U.S. Markets closed

Timken's Acquisition Strategy Bodes Well Amid High Input Costs

Zacks Equity Research

On Oct 10, we issued an updated research report on The Timken Company TKR. The company is likely to benefit from favorable price and mix, higher volumes and its cost-reduction initiatives. Acquisition strategies and efforts to boost market share and market offerings are added positives. However, input cost inflation, weakness in order rate remain near-term headwinds.

Favorable Price & Mix, Volumes to Aid 2019 Results

In second-quarter fiscal 2019, Timken’s adjusted earnings per share and revenues improved 14.4% and 10.3%, respectively, on a year-over-year basis. The upside was driven by favorable price and mix, organic growth in the Process Industries segment and benefit from acquisitions, partly offset by higher interest expense and unfavorable impact of foreign-currency translation. .

For fiscal 2019, Timken expects adjusted earnings between $4.80 and $5.00 per share. The mid-point of the guidance suggests 17.7% year-over-year growth. Earnings for the current year will benefit from favorable price and mix, higher volumes and improved manufacturing performance.

On the top-line front, Timken now expects 2019 total revenues to be up 7-9% year on year, driven by strong organic growth in the Process Industries segment and benefit from acquisitions. The company also expects steady demand growth in its products and services. Further, strength in wind, solar and aerospace market is likely to mitigate weak highway and heavy truck markets. The company continues to mitigate tariff impact through pricing initiatives. Also, cost-reduction initiatives will drive margins.

The Zacks Consensus Estimate fiscal 2019 revenues stands at $3.86 billion, indicating a 7.74% growth from year-ago reported figure. The same for earnings per share is pegged at $4.88, suggesting a 16.75% increase over $4.18 registered in fiscal 2018.

Acquisition Strategy to Drive Growth

Timken is benefiting from acquisitions focused on expanding its market share and offerings with differentiated products, engineering innovation and industry-leading customer service. Last year, the company acquired Rollon, Cone Drive and ABC Bearings and divested the ICT Business. In the June-end quarter, Timken acquired the Diamond chain for $84.9 million. Notably, these buyouts are likely to add 7% to the top line in the current year.

Recently, Timken entered into an agreement to acquire BEKA Lubrication. This buyout will strengthen the company’s global leadership in the automatic lubrication systems market sector and expand its geographic reach in Europe and Asia. Additionally, it will create opportunities for Timken to better serve wind and other industrial end markets. The company is also poised to benefit from cost synergies owing to acquisitions.

Headwinds

Timken is exposed to currency-exchange rate fluctuations, which will likely hurt its top-line growth for the ongoing year. Higher inventory and weak orders levels are other concerns. Higher input costs owing to the imposition of tariffs will dent margins. Furthermore, recent slowdown in the manufacturing sector is worrisome, which may adversely impact demand for the company’s products. Following the Rollon and Cone Drive acquisitions, Timken witnessed an increase in its debt level. The consequent increase in interest expense will hurt earnings.

Price Performance



In a year’s time, shares of Timken have lost 2.4% compared with the industry’s 17.5% decline.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the Industrial Products sector are Atkore International Group Inc. ATKR, Cintas Corporation CTAS and Sharps Compliance Corp SMED, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Atkore International Group has a projected earnings growth rate of 19.8% for the current year. The stock has gained 29% in a year’s time.

Cintas has an estimated earnings growth rate of 12.74% for 2019. Shares of the company have rallied 42% in the past year.

Sharps Compliance has an estimated earnings growth rate of 500% for 2019. The company has rallied 26% in the past year.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot trades we're targeting>>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Atkore International Group Inc. (ATKR) : Free Stock Analysis Report
 
Cintas Corporation (CTAS) : Free Stock Analysis Report
 
Timken Company (The) (TKR) : Free Stock Analysis Report
 
Sharps Compliance Corp (SMED) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research