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Agenda
•Introduction•Macro-economy•Industry•Timken’s Business•Financial analysis•Multiple valuation•DCF valuation•Recommendation
Introduction• Company: The Timken Company Ticker: TKR• Reg. in NYSE
• Current market price : $ 49.57 (Previous close price on 4/23/2012)• PEG = 0.84
• Industry : Industrial Machinery GICS Map place: 20106020
• Founded in 1899 by Henry Timken with two patents on the design of tapered roller bearings.
• TKR develops, manufactures, markets and sells products for friction management and mechanical power transmission, alloy steels and steel components.
• 1 yr implied growth in EPS = 28% Graham g = 1.25%
• Greenblatt profitability ratios:
EBIT/TA = 32% EBIT/EV=14.7% Sum= 47%
Relationship to economy• The Bearing industry is correlated to Macroeconomic
activities
Source: World Bank; Timken 09’, 10’ 10-K
Industry overview
•Bearing industry in the US generated $7.9 billion revenue in 2011.
•The industry is at mature stage•The annual growth rate from 2006 to
2011 is 1.4%•The forecasted annual growth for next 5
years is 2.3%
Up and down stream
•The up stream of bearing industry is steel industry.
•The customers of bearing products include
Transportation industryDefense industryClean energy (wind turbine)
Business Overview• Started with two patents on the design of tapered roller
bearing, Timken grew to become the world’s largest manufacturer of tapered roller bearing.
• 10 technology and engineering centers
• 14 distribution centers and warehouses and
• nearly 21,000 employees.
• operates in 30 countries and territories.
• Have many customers in many industries and no single customer generates 10% or more of total sales or segment sales
• Around 66% sales comes from the US market.
Bearings & Power Transmission• Bearings can be of different shapes and sizes.• Have 4 components: 1) the cone or inner race 2)the cup or outer race 3)the rollers in between cup and
cone 4)the cage between the rollers
Usage: • To reduce friction where shafts, gears or wheels are used.• To provide high load tolerance
Applications:• Transportation including cars, trucks, heavy trucks,
helicopters, airplanes and trains. • Industries including mills, mining, oil and gas extraction
and production, gear drives, health and positioning control, wind mills and food processing.
Tapered Roller Bearing Ball Bearings Spherical Plain Bearings
High Performance Bearings Precision Bearings Aerospace Bearings
Integrated Bearing Assemblies Precision Bearing Assemblies Picture source: www.timken.com
Steel• produces more than 450 grades of carbon, micro-alloy and
alloy steel, which are sold as ingots, bars and tubes in a variety of chemistries, lengths and finishes and custom made precision steel products for many industries.
Applications: a wide variety of end products including oil country drill
pipe, bits and collars, gears, hubs, axles, crankshafts and connecting rods, bearing races and rolling elements, bushings, fuel injectors, wind energy shafts and other demanding applications, where mechanical power transmission is critical to the end customer.
Distribution and Services
• Mostly use their own efficient distributors to sell products in Mobile industries, Process Industries and Aerospace and Defense segments.
• Has a joint venture named CoLinx, LLC in North America to support sales in Process segment.
• Timken provides expert services for bearing maintenance and repair. Total services accounted for less than 5% of the sales last year.
Risks
•Pricing pressure resulted from high competition in bearing and steel industry and potential over-capacity in Steel industry.
•Cyclical nature of many customers and sustained uncertainty in financial market.
•Substantial costs and limitations on operation imposed by environmental laws and regulations.
Recent Acquisitions and new products• Acquired Drives LLC in 2011. - Manufactures highly engineered products like
precision roller chain, pintle chain, agricultural conveyor chain, engineering class chain, oil filled roller chain and augur products.
• Acquired Philadelphia Gear Corp. in 2011. - provides aftermarket gear box repair services and
gear-drive systems for the industrial, energy and military marine sectors, including refining and pipeline systems, mining, cement, pulp and paper making and water management systems
Financial analysis - ROE
2007 2008 2009 2010 2011
Profit margin 4.9% 5.4% -4.3% 6.8% 8.8%
Assets turnover 1.03 1.11 0.78 0.97 1.19
Leverage (A/E) 2.23 2.73 2.51 2.15 2.13
ROE 11.41% 16.31% -8.40% 14.15% 22.24%
MultiplesTimken (TKR)
SKF (SKFRY.PK)
NSK(NPSKY.PK)
Price per share $
50.51 25.09 13.64
D/A 9% 14% 35%
P/E 11 13.25 21.72
P/S .95 1.13 .83
EV/Revenue .96 1.27 1.08
EV/EBITDA 5.36 7.77 2.29
Revenue $
EBITDA $ EPS $
Anti Friction Bearings
3334 678 3.04
Steel 1836.7 316.5 1.55
Total 5170 924.2 4.59
Data source for multiples: Yahoo Finance
Contd.
Tenaris (TS)
Gerdau (GGB)
Nucor (NUE)
Steel Dynamics (STLD)
Price per share $
34.92 9.55 39.67 12.89
D/A 4% 31% 25% 0%
P/E 15.48 14.62 16.54 13.46
P/S 2.08 .85 .63 .36
EV/Revenue
2.03 1.12 .72 .6
EV/EBITDA 8.41 8.61 7.32 6.6
Data source for multiples: Yahoo Finance
Valuation
Anti-friction Bearings &
Power Transmission Steel
Enterprise Value $
Equity Value per Share $
Enterprise Value $
Equity Value Per Share $
Value per Share $ Weight
P/E 53.20
23.25
76.45 0.25
EV/EBITDA 3,408.33
2,448.13
59.73 0.25
EV/Revenue 3,916.86
2,052.51
60.89 0.25
P/S 33.42
18.42
51.84 0.25
Final Value $ 62.23