The Timken Company (TKR)

Presented by,
Han Yang
Nurul Alam Rafi
Kannu Priya
Presented on April 24, 2012

Agenda

Introduction
Macro-economy
Industry
Timkens 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

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 industry
Defense industry
Clean energy (wind turbine)

Major players in the US

Source: IBIS World

Business Overview
Started with two patents on the design of tapered roller bearing,
Timken grew to become the worlds 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

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

Timken 08,09,10,11 10-Ks

Financial analysis EBIT margin

Timken 08,09,10,11 10-Ks

Financial analysis Dep & Capex

Timken 08,09,10,11 10-Ks

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

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

P/E

EV/EBIT
DA

Anti-friction
Bearings & Power
Transmission
Steel
Equity
Equity
Enterprise Value per Enterprise Value Per
Value $
Share $
Value $
Share $

Value
per
Weigh
Share $ t

76.45

23.25

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

53.20

Final Value
$

33.42

18.42

62.23

0.25

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