The Timken Company

The Timken Company ( TKR - Snapshot Report ) delivered strong first quarter results on April 24 with sales and EPS both beating the Zacks Consensus Estimates. And management provided bullish guidance for the remainder of 2012.

This prompted analysts to raise their estimates for both 2012 and 2013, sending the stock to a Zacks #1 Rank (Strong 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 have pulled back a bit recently along with the overall market. But so far Timken continues to deliver strong results. And if global growth concerns turn out to be overblown, this stock could soar.

First Quarter Results

Timken delivered strong results for the first quarter of 2012 on April 24. Earnings per share came in at $1.58, beating the Zacks Consensus Estimate by 32 cents. It was a stellar 40% increase over the same quarter in 2011. So how'd they get there?

First, revenues jumped 13% to $1.421 billion, a quarterly record. It was also ahead of the Zacks Consensus Estimate of $1.372 billion. The Process Industries and Steel segments remained particularly strong due in part to strong demand.

Secondly, margins expanded. Gross profit improved from 26.6% of net sales to 29.0%. And operating income expanded from 14.5% of net sales to 17.4% as the company leveraged its selling, general and administrative expenses.

Outlook

Following strong Q1 results, management provided encouraging guidance for the remainder of 2012. The company stated that it expects EPS between $5.40 and $5.70 on sales growth of 7-10%.

This prompted analysts to revise their estimates higher for both 2012 and 2013, sending the stock to a Zacks #1 Rank (Strong Buy).

The Zacks Consensus Estimate for 2012 is now $5.76, slightly above guidance. This corresponds with EPS growth of 26%. The 2012 consensus estimate is currently $6.38, representing 11% 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 11 straight positive earnings surprises:

Dividend

On top of solid earnings growth, Timken pays a dividend that yields 1.9%. The company has raised it 4 times since early 2010, including a 15% increase earlier this year. But it did cut it in half during the Great Recession.

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 7.9x 12-month forward earnings, a significant discount to the industry average of 10.5x and its 10-year historical median of 12.1x.

Its PEG ratio is only 0.6 based on a 5-year EPS growth rate of 13.6%.

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 at least slowly improve.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.