The Timken Company - Growth & Income
03 Novembre 2011 - 1:00AM
Zacks
The Timken Company (TKR) delivered excellent third quarter
results on October 27 with sales and EPS both beating the Zacks
Consensus Estimates, and management raising its guidance for the
remainder of the year.
This prompted analysts to raise their estimates for
both 2011 and 2012, sending the stock to a Zacks #2 Rank (Buy).
Cyclical as She Goes
Timken manufactures bearings, alloy steel, and
other related components. The company is very cyclical and highly
dependent on the health of the overall economy.
So as you can imagine, shares pulled back
considerably in late summer/early fall over fears that another
recession in the U.S. was looming. Although recession fears have
waned and the stock has rallied over the last few weeks, it is
still well below its previous highs.
Third Quarter Results
Timken delivered strong results for the third
quarter of 2011 on October 27. Earnings per share came in at $1.12,
beating the Zacks Consensus Estimate by 4 cents. It was a stellar
53% increase over the same quarter in 2010. So how'd they get
there?
First, revenues jumped 25% to $1.322 billion, also
ahead of the Zacks Consensus Estimate, which was $1.279 billion.
The Process Industries and Steel segments were particularly strong
due in part to strong demand.
Secondly, margins expanded. Gross profit improved
from 25.0% of net sales to 26.0%. And operating income expanded
from 11.5% of net sales to 14.1% as the company leveraged its
selling, general and administrative expenses.
Outlook
Management raised its guidance for the remainder of
the year following better than expected Q3 results. The company now
expects EPS between $4.45 and $4.55 on sales growth of 25-30%. This
is up from previous guidance of $4.30-$4.50 per share.
This prompted analysts to revise their estimates
higher for both 2011 and 2012, sending the stock to a Zacks #2 Rank
(Buy).
The Zacks Consensus Estimate for 2011 is now $4.57,
slightly above guidance. This corresponds with EPS growth of 55%.
The 2012 consensus estimate is currently $5.19, representing 14%
EPS growth.
As you can see in Timken's Price & Consensus
chart, consensus estimates have been trending significantly higher
over the last several months as the company has delivered some
impressive results:
Dividend
On top of solid earnings growth, Timken pays a
dividend that yields 1.9%. The company has raised it three times
since early 2010, but it did cut it in half during the Great
Recession.
As long as earnings can grow as projected, I'd
expect to see more dividend hikes on the horizon.
Valuation
The recent pullback in the stock market has led to
some compelling valuations, as long as a recession isn't right
around the corner.
Shares trade at just 8.1x 12-month forward
earnings, a significant discount to the industry average of 11.0x
and its 10-year historical median of 12.6x.
Its PEG ratio is only 0.5 based on a 5-year EPS
growth rate of 17.8%.
The Bottom Line
With rising earnings estimates, strong growth
projections, a solid 1.9% dividend yield and very attractive
valuation, Timken offers investors a lot of upside potential...as
long as the economy continues to improve.
Todd Bunton is the Growth & Income Stock
Strategist for Zacks Investment Research and Co-Editor of the
Reitmeister Value Investor.
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