Timken (TKR) Hurt By Higher Costs & Currency Headwinds

 | Sep 27, 2019 05:31AM ET

We issued an updated research report on The Timken Company (NYSE:TKR) on Sep 26. The company’s near-term results are likely to bear the brunt of input cost inflation due to the implementation of tariffs and unfavorable foreign-currency impact.

Mixed Q2

Timken’s second-quarter adjusted earnings per share improved 14.4% on a year-over-year basis to $1.27. The upside was driven by favorable price and mix, and the benefit of acquisitions, partly offset by higher interest expenses. Further, net sales were up 10.3% year over year to $1 billion. However, the company lagged the Zacks Consensus Estimate for both metrics.

Higher Costs & Unfavorable Currency to Hurt 2019 Results

Timken’s results will bear the brunt of raw-material cost inflation. The company’s business requires a substantial amount of raw material, including steel. The U.S. government has initiated the imposition of tariffs on certain foreign goods, including steel. These measures have led to higher input costs for Timken. This, in turn, will dent margins if the company is not able to pass on the price increase to customers.

Further, Timken is exposed to the risks of currency exchange rate fluctuations, which may hurt its top line this year. Also, higher inventory and weakness in order intake rate are concerns.

Additionally, higher expenses related to restructuring charges are weighing on Timken. In the last five years, the company has taken $159 million in impairment and restructuring charges. Furthermore, the recent slowdown in the manufacturing sector is a concern, which may adversely impact the demand for the company’s products.

High Debt Levels a Worry

Higher debt level can inflate Timken’s financial obligations and subsequently hurt profitability. The company’s debt has increased following the Rollon and Cone Drive acquisitions. It had long-term debt of $1,642.6 million at the end of the second quarter, up from $1,638.6 million at 2018 end. The consequent increase in interest expenses will negatively impact earnings.

Share Price Performance

In the past year, Timken’s shares have lost 12.8% compared with the industry ’s decline of 21.2%.