- By GF Value
The stock of The Timken Co (NYSE:TKR, 30-year Financials) is believed to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $82.16 per share and the market cap of $6.2 billion, The Timken Co stock shows every sign of being significantly overvalued. GF Value for The Timken Co is shown in the chart below.
Because The Timken Co is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 6.5% over the past three years and is estimated to grow 3.91% annually over the next three to five years.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. The Timken Co has a cash-to-debt ratio of 0.19, which which ranks worse than 86% of the companies in Industrial Products industry. The overall financial strength of The Timken Co is 5 out of 10, which indicates that the financial strength of The Timken Co is fair. This is the debt and cash of The Timken Co over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. The Timken Co has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $3.5 billion and earnings of $3.73 a share. Its operating margin is 13.55%, which ranks better than 81% of the companies in Industrial Products industry. Overall, the profitability of The Timken Co is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of The Timken Co over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of The Timken Co is 6.5%, which ranks in the middle range of the companies in Industrial Products industry. The 3-year average EBITDA growth rate is 14.5%, which ranks better than 71% of the companies in Industrial Products industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, The Timken Co's ROIC is 8.43 while its WACC came in at 10.15. The historical ROIC vs WACC comparison of The Timken Co is shown below:
In summary, the stock of The Timken Co (NYSE:TKR, 30-year Financials) appears to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 71% of the companies in Industrial Products industry. To learn more about The Timken Co stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.