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Bank Of America's Bearish Thesis On Timken Ends

Jayson Derrick

The bearish case for Timken Co (NYSE: TKR), a maker of engineered bearings and power transmission products, has come to an end after the company released its second-quarter results, according to Bank of America.

The Analyst

Bank of America's Ross Gilardi upgraded Timken from Underperform to Neutral with a price target lifted from $51 to $55.

The Thesis

One of the main components to Bank of America's bearish case for Timken's stock was expectations for "muted" operating leverage in the first half of 2018, Gilardi said in a note. The thesis hasn't played out as the company expanded its EBIT margin by 340 basis points in the first half of 2018 due to strong volume growth and positive impacts from price costing.

Meanwhile, Timken's recent acquisitions of Cone Drive in July and Rollon in August are likely to be accretive to the company's earnings as management said the backlog in both businesses continues to build, the analyst wrote. Both of the companies were acquired through debt at a cost of nearly 13 times 2018 EBITDA, which is above the stock's current multiple of 8.2 times EBITDA. However, total free cash flow should come in at $250 million in 2018 and $315 million which will support paying down the debt which will imply the acquisition multiple falls by nearly three turns.

Bottom line, Timken's stock has lost 2 percent since the start of 2018 and the company's outlook exiting its second-quarter report implies prior concerns have abated, the analyst wrote. As such, there are now riskier companies in the industrial machinery space so a bearish stance can no longer be justified.

Price Action

Shares of Timken closed Wednesday at $48.60.

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