How has the Timken Company transformed their business after the spin-off of TimkenSteel?By: Ryan T. Fulmer
Tuesday, July 26, 2016
Over the last few years, we have been asked many questions about the Timken Company. Are they better or worse off after the spin-off? Has the company been able to improve operations?
As a bit of background, the Timken Company (TKR) spun off TimkenSteel (TMST) in the summer of 2014. Since then, Timken has worked hard to transform the business and improve operations.
In fiscal year 2015, the company had $2.9 billion in sales, with $1.6 billion in Mobile Industries (such as Automotive, Off-Highway, Rail, Aerospace/Defense and Heavy Truck) and $1.3 billion in Process Industries (such as Distribution and Services and OEM).
Timken sells products globally, with about 59% of sales in North America; 17% in Europe, the Middle East and Africa (EMEA); 16% Asia-Pacific (APAC); and 8% in Latin America. Companies looking to improve their organic revenue growth rate often look to expand their sales internationally as these markets are often growing more quickly.
For example, in 2016, the U.S. economy will grow about 2%, and Europe will grow about 1-1.5%. But many of the Asian and emerging-market economies will grow 2-3 times faster. In general, I tend to like companies looking to expand internationally because the risks associated with the growth are less than they might otherwise be if the company was looking to expand into new product offerings.
A common approach for industrial companies looking to accelerate growth is to pursue bolt-on or smaller acquisitions that provide the company with a foothold in a new product or geography. These types of acquisitions generally provide a better return on capital and are less risky than larger acquisitions.
I find it impressive that, over the last 15 years, Timken has undergone a major strategic push to expand into adjacent bearing categories in order to accelerate revenue growth.
Tapered Roller Bearings, which represented 84% of the product offering in 2001, represents only 57% in 2015 as Timken expanded into Power Transmission products and other bearings.
Over the last 15 years, the company has completed over 10 acquisitions. Each of these has helped diversify their product line and expand into adjacent categories. These new bearing offerings include spherical, cylindrical, house unit and ball and expand the market size from $10 billion in potential sales to over $55 billion. The market opportunity is much larger if you include mechanical power and transmission product and services space.
Timken has worked hard to improve profitability. From 2004 to 2008, their EBIT margin averaged 5% (prior to spin-off, these margins exclude steel) but has risen steadily over the last few years towards 10%.
One of the most famous investors, Warren Buffett, often discusses how he looks for businesses with a competitive niche that provide a ‘moat’ around the business. Under this purview, I think Timken has several things going for it. In the categories that Timken competes in, they are #1 or #2, and they provide products to highly-demanding industries and applications. Timken’s customers are in many different markets. More importantly, they demand reliability and quality versus the lowest-cost provider.
With improved profitability and revenue growth that looks to be accelerating through several different initiatives, it is easy to say that Timken looks well positioned for the future.
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