to offset the effect of the supply chain challenges and inflationary pressures through improved operational efficiencies and pricing. It will also undertake further price increases and hopes to realise a significant price in 2022.

Meanwhile, the company will release its Q3FY21 earnings results on 1 November 2021.

Key Risks

The bearing industry is highly competitive, which could lead to significant pricing pressure on its bearings products and hurt its financial results. Further, it is exposed to the risk of foreign currency fluctuations as most of its net sales, costs, assets and liabilities, are denominated in foreign currencies. Therefore, any change in raw materials prices 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

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation

The company has delivered a 6-month and 9-month return of ~-21.26% and ~-9.88%, respectively. The stock is trading lower than the average of the 52-week high price of $92.3856 and the 52-week low price of $55.3501.

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). In addition, a slight premium has been applied to EV/Sales Multiple (NTM) (Peer Average), considering the solid performance in Q2FY21 and a robust demand environment.

Considering the aforementioned factors, a “Buy” recommendation has been assigned on the stock at the closing market price of $68.35 per share, down by 3.45% as of 27^th October 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