It has been about a month since the last earnings report for Timken (TKR). Shares have added about 15.1% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Timken due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Timken Q2 Earnings and Revenues Surpass Estimates
Timken reported second-quarter 2020 adjusted earnings per share of $1.02, which beat the Zacks Consensus Estimate of 33 cents by a wide margin. However, the bottom line declined 20% from the prior-year quarter due to lower volumes and related manufacturing utilization, and impact of unfavorable currency. However, lower selling, general and administrative expenses, favorable price/mix, and lower material and logistics costs somewhat mitigated the impact. Timken had implemented cost reduction actions in the quarter under review, which led to lower operating expenses.
On a reported basis, Timken delivered earnings per share of 82 cents in the reported quarter compared with $1.20 in the prior-year quarter.
Total revenues in the quarter were $804 million, down 20% from the year-ago quarter on account of lower demand due to the COVIS-19 situation and unfavorable currency impact, partially offset by the favorable impact of acquisitions. The top line, however, surpassed the Zacks Consensus Estimate of $705 million.
Costs and Margins
Cost of sales was down 17% to $573 million from the prior-year quarter. Gross profit slumped 25% year over year to $230 million. Gross margin was 28.7% compared with 30.6% in the year-ago quarter.
Selling, general and administrative expenses went down 30% to $112 million from the prior-year quarter. Adjusted EBITDA declined 17% year over year to $164.2 million. Adjusted EBITDA margin in the quarter was 20.4% compared with 19.7% in the prior-year quarter.
Segmental Performance
The Mobile Industries segment revenues declined to $343 million from $494 million in the year-ago quarter. This downside was primarily due to lower shipments across the board, partly offset by the benefit of acquisitions. The segment’s adjusted EBITDA plunged 47% year over year to $42 million.
The Process Industries segment revenues decreased 9% year over year to $461 million in the quarter, due to lower revenues across all sectors and unfavorable currency-translation impact. The segment’s adjusted EBITDA dipped 1% year over year to $129 million.
Financial Position
Timken generated free cash flow of $223 million in second-quarter 2020 compared with $135 million in the prior-year quarter. Cash flow from operations was around $247 million in the reported quarter compared with $158 million in the previous-year quarter.
As of the second quarter end, the company had $416 million of cash on hand and over $400 million of availability under committed credit facilities. The company’s net debt to capital ratio stood at 0.41 as of Jun 30, 2020.
Considering the ongoing uncertainty surrounding COVID-19, the company has not provided sales and earnings guidance for 2020.
Timken has accelerated and expanded structural cost reduction initiatives to align both its costs with near-term demand expectations and improve margins of the company longer-term. Cost reduction actions are expected to generate year-over-year savings of approximately $50 to $60 million in the second half of 2020.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 31.68% due to these changes.
VGM Scores
At this time, Timken has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren’t focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Timken has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.
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