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Timken Report_2 - NYSE TKR THE TIMKEN COMPANY Investment...

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Investment Thesis The Timken Company is the largest tapered roller bearings manufacturer in the world and one of the largest manufacturers of alloy and specialized steel in the world. The company reports revenues in three business segments: Steel (31% of 2005 revenue), Automotive (32%), and Industrial (37%). I feel that Timken is capable of delivering solid EPS and top-line revenue growth over the next two years, driven largely by demand for industrial bearings and steel products in key end-markets, including aerospace & defense, energy, rail, mining, and construction. Timken’s Industrial and Steel margins have been expanding since 2004, and with strong demand for the company’s products and global capacity constraints, I forecast margin expansion through 2008. Price Target I have assigned Timken a one-year price target of US $42.00. This price target is based on applying a 14.0x P/E multiple of my 2007E EPS of $3.07. This P/E multiple was constructed using a weighted average comparables multiple of automotive, industrial, and bearings companies (see Equity Valuation: Multiples section for discussion). Timken is a strong BUY based on valuation, with a 38.2% upside to the company’s 11/17/2006 stock price of $30.38. THE TIMKEN COMPANY NYSE: TKR 28 November 2006 Analyst: Constantine Elefter Fisher College of Business The Ohio State University Columbus, Ohio Contact: 330.806.6217 Email: [email protected] Fund: OSU SIM Class: Bus-Fin 724 Manager: Royce West, CFA Recommendation BUY Sector: Industrials Industry: Machine Tools & Accessories Q4/04 Q1/05 Q2/05 Q3/05 Q4/05 Q1/06 Q2/06 Q3/06 Q4/06 TIMKEN COMPANY (TKR) PRICE 30.38 DATE 11-17-2006 StockVal ® 22 22 24 24 26 26 28 28 30 30 32 32 34 34 38 40 200 50 SP5 0.98 Volume in Thousands of Shares 100 100 200 200 300 300 600 600 1000 1000 1700 1700 3100 60 Day Avg. Volume 801 (US$) 2004A 2005A 2006E 2007E 2008E $1.50 $2.81 $2.81 $3.07 $3.69 87.3% 0.0% 9.3% 20.2% $2.70 $2.99 $3.60 $2.75 $3.20 $3.65 $2.69 $2.70 $3.55 Estimates High EPS Low EPS GAAP EPS EPS Change YoY Consensus EPS (First Call: October) US $ 30.38 US $ 42.00 US $36.58 US $26.57 US $2.74 B 94.1 MM -18% 1.09 US $5,286 MM US $2.81 2006E Net Sales: 2006E EPS: Stock Data Market Capitalization: Shares Outstanding: YTD Return: Beta: Price: Price Objective: 52 Week High: 52 Week Low: 2005 Revenue Breakdown by Business Segment Industrial 37% Automotive 32% Steel 31%
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1 1 Table of Contents Company Overview 3 Products 3 Tapered Roller Bearings 3 Precision Cylindrical and Ball Bearings 3 Spherical and Cylindrical Bearings 3 Needle Bearings 4 Bearing Reconditioning 4 Steel 4 Business Segments 4 Automotive Group 4 Restructuring: Automotive 6 Industrial Group 7 Steel Group 7 Macroeconomic Conditions 8 Gross Domestic Product 8 Industrial Production 8 Manufacturing and Equipment Orders 10 Pricing: Steel and Capital Equipment 11 Regulatory Framework (CDSOA “Byrd Amendment”) 12 Industry Analysis 13 Industrials Sector Valuation 14 Competitive Advantages: Growth Drivers 15 Engineering 15 Acquisition 15 Competitive Pressures 15 Project ONE 15 Sources of Growth 16 DuPont Analysis 17 Summary 18 Financial Statement Ratios Analysis 19
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2 2 Equity Valuation: Multiples 20 Absolute Valuation 20 Automotive Comparables 20 Industrial Comparables 21 Bearings Comparables 22 Conclusion 22 Equity Valuation: Discounted Cash Flow 23
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