A High Quality Industrial Company
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These are not easy times for companies in the industrial or steel sector. The economic crisis in Europe and the slowdown in China are producing lackluster demand for many firms in the industry. However, you couldn´t tell that by looking at the financial and operating performance of The Timken Company (NYSE: TKR) which reported better than expected results over the last quarters.
The company supplies anti-friction and power transmission components to an ample variety of industrial clients. Its products are used to reduce frictions in planes, trains and automobiles. Timken is also in the steel business, manufacturing specialty alloy steel bars, tubes and precision components. Although the company is quite diversified, we could say that its markets are also very exposed to the economic cycle, and for that reason it sounds reasonable to expect some weakness in times of economic uncertainty.
But that is not the case at all: In fact, Timken reported record earnings per share for the last quarter, and also increased guidance for the rest of the year. Management sounds quite optimistic about performance in the following months, form the press release:
“Our record performance, as well as our confidence in our improved full-year earnings outlook, stand as further testimony to the company’s ability to execute at a structurally higher level of performance,” said James W. Griffith, Timken president and chief executive officer. “Around the globe, our company is operating very well, leveraging momentum we see in our target markets, earning new business through our expanded product and services portfolio, and successfully driving those gains to the bottom line.”
The last quarter was not an isolated event; Timken has a solid track record at performing better than estimated by Wall Street analysts and last year was another historical record in terms of sales and earnings, fully recovering from the last recession and challenging the adverse economic scenario.
Management has been moving away from low margin operations and into businesses with higher profitability. In 2009 for example, Timken sold its needle roller bearings business to JTEKT for $330 million reducing its presence in the light vehicle market. From 2007 to 2011 Timken has made several acquisitions in the aerospace and industrial sectors, and those deals have provided the basis for above average performance in the current environment.
The steel division has been able to translate higher raw material prices into surcharges, sustaining attractive margins, and demand has been very strong for this segment lately, which is not the case for other companies in the industry. Timken has started the construction of an expansion project in its Faircrest steel plant which is expected to add 25% in capacity by 2014.
The company has sustained a dividend payment since 1922, and dividends were increased by a 15% in February versus the same quarter in the last year, this gives a projected dividend yield of 1.8% for the next year at current prices. Timken also has authorization from the board to repurchase 10 million of its own shares over the next four years.
Although the stock has performed pretty strongly in the last years, earnings have been improving at the same peace, as we can see from the chart comparing price and earnings per share over the last 5 years. Trading at a P/E ratio of 10 and with a forward P/E below 8, shares of Timken are attractively valued in spite of the company´s outstanding performance.
When analyzing valuation and financial statistics for Timken versus other machinery and steel companies, the company looks pretty good. In the following table we have some data for Timken and Illinois Tool Works (NYSE: ITW), Nucor Corp (NYSE: NUE), United States Steel (NYSE: X) and Kennametal (NYSE: KMT).
Timken comes ahead of all the companies in the group when it comes to earnings per share growth over the last five years and return on equity, reflecting the quality of the business and the smart decisions made by its management. Kennametal has a barely lower P/E ratio, but the company reports a decrease in earnings per share over the comparison period and a slightly lower level of profitability as measured by ROE. Nucor and ITW have lower growth rates and ROE, while at the same time carrying higher relative valuations. US Steel has negative results for the last year, which makes it a much riskier proposition.
There are no signs of economic problems at Timken, and that probably has a lot to do with a high quality management leading the company into the most attractive sectors and industries. Even in the face of economic uncertainty, Timken looks poised for superior performance.
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