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Timken: Strong Market Position With Earnings Growth, Technicals Improving

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Dec 27,2022


The Industrials sector continues to sport impressive relative gains against the S&P 500 this year.

High macro uncertainty hasn't seemed to hurt one domestic machinery company lately.

I see more upside potential than downside risk in shares of Timken.

The bulls might be pinning their hopes on one important relative strength chart as we head into 2023 – Industrials vs the S&P 500. The Industrial Select Sector SPDR Fund (XLI) is down less than six percentage points in total return in 2022 – producing more than 15% of alpha against the broad market.

This cyclical-value part of the market continues to run (vs SPY) despite rising fears of a recession next year. Will one domestic machinery company provide gains amid economic uncertainty? Let’s check out Timken.

According to Bank of America Global Research, the Timken Company (NYSE:TKR) is the largest manufacturer of tapered roller bearings in the U.S. and a leading global manufacturer of highly engineered bearings and power transmission products. The company generates 50% of sales from its Mobile Products division, which primarily sells bearings for new heavy equipment products, and the remaining 50% from Process Industries, which is more aftermarket driven. 55% of sales are from North America.

The Ohio-based $5.1 billion market cap Machinery industry company within the Industrials sector trades at a near-market 14.2 trailing 12-month GAAP price-to-earnings ratio and pays a 1.8% dividend yield, according to The Wall Street Journal.

The company’s strong position in power transmission products with somewhat high barriers to entry is a plus for Timken, but recent acquisitions could be a risk along with a weaker overall macro environment. Morgan Stanley recently upgraded the stock. Before that, TKR reported an EPS beat along with topping analysts’ revenue expectations in October.

On valuation, analysts at BofA see earnings having risen significantly in 2022, then continuing to rise next year and through 2024. The Bloomberg consensus forecast is about on par with what BofA sees. Dividends, meanwhile, should rise commensurate with per-share profit growth as the yield remains about in line with the market’s rate.

HMY’s forward operating and GAAP earnings multiples are low compared to the broad market and considering the future growth outlook. Finally, I like the free cash flow yield percentage when looking out to 2023 and ‘24.

Looking ahead, corporate event data from Wall Street Horizon show an unconfirmed Q4 2022 earnings date of Thursday, February 2 BMO. There are no other event dates to stir up volatility though.

The Technical Take

TKR pulled back big off its early 2021 peak above $90 to the summer 2022 low just above $50. That downtrend was broken, however, in August then successfully retested in October. Shares recently pulled back from resistance in the mid-$70s – that move came on bearish RSI divergence, so the very near-term trend could be lower.

Notice, though, that the long-term 200-day moving average has turned flat and should begin rising. A breakout above the December peak should help the case for a bullish move back toward the 2021 peak. I’d like to see such a move come on a new high in RSI. Overall, a breakout would imply a bullish measured move price objective to just above $100 based on the previous $25 range.

The Bottom Line

I like the valuation on TKR while a bearish to bullish reversal on the chart is encouraging. The bulls still have some work to do, however, in order to get the stock above $80 or so.

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