Timken Report

Topics: Revenue, Automotive industry, Cash flow Pages: 38 (10664 words) Published: July 9, 2010
NYSE: TKR

THE TIMKEN COMPANY
Investment Thesis The Timken Company is the largest tapered roller bearings manufacturer in the world and one of the largest manufacturers of alloy and specialized steel in the world. The company reports revenues in three business segments: Steel (31% of 2005 revenue), Automotive (32%), and Industrial (37%). I feel that Timken is capable of delivering solid EPS and top-line revenue growth over the next two years, driven largely by demand for industrial bearings and steel products in key end-markets, including aerospace & defense, energy, rail, mining, and construction. Timken’s Industrial and Steel margins have been expanding since 2004, and with strong demand for the company’s products and global capacity constraints, I forecast margin expansion through 2008.

28 November 2006 Analyst: Constantine Elefter
Fisher College of Business The Ohio State University Columbus, Ohio Contact: 330.806.6217 Email: Elefter.1@osu.edu Fund: OSU SIM Class: Bus-Fin 724 Manager: Royce West, CFA

Recommendation
Price Target I have assigned Timken a one-year price target of US $42.00. This price target is based on applying a 14.0x P/E multiple of my 2007E EPS of $3.07. This P/E multiple was constructed using a weighted Sector: Industrials average comparables multiple of automotive, industrial, and bearings Industry: Machine Tools & Accessories companies (see Equity Valuation: Multiples section for discussion). Timken is a strong BUY based on valuation, with a 38.2% upside to the company’s 11/17/2006 stock price of $30.38. Stock Data Estimates Price: US $ 30.38 (US$) 2004A 2005A 2006E 2007E 2008E Price Objective: US $ 42.00 GAAP EPS $1.50 $2.81 $2.81 $3.07 $3.69 52 Week High: US $36.58 52 Week Low: EPS Change YoY 87.3% 0.0% 9.3% 20.2% US $26.57 Market Capitalization: US $2.74 B Consensus EPS (First Call: October) $2.70 $2.99 $3.60 Shares Outstanding: High EPS 94.1 MM $2.75 $3.20 $3.65 YTD Return: -18% Low EPS $2.69 $2.70 $3.55 Beta: 1.09 40 TIMKEN COMPANY (TKR) PRICE 30.38 DATE 11-17-2006 2006E Net Sales: 38 US $5,286 MM StockVal® 2006E EPS: US $2.81

BUY

34 32 30 28 26
SP5 0.98 200 50

34 32 30 28 26 24

2005 Revenue Breakdown by Business Segment

24

Steel 31%

22 Q4/04
1700 1000 600 300 200 100

22 Q1/05 Q2/05 Q3/05 Q4/05 Q1/06 Q2/06 Q3/06 Q4/06
3100 1700 1000 600 300 200 100 Volume in Thousands of Shares

Industrial 37%

60 Day Avg. Volume 801

Automotive 32%

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Table of Contents
Company Overview Products Tapered Roller Bearings Precision Cylindrical and Ball Bearings Spherical and Cylindrical Bearings Needle Bearings Bearing Reconditioning Steel Business Segments Automotive Group Restructuring: Automotive Industrial Group Steel Group Macroeconomic Conditions Gross Domestic Product Industrial Production Manufacturing and Equipment Orders Pricing: Steel and Capital Equipment Regulatory Framework (CDSOA “Byrd Amendment”) Industry Analysis Industrials Sector Valuation Competitive Advantages: Growth Drivers Engineering Acquisition Competitive Pressures Project ONE Sources of Growth DuPont Analysis Summary Financial Statement Ratios Analysis 3 3 3 3 3 4 4 4 4 4 6 7 7 8 8 8 10 11 12 13 14 15 15 15 15 15 16 17 18 19 1

2 Equity Valuation: Multiples Absolute Valuation Automotive Comparables Industrial Comparables Bearings Comparables Conclusion Equity Valuation: Discounted Cash Flow Revenue Forecast Income Statement Assumptions Balance Sheet Assumptions Summary and Outputs Conclusion: BUY Risks and Concerns Timken Bearings Snapshots Endnotes Valuation Appendices Segment Revenue and Profitability Income Statement and Drivers Balance Sheet and Drivers Cash Flow Statement and Analysis of FCF DCF Valuation 20 20 20 21 22 22 23 23 23 24 24 25 26 27 28

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Company Overview1
Founded in 1898 by Henry Timken and incorporated in 1904, The Timken Company (“Timken” or “the company”), is headquartered in Canton, Ohio.

Timken is the largest manufacturer of tapered roller...
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