By Matt Doiron
On Tuesday the CEO of Timken (TKR), James Griffith, disclosed that on Monday he had directly purchased 5,000 shares of the company at an average price of $37.94. As of this writing after hours on Tuesday the stock is below $37 after rising from a close at $36.20. If Griffith believed that the stock was a buy earlier this week at a slightly higher price, and was willing to forgo a good deal of income diversification to get there (which is part of why insider trading tends to be a bullish signal), then investors might be wise to consider it for their own portfolios. Timken, which manufactures and sells industrial products such as bearings, alloys, and power transmission components, has not had a good year- it is down 9%, and down 35% from three months ago- but the CEO apparently feels that the stock has fallen far enough.
Monday was also the day on which Timken released its 10-Q for the second quarter of 2012. Revenue showed very little change from a year ago; margins rose, but this was due to an unusual receipt from the federal government related to payments from antidumping cases that had previously been withheld from qualifying companies such as Timken. The company warned investors that depending on future legal action this receipt could be clawed back. Over the first half of 2012, Timken has increased its revenue by 7% and its operating income by 12% compared with the first half of 2011, solid growth numbers. The operating income growth does not include any effect of the federal receipt. Revenue growth was led by sales to Process Industries customers such as power transmission companies and industrial mills, with Steel customers contributing most of the rest of the rise. The Steel segment also powered the company's increase in operating income.
Citadel Investment Group, managed by billionaire Ken Griffin, was the largest hedge fund holder of Timken at the end of the first quarter according to 13F filings. Citadel reported owning about 750,000 shares, and has owned over 600,000 shares since last summer. AQR Capital Management and its head Cliff Asness owned about 580,000 shares and has been reducing its position recently. The only other hedge fund which, reported a position greater than $25 million, was Israel Englander's Millennium Management.
The decline in Timken's stock price has brought it to a level where it carries a trailing P/E of 6.4. Sell-side analysts expect earnings to be essentially flat next year, and its forward multiple is 6.5. Given the company's decent fundamental performance, these multiples look rather low even with the uncertainty of Timken's receipt possibly being clawed back. The company's market capitalization also gives it an implied EV/EBITDA ratio of 3.5, which is very low for a $3.5 billion company. Timken also pays a moderate dividend yield of 2.4%, adding to its value credentials.
Timken's closest peer in the machine goods industry is RBC Bearings (ROLL), which is more or less a pure-play bearings company. RBC trades at higher valuation multiples than Timken; though it has been growing its revenue at a higher rate, its forward P/E is more than twice Timken's at 15. Its EBITDA multiple is also about 10. MRC Global (MRC) provides pipes and valves to industrial customers, including energy and power companies. It also has EBITDA and forward P/E multiples in the low double digits. Finally, Kennametal (KMT) and Stanley Black & Decker (SWK) are more diversified tool companies but also serve as large-cap machine goods peers. Kennametal's forward P/E is comparable to Timken's at 8, with Stanley Black & Decker's being higher at 10, though the latter company does deserve a mention for paying a higher dividend yield at 2.9%. EBITDA multiples for these companies are also considerably higher than Timken's. Compared with its peers, Timken seems better priced for its value and the CEO may have placed a good trade.