Timken Company

TKR Details

Timken Company (NYSE: TKR) provides engineered bearings and power transmission products with operations in over 42 countries. It caters to an array of markets such as automotive, aerospace, rail, renewable energy, agriculture/turf, mining, construction, and several others.

Healthy Demand Offtake: TKR posted Q3FY21 revenue of US$1.04 billion, up by 16% over PcP aided by healthy demand for industrial distribution and off-highway products and improvement in product pricing. Its Process Industries segment showed EBITDA of US$129.7 million vs. US$109.2 million in PcP driven by higher volumes and favourable forex movements. In contrast, its Mobile Industries segment showcased EBITDA of US$53.2 million, up from US$64.0 million due to higher operating costs. Overall net income edged down to US$88.1 million in Q3FY21 as compared to US$88.8 million in last year. It had witnessed an increase in pension remeasurement related expenses and restructuring charges.

Decent Financial Position: During the quarter, TKR returned US$53.1 million of cash to shareholders in the form of dividend distribution and repurchase of about 400k shares. During the quarter, it had completed the acquisition of Intelligent Machine Solutions, due to which its cash balance dropped from US$320.3 million as of December 31, 2020 to US$261.8 million as of September 30, 2021.

Q3FY21 Net Sales and Adjusted EBITDA Growth, Analysis by Kalkine Group

Key Risks and Challenges

TKR’s margin is affected by swings in material costs and logistics and freight expenses. Changing customer preferences and increasing household debt may limit automobile demand. Due to widespread of customers, volatility in foreign currencies may affect the realization and operating cash flows.

Outlook

TKR is expecting lower revenues in Q4FY21 due to seasonality factors and fewer shipping days. Adjusted EBITDA for Q4FY21 to be below Q3FY21 as supply chain disruptions continue to mount. However, the company has an optimistic view on FY22 business prospects with higher price realization and strong backlog and positive customer sentiments. The recently acquired Intelligent Machine Solutions is expected to enhance linear motion capabilities and factory automation.

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

Stock Recommendation

The stock of TKR delivered one year returns of ~3.41%. It is currently trading lower than the 52-week low price of US$64.66 and the 52-week high price of US$92.39. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with a correction of mid-single-digit (in percentage terms). The company might trade at a slight premium to its peers, considering the expected synergies from the acquisition of Intelligent Machine Solutions. For the purpose of valuation, few peers Altra Industrial Motion Corp. (NASDAQ: AIMC), Twin Disc Inc. (NASDAQ: TWIN), Park Ohio Holdings Corp. (NASDAQ: PKOH), and others have been considered. Considering the bleak outlook for Q4FY21, increasing freight costs to impact margins, current trading levels, and valuation indicating downside, we suggest investors book profit and give a “Sell” rating this stock at the current market price of US$74.30 as of November 18, 2021, at 9:50 AM ET.

TKR Daily Technical Chart, Data Source: REFINITIV

Note: The purple line at the bottom of the chart reflects the RSI (14-day period)

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

Note 2: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.