The Timken Company (TKR)
Presented by,
Han Yang
Nurul Alam Rafi
Kannu Priya
Presented on April 24, 2012
Agenda
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Introduction
Macro-economy
Industry
Timken’s Business
Financial analysis
Multiple valuation
DCF valuation
Recommendation
Introduction
• Company: The Timken Company
• Reg. in NYSE
Ticker: TKR
• 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
US GDP vs TKN's revenue
40.00%
30.00%
20.00%
Changes
10.00%
0.00%
-10.00%
-20.00%
-30.00%
-40.00%
-50.00%
US GDP
TKN sales
2008
2.15%
-3.73%
Source: World Bank; Timken 09’, 10’ 10-K
2009
-1.73%
-37.68%
2010
3.84%
29.09%
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 industry
Defense industry
Clean energy (wind turbine)
Major players in the US
Market share
12%
26%
21%
41%
Source: IBIS World
NSK
Aktlebolaget SKF
Timken
Ohters
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.
Product lines
Anti-Friction
Bearings and
Adjacent
Transmission
Mobile
Industry
Process
Industry
Steel
Aerospace and
Defense
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
Integrated Bearing Assemblies
Aerospace Bearings
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 overcapacity 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 – revenue
6,000.00
Steel
5,000.00
4,000.00
Aerospace and
Defense
3,000.00
Process
Industries
2,000.00
Mobile
Industries
1,000.00
0.00
2007
Timken 08’,09’,10’,11’ 10-Ks
2008
2009
2010
2011
Financial analysis – EBIT margin
25.00%
20.00%
15.00%
Mobile
Industries
10.00%
Process
Industries
5.00%
Aerospace
and Defense
0.00%
-5.00%
2007
-10.00%
Timken 08’,09’,10’,11’ 10-Ks
2008
2009
2010
2011
Steel
Financial analysis – Dep & Capex
Depreciation VS Capital Expenditure
350
In millions
300
250
200
150
100
50
0
Capex
Depreciation
Timken 08’,09’,10’,11’ 10-Ks
2007
289.8
187.9
2008
258.1
200.8
2009
114.1
201.5
2010
115.8
189.7
2011
205.3
192.5
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
11.41%
16.31%
-8.40%
14.15%
22.24%
ROE
Comparable Companies
Anti Friction
Bearing and Power
Transmission
Steel
SKF AB
Tenaris SA
NSK Ltd.
Gerdau SA
Nucor
Corp.
Steel
Dynamics
Inc.
Multiples
Timken
(TKR)
SKF
NSK
(SKFRY.PK) (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 Equity Value Enterprise Equity Value
Value $
per Share $ Value $
Per Share $
P/E
53.20
23.25
Value per
Share $ Weight
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
51.84
0.25
P/S
Final Value $
33.42
18.42
62.23
Recommendation
• Multiple valuation: $ 62.23
• DCF valuation: $63.67
• Current price: $49.57
Recommendation: buy 200 share at market
price – approximately 3% of total portfolio