By Matt Rego
If you follow my articles, you will know that I have been taking an in depth look at industrials and companies that will flourish under a revived U.S. industrial sector. After reading several articles in Barron’s and other news sources and the President’s State of the Union address, it became extremely clear that capital expenditures are on the rise in this country. Currently, our factories and manufacturing facilities are showing signs of wear and tear, as they are decades old and desperately need improvement. With interest rates low and companies hording cash reserves, now is the time for companies to step up their capital expenditures and put a fresh coat of paint on our factories; especially as more companies are determined to bring manufacturing back to the United States. This is great news for the U.S. economy and certainly there will be a variety of winners from the rise of capital expenditures. In addition to the companies I have written about previously,
The Timken Company (NYSE: TKR) is next in line to benefit greatly.
Timken “develops, manufactures, markets and sells anti-friction bearing and assemblies, alloy steels, and mechanical power transmission systems”. These are the basics that are needed to run a factory. Analysts love Timken for its steel abilities and its well-positioned stature in the industry. No wonder they gave the stock a 1.9 buy rating.
Activist shareholder fund, Relational Investors recently doubled their holdings on Timken to 7 million shares, which equates to 7.3 percent stake of the company. This move has made Relational the 15th largest shareholder in the company. Relational Investors has had a successful history of working in the industrial industry. For instance, the fund was able gain a nice share of Illinois Tool Works (NYSE: ITW) and break off certain aspects of the company to unlock value. Illinois Tool subsequently sold off some assets and made the recommended changes that shareholders requested. As a result, the stock has had a 20 percent run in the past year. Billionaire Jim Simons upped his stake in Timken as he also sees more value capabilities.
Fundamentally, the company is in great shape. Currently TKR has a price to earnings ratio of 11.14, with forward price to earnings coming in at 11.46. The nice share price run since December has given the stock an overvalued PEG of 1.33, price to sales of 1.08 and price to book of 2.42. However, the company is extremely stable financially with a current ratio of 3.26. Breaking it down further, we see that the company has total debt to equity of 0.21, with most of the debt considered to be long term. Meanwhile, the company has 6.11 cash per share and a dividend yield of 1.64 percent.
The bottom line here is that Timken is attracting high investor interest due to its well-positioned stature to profit from the coming factory and manufacturing remodel here in the United States. The stock has had a nice run and I would wait to buy on a pullback but everything points to success for this company in the coming years.