We issued an updated research report on The Timken Company TKR on Sep 26. The company’s near-term results are likely to bear the brunt of input cost inflation due to the implementation of tariffs and unfavorable foreign-currency impact.
Timken’s second-quarter adjusted earnings per share improved 14.4% on a year-over-year basis to $1.27. The upside was driven by favorable price and mix, and the benefit of acquisitions, partly offset by higher interest expenses. Further, net sales were up 10.3% year over year to $1 billion. However, the company lagged the Zacks Consensus Estimate for both metrics.
Higher Costs & Unfavorable Currency to Hurt 2019 Results
Timken’s results will bear the brunt of raw-material cost inflation. The company’s business requires a substantial amount of raw material, including steel. The U.S. government has initiated the imposition of tariffs on certain foreign goods, including steel. These measures have led to higher input costs for Timken. This, in turn, will dent margins if the company is not able to pass on the price increase to customers.
Further, Timken is exposed to the risks of currency exchange rate fluctuations, which may hurt its top line this year. Also, higher inventory and weakness in order intake rate are concerns.
Additionally, higher expenses related to restructuring charges are weighing on Timken. In the last five years, the company has taken $159 million in impairment and restructuring charges. Furthermore, the recent slowdown in the manufacturing sector is a concern, which may adversely impact the demand for the company’s products.
High Debt Levels a Worry
Higher debt level can inflate Timken’s financial obligations and subsequently hurt profitability. The company’s debt has increased following the Rollon and Cone Drive acquisitions. It had long-term debt of $1,642.6 million at the end of the second quarter, up from $1,638.6 million at 2018 end. The consequent increase in interest expenses will negatively impact earnings.
Share Price Performance
In the past year, Timken’s shares have lost 12.8% compared with the industry’s decline of 21.2%.
Zacks Rank & Stocks to Consider
Timken currently carries a Zacks Rank #4 (Sell).
A few better-ranked stocks in the Industrial Products sector are Albany International Corp. AIN, AGCO Corp. AGCO and UFP Technologies, Inc. UFPT, each carrying a Zacks Rank of 2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Albany International has an estimated earnings growth rate of 33.85% for 2019. The company’s shares have surged 44.6% year to date.
AGCO Corp. has a projected earnings growth rate of 11.2% for the current year. The stock has gained 35.7% so far this year.
UFP Technologies has an expected earnings growth rate of 8.10% for the ongoing year. The stock has jumped 31.2% in the year-to-date period.
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