The Timken Company

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.