Back to top

Image: Bigstock

Timken (TKR) Banks on Cost Saving Amid End-Market Weakness

Read MoreHide Full Article

On May 28, we issued an updated research report on The Timken Company (TKR - Free Report) . The company is likely to benefit from actions to enhance liquidity, reduce costs and generate strong cash flow. Acquisitions to boost market share and offerings will also contribute to growth. However, impact of COVID-19 on operations and end-markets remains a concern.

COVID-19 Impacts End Markets

Timken reported first-quarter 2020 adjusted earnings per share of $1.11, which marked a decline of 11% from the prior-year quarter owing to lower volumes on account of impact of COVID-19 and unfavorable currency.

With coronavirus spreading globally, Timken had to adjust production schedules in response to customer and government shut-downs and other changes. Europe has been the hardest-hit geography for the company. There is considerable uncertainty at this point regarding the overall impact of the pandemic on its business as a whole. COVID-19 has impacted most of its end markets.

Heavy Truck, Automotive, Off-Highway, and Industrial sectors were all down year over year in first-quarter 2020 and are expected to remain so in the ongoing quarter as well. Considering continued uncertainty surrounding the same, the company suspended sales and earnings guidance for 2020. Timken anticipates revenues to drop significantly in second-quarter 2020 from the prior-year quarter owing to weakness in its end markets.

Cost Saving Actions to Buoy Margins

Timken is taking actions to enhance liquidity, reduce costs and generate strong cash flow. The company has implemented furloughs and salary reductions. It remains focused on improving working capital and reducing capital expenditure. Meanwhile, the company continues to advance its ongoing strategy – footprint optimization, acquisition integration, and driving operational excellence to drive growth. Timken’s cost reduction actions will help sustain margins amid lower volumes.

Acquisition Strategy to Drive Growth

Timken continues to pursue strategic acquisitions to broaden portfolio and capabilities across diverse markets, with a focus on bearings, adjacent power transmission products, and related services. In 2018, the company acquired Rollon, Cone Drive and ABC Bearings and divested the ICT Business. In 2019, Timken completed the buyout of BEKA Lubrication and the Diamond Chain Company. The acquisition of BEKA Lubrication strengthened the company’s global leadership in the automatic lubrication systems market sector. Diamond Chain augments Timken's leadership in high-performance roller chains for industrial markets.

These acquisitions have strengthened the company's global presence in growing markets, particularly China and Europe. These buyouts are expected to deliver significant cost and revenue synergies in the days ahead.

Solid Liquidity Position

Due to uncertainty caused by COVID-19, the company suspended share buyback program for the time being. Timken’s long-term debt stood at $1.78 billion at the first-quarter 2020 end. The company has no significant long-term maturity before September 2023. Further, its total debt-to-total capital ratio is 0.50, lower than its industry's 0.83. The company's times interest earned ratio was 7.3 as of Mar 31, 2020, better than the industry's 6.2. The company drew $350 million on its revolving credit facility on Apr 3, 2020, to boost financial flexibility. As of Apr 3, 2020, the company had over $700 million of cash in hand. Cash flow is expected to improve through the year driven by favorable working capital and cost saving initiatives.

Share Price Performance

In the past three months, the stock has fallen 2.3% compared with the industry’s decline of 16.3%.

Zacks Rank & Stocks to Consider

Timken currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Industrial Products sector are Silgan Holdings Inc. (SLGN - Free Report) , Broadwind Energy, Inc. (BWEN - Free Report) and Energous Corporation (WATT - Free Report) . While Silgan sports a Zacks Rank #1 (Strong Buy), Broadwind Energy and Energous carry a Zacks Rank of 2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Silgan has a projected earnings growth rate of 11.3% for 2020. The company’s shares have gained 15% in the past three months.

Broadwind Energy has an expected earnings growth rate of 174% for the current year. The stock has appreciated 6% over the past three months.

Energous has an estimated earnings growth rate of 17.3% for the ongoing year. The company’s shares have rallied 37% in three months’ time.

The Hottest Tech Mega-Trend of All

Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>

Published in