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Timken (TKR) Up 46% in a Year: What's Driving the Rally?

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Shares of The Timken Company (TKR - Free Report) have been gaining over the past year driven by forecast-topping quarterly results, expected savings from cost-cutting actions and strategic acquisitions. The pickup in the manufacturing sector in the back half of 2020 and announcement of investments through 2022 to expand in the lucrative wind and solar energy  markets fueled the rally further. Timken’s shares have gained 46.3% over the past year compared with the industry’s growth of 23.6%.

The company has a market cap of $6.4 billion. It has an expected long-term earnings per share growth rate of 4.4%.

The Zacks Consensus Estimate for the company’s 2021 earnings has moved up 11% over the past 90 days. The estimate for the next year has moved north by 8% over the same time period. The Zacks Consensus Estimate for earnings for 2021 and 2022 indicates year-over-year growth of 15% and 11%, respectively.

Let’s delve deeper and analyze the factors driving the stock.

Despite the impact of COVID-19 pandemic on demand, Timken earnings in the first three quarters of 2020 surpassed the Zacks Consensus Estimate. This can be attributed to cost-reduction initiatives and favorable manufacturing performance. Notably, the company has a trailing four-quarter earnings surprise of 56.4%, on average.

Timken continues to pursue acquisitions to augment product offerings, with focus on bearings, adjacent power transmission products and related services. In sync with this, on Dec 1, 2020 the company announced that it has purchased all assets of Aurora Bearing Company (Aurora to expand its product offerings in the engineered bearings space. This buyout builds upon buyouts of BEKA Lubrication and the Diamond Chain Company in 2019. The acquisition of BEKA Lubrication reinforced the company’s global leadership in the automatic lubrication systems market sector. The Diamond Chain acquisition enhanced Timken's leading position in high-performance roller chains for industrial markets. These acquisitions have strengthened the company's global presence in growing markets, particularly China and Europe. Moreover, these are expected to deliver significant cost and revenue synergies in the days ahead.

After being impacted by lockdowns and lull in orders as the COVID-19 pandemic spread, manufacturing activity has picked up in the back half of 2020. Per the Institute for Supply Management, the U.S Manufacturing Purchasing Managers’ Index (PMI) has remained above 50 since June 2020 and registered an impressive 60.7% in December 2020 — the highest in two and half years. This momentum bodes well for Timken.

On Dec 8, the company announced that it will make capital investments of more than $75 million through early 2022 in an effort to expand renewable energy business. This will further support the company’s remarkable growth in the wind and solar businesses in the days ahead. The company’s investments in acquisitions and innovations over the last few years have positioned it as a leading supplier and technology partner in the wind and solar energy market.

The global demand for renewable energy is expected to witness a CAGR of around 8% over the next 10 years. Thus, the company is focused on targeted investments in this sector to capitalize on this trend and making it a bigger part of its portfolio in the future.

Timken has been taking actions to enhance liquidity, reduce costs and generate strong cash flow. The company has accelerated and expanded its structural cost-reduction initiatives in order to align costs with near-term demand expectations and enhance profitability over the longer term.

Zacks Rank & Other Stocks to Consider

Timken currently carries a Zacks Rank #2 (Buy).

Some other top-ranked stocks in the Industrial Products sector include AGCO Corporation (AGCO - Free Report) , Deere & Company (DE - Free Report) and Avery Dennison Corporation (AVY - Free Report) . While AGCO and Deere sport a Zacks Rank #1 (Strong Buy), Avery Dennison carries a Zacks Rank #2, currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

AGCO has an estimated long term earnings growth rate of 13%. The company’s shares have gained 50% in a year’s time.

Deere has an estimated long-term earnings growth earnings growth rate of 16%. The company’s shares have appreciated 68% over the past year.

Avery Dennison has an estimated long term earnings growth 6.7%. The stock has gained 20% over the past year.

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