Timken Report
NYSE: TKR
THE TIMKEN COMPANY
Investment Thesis The Timken Company is the largest tapered roller bearings manufacturer in the world and one of the largest manufacturers of alloy and specialized steel in the world. The company reports revenues in three business segments: Steel (31% of 2005 revenue), Automotive (32%), and Industrial (37%). I feel that Timken is capable of delivering solid EPS and top-line revenue growth over the next two years, driven largely by demand for industrial bearings and steel products in key end-markets, including aerospace & defense, energy, rail, mining, and construction. Timken’s Industrial and Steel margins have been expanding since 2004, and with strong demand for the company’s products and global capacity constraints, I forecast margin expansion through 2008.
28 November 2006 Analyst: Constantine Elefter
Fisher College of Business The Ohio State University Columbus, Ohio Contact: 330.806.6217 Email: Elefter.1@osu.edu Fund: OSU SIM Class: Bus-Fin 724 Manager: Royce West, CFA
Recommendation
Price Target I have assigned Timken a one-year price target of US $42.00. This price target is based on applying a 14.0x P/E multiple of my 2007E EPS of $3.07. This P/E multiple was constructed using a weighted Sector: Industrials average comparables multiple of automotive, industrial, and bearings Industry: Machine Tools & Accessories companies (see Equity Valuation: Multiples section for discussion). Timken is a strong BUY based on valuation, with a 38.2% upside to the company’s 11/17/2006 stock price of $30.38. Stock Data Estimates Price: US $ 30.38 (US$) 2004A 2005A 2006E 2007E 2008E Price Objective: US $ 42.00 GAAP EPS $1.50 $2.81 $2.81 $3.07 $3.69 52 Week High: US $36.58 52 Week Low: EPS Change YoY 87.3% 0.0% 9.3% 20.2% US $26.57 Market Capitalization: US $2.74 B Consensus EPS (First Call: October) $2.70 $2.99 $3.60 Shares Outstanding: High EPS 94.1 MM $2.75 $3.20 $3.65 YTD Return: -18% Low EPS $2.69 $2.70 $3.55 Beta: 1.09 40 TIMKEN
THE TIMKEN COMPANY
Investment Thesis The Timken Company is the largest tapered roller bearings manufacturer in the world and one of the largest manufacturers of alloy and specialized steel in the world. The company reports revenues in three business segments: Steel (31% of 2005 revenue), Automotive (32%), and Industrial (37%). I feel that Timken is capable of delivering solid EPS and top-line revenue growth over the next two years, driven largely by demand for industrial bearings and steel products in key end-markets, including aerospace & defense, energy, rail, mining, and construction. Timken’s Industrial and Steel margins have been expanding since 2004, and with strong demand for the company’s products and global capacity constraints, I forecast margin expansion through 2008.
28 November 2006 Analyst: Constantine Elefter
Fisher College of Business The Ohio State University Columbus, Ohio Contact: 330.806.6217 Email: Elefter.1@osu.edu Fund: OSU SIM Class: Bus-Fin 724 Manager: Royce West, CFA
Recommendation
Price Target I have assigned Timken a one-year price target of US $42.00. This price target is based on applying a 14.0x P/E multiple of my 2007E EPS of $3.07. This P/E multiple was constructed using a weighted Sector: Industrials average comparables multiple of automotive, industrial, and bearings Industry: Machine Tools & Accessories companies (see Equity Valuation: Multiples section for discussion). Timken is a strong BUY based on valuation, with a 38.2% upside to the company’s 11/17/2006 stock price of $30.38. Stock Data Estimates Price: US $ 30.38 (US$) 2004A 2005A 2006E 2007E 2008E Price Objective: US $ 42.00 GAAP EPS $1.50 $2.81 $2.81 $3.07 $3.69 52 Week High: US $36.58 52 Week Low: EPS Change YoY 87.3% 0.0% 9.3% 20.2% US $26.57 Market Capitalization: US $2.74 B Consensus EPS (First Call: October) $2.70 $2.99 $3.60 Shares Outstanding: High EPS 94.1 MM $2.75 $3.20 $3.65 YTD Return: -18% Low EPS $2.69 $2.70 $3.55 Beta: 1.09 40 TIMKEN