Can A Spinoff Boost Timken Stock?

With shares of Timken (NYSE:TKR) trading around $61, is TKR an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.

T = Trends for a Stock’s Movement

Timken develops, manufactures, markets, and sells products for friction management and mechanical power transmission, as well as alloy steels and steel components. Timken manufactures and manages global supply chains for two core product lines: anti-friction bearings and adjacent mechanical power transmission components, in addition to specialty steel and related precision steel components. Its products and services include bearings and power transmission, tapered roller bearings, precision cylindrical and ball bearings, spherical and cylindrical roller bearings, chains and augers, gear-drive systems, aerospace products and services, and steel and precision steel components.

Timken is bowing under pressure to split its steel and bearings businesses. A shareholder vote and a Goldman Sachs (NYSE:GS) review both favored a spinoff of the company’s steel business, Bloomberg reports. Ward Timken will be the chairman and CEO of the new steel company, and Richard Kyle will be president and CEO of the bearings and power transmission company.

T = Technicals on the Stock Chart Are Strong

Timken stock has been surging higher over the past several quarters. The stock is currently trading near all-time high prices and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Timken is trading above its rising key averages, which signals neutral to bullish price action in the near term.

TKR

Source: Thinkorswim

Taking a look at the implied volatility and implied volatility skew levels of Timken options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Timken Options

27.83%

16%

15%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

September Options

Flat

Average

October Options

Flat

Average

As of Friday, there is average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

E = Earnings Are Decreasing Quarter Over Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Timken’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Timken look like and, more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

-53.76%

-51.27%

-29.75%

-25.89%

Revenue Growth (Y-O-Y)

-16.13%

-23.30%

-14.58%

-13.56%

Earnings Reaction

-4.92%

0.32%

1.67%

6.50%

Timken has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Timken’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Timken stock done relative to its peers – RBC Bearings (NASDAQ:ROLL), Kaydon (NYSE:KDN), and Regal-Beloit  (NYSE:RBC) — and sector?

Timken

RBC Bearings

Kaydon

Regal-Beloit

Sector

Year-to-Date Return

30.17%

20.73%

48.47%

-9.05%

25.47%

Timken has been a relative performance leader, year to date.

Conclusion

Timken operates a bearing and steel business with a presence all around the world. The company was recently persuaded to spin off its steel business. The stock has been moving higher and is now trading near all-time high prices. Over the last four quarters, earnings and revenues have been decreasing; however, investors have been relatively pleased with recent earnings announcements. Relative to its peers and sector, Timken has been a year-to-date performance leader. Look for Timken to OUTPERFORM.

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