Monday, 21 September 2015

Timken - out-of-favour US industrial...but bear with it

The last time I wrote about the US-listed bearings and related company Timken it was to grade myself on my full year 2014 stock picks (link here).  Well since then...the stock has had a terrible 2015 year-to-date as the five year chart shows including a couple of earnings downgrades:

From a top-down perspective no huge surprises that the combination of a stronger US dollar and patchy global industrial production growth should negatively impact given the company's profile:

Looking through the company's presentation transcript from a conference last Thursday (link here) operational caution was apparent e.g.: 

'I'd say not a huge change in customer sentiment, certainly no improvement in customer sentiment in anyway and again as we look at the markets are weakening and it's something that we are doing everything we can to offset it through cost reduction initiatives and other self help actions, but it's a fairly challenging market environment right now'

Having run through a variety of observations about specific sectors and geographies (in short: desperately mixed) company senior management noted about current market share developments: 

'I would say are remain relatively strong although obviously that will moderate as the accounts get more difficult as the year plays out as well as some seasonal weakness in the second half'

Two clearly better aspects than perhaps I expected was the notion that currency was currently not a huge concern for the company's management:

'...from a competitive standpoint I would say we're not seeing our competitors use currency as a weapon if you will'

Additionally Timken's balance sheet remains pretty strong...

...and with the company talking (at the time of its Q2 statement a couple of months ago) about US$190m of free cash flow this year this implies at the current share price a 7%+ free cash flow yield (of which about half is currently paid out as a dividend).  

Applying the company's guided full year margin level of 11% tentatively puts the company on a high single digit EV/ebit multiple for its FY15e numbers.  Clearly industrial conditions remain uncertain but the combination of this multiple with a good free cash flow yield/dividend yield'/general balance sheet makes the current sub US$30 share price feel...opportunistic (over a reasonable time period).  Ex a big industrial sector recession, Timken offers solid risk-reward at prevailing.  I would re-review again c. 20% higher (c. US$36/share).  

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