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TIMKEN | Technical buying opportunity in one of America's most responsible companies

By Kristoff De Turck

Last update: Dec 9, 2022

TKR daily chart

Timken was recently included in the list of America's most responsible companies for the third year in a row. With the price development of the last few days, the stock screener identified a technical buying opportunity which can be particularly interesting for swing traders. In this article, we explain exactly what that means while looking at a number of fundamental parameters regarding valuation, profitability, growth and financial health of the company to see if Timken could be a good candidate for the more fundamental investor as well.

Company Profile : TIMKEN (NYSE:TKR)

Timken Co. engages in the engineering, manufacturing, and marketing of bearings and power transmission products. The company is headquartered in North Canton, Ohio and currently employs 18,029 full-time employees. It is also a provider of engineered metal-polymer plain bearings. The company operates through two reportable segments: Mobile Industries and Process Industries... Read the full profile here.

Mean reversion screen

TIMKEN is one of the results from this list, selected through a mean reversion filter screen as of December 9 (before market opening). The screen is based on the use of Bollinger Bands and it looks for stocks whose price has experienced a fairly short but solid price decline and where a reversal pattern occurs at the level of the lower bollinger band. That reversal pattern can be used to open a position towards the prevailing long-term trend which is still positive. This screen is part of our trading ideas section.

Daily and Weekly Charts


TKR daily chart

After a recent decline which brought the price below the lower bollinger band, the price recovered sharply with remarkable buying volume. It closed above the lower bollinger band. The price recovered from the price level of an earlier price break, which served as support. The price decline occurs in a long-term upward trend, which is determined on the basis of the ChartMill Trend Indicator that we have plotted as an overlay on a long-term weekly chart of the stock (see below).

TKR weekly chart

The actual Buy Setup

First, we want to see confirmation that the reversal movement is actually continuing. Therefore we apply a buy stop limit order that only comes into effect once the price hits $71.87, the maximum buy price is set at $72.08. That limit protects us should the price suddenly open with a significant gap up today.

TKR buy setup

The middle Bollinger Band is the first target. Depending on which strategy you use, you may or may not want to sell an initial small portion here and/or move the initial stoploss a bit closer. The second target is the current high on the daily chart. Swing traders who like to stay on board a bit longer can use a third target around the $92.5 price level ( see the first horizontal red resistance line on the weekly chart earlier in this article).



Does this buying opportunity also present opportunities for the long-term investor?

Technical buying opportunities are short snapshots which are purely based on momentum and price development. However, they provide no information about the profitability or further growth potential of the company in the long term. Below we will look at a number of parameters which give us a little more insight into the company's fundamentals.

General Overview


TKR general overview

Timken receives an overall ChartMill Fundamental Rating of ⅗ which is not a bad score. What stands out is that the company scores decently on all aspects and has no real negative outliers. The company is financially sound with moderate growth but good profitability and valuation in return. Investors can also look forward to a solid and stable dividend yield.

Growth

A good measure of historical performance is revenue growth. This is the total number of goods and/or services sold in a specific period which is then multiplied by the selling price. It's best to look at that revenue growth over several years. Timken realized a revenue growth of more than 9% over the past 5 years. The general minimum is 5%, so Timken's result is above average.

TKR revenue and EBIT growth

In addition to sales growth, of course, profits must also evolve positively. There are several ways to measure this profit. You can choose between gross profit, net profit or operating profit (EBIT). The most objective picture is provided by EBIT, which includes all operating expenses. Also, when you want to compare companies, this is the appropriate ratio because it looks purely at the core operational activity of the company. The Ebit growth for Timken over the last 5 years is more than 14%, which again is considerably higher than the applied standard of 5%.

We note that Ebit growth over the past 5 years is higher than Revenue growth over the same period. This indicates a sustainable and positively evolving profitability, a sign of the company's pricing power.

Profitability

To get an accurate picture of profitability, we look at return on invested capital (ROIC) and not ROE or ROA. However, it is important to know what that ROIC measures. In ChartMill, you have a choice of three different ROIC versions. For our analyses, we use the most operational version where we exclude cash, goodwill and all other intangibles.

TKR roic

For Timken, we arrive at an attractive ROICexgc (excluding goodwill and cash...) of 20.8%. Looking at that figure over the last three years we arrive at 17.58% still a very good result.

Financial health

A current ratio of 2.03 is already an indication that the company has no problems paying off its debts in the short term. There is - by general standards - adequate liquidity. The industry average is 2.08. The company has a slightly higher debt ratio than the industry average. The debt-to-equity ratio is 0.67 while the industry average is 0.47. However, the debt remains contained, the ratio is still noticeably below 1 which means that more equity than debt is still being used to finance the company. Moreover, the return on invested capital above has shown that that debt is being used efficiently.

Also, the Piotroski F-score which comes out at 7 shows that we are dealing with a strong company that has many qualities.


TKR financial health




The only downside we can currently spot for Timken has to do with the debt/FCF score. This filter compares debt to free cash flow. This ratio calculates how many years it will take to pay off all outstanding debt with the current free cash flow. 0 to 5 years is considered good for typical quality companies.

At Timken, this figure is noticeably higher, 11.3. However, closer examination reveals that this is largely due to the recent acquisition of GGB Bearing Technology that will allow it to further expand its range of engineering bearings. This is thus a one-time investment for which a lot of own cash was used and which gives this ratio a somewhat distorted picture.

Profit Quality

Finally, let's take a look at the profit/quality ratio, another fundamental indicator implemented by ChartMill that provides valuable information about the relationship between profit and cash flow. It is defined as the percentage of free cash flow to net income and indicates the extent to which the company is able to convert net profit (an accounting number) into real hard and valuable cash. When all recorded net profit is converted into free cash flow, we can consider profit to be of high quality. So ideally, we would like to see 100% of net profit converted into free cash flow.

For Timken we obtain a profit quality of no less than 95% , measured over the past 5 years, definitely a top result!
TKR profit quality

Conclusion

In the (very) short term, Timken shows a pure technical buying opportunity based on momentum and specific price-related elements. The company is financially healthy and can present more than decent profit figures over several years.

Furthermore, it has many characteristics of a pure quality company with attractive returns on invested capital. This certainly makes the buy signal interesting for the long-term investor as well.



Important

ChartMill is not a registered investment, legal or tax advisor or a broker/dealer. All investment/financial opinions expressed by ChartMill are from the personal research and experience of the owners of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.

Do your own research

Our content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find on our website and wish to rely upon, whether for the purpose of making an investment decision or otherwise.

Read our full disclaimer here

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TIMKEN CO

NYSE:TKR (2/20/2024, 7:09:18 PM)

After market: 79.77 0 (0%)

79.77

-1.94 (-2.37%)

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