A month has gone by since the last earnings report for Timken (TKR). Shares have lost about 2.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Timken due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Timken’s Q3 Earnings Miss, Revenues Dip Y/Y

Timken reported adjusted earnings per share (EPS) of $1.23 in the third quarter of 2024, which marked a 20.6% year-over-year decline. The bottom line also missed the Zacks Consensus Estimate of earnings of $1.37. The weaker-than-expected results were led by lower volumes and higher costs. 

On a reported basis, the company delivered earnings of $1.16 per share compared with $1.23 in the prior-year quarter.

Total revenues were $1.13 billion, down 1.4% from the year-ago quarter. The top line beat the Zacks Consensus Estimate of $1.12 billion.

Timken Reports Margin Contraction

The cost of sales dipped 0.6% to $782 million from the prior-year quarter. The gross profit decreased 3% year over year to $344 million. The gross margin was 30.6% compared with 31.1% in the year-ago quarter.

Selling, general and administrative expenses were up 5.6% year over year to $189.7 million. Operating income fell 2% year over year to $146 million. 

Adjusted EBITDA declined 12% year over year to $190 million. The adjusted EBITDA margin was 16.9%, a 200-basis-point contraction from 18.9% in the prior-year quarter.

Timken’s Segment Performances in Q3

The Engineered Bearings segment’s revenues fell 4.5% year over year to $741 million. This was due to weak end-market demand in Europe and China. Renewable energy witnessed a significant organic decline in the quarter, owing to continued weakness in China. The off-highway, auto/truck and general & heavy industrial sectors also declined, while industrial distribution, aerospace and rail shipments were higher year over year. 

The Engineered Bearings segment’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were $138 million compared with the year-ago quarter’s $157 million. The decline was due to lower volume and higher logistics and manufacturing costs, offset by favorable price/mix.

The Industrial Motion segment’s revenues rose 5.2% year over year to $386 million. The increase was aided by acquisitions, offset by lower end-market demand. Organically, the automatic lubrication systems platform posted the largest decline, while drive systems revenues showed improvement. 

The segment’s adjusted EBITDA was $74 million compared with $75 million in the third quarter of 2023. The decline was due to lower volume and higher operating costs, partially offset by the benefits of acquisitions.

TKR’s Cash Flow & Balance Sheet Updates

Timken had cash and cash equivalents of $413 million at the end of the third quarter compared with $419 million at the end of 2023. Cash flow from operating activities was $123 million compared with $194 million in the prior-year quarter. 

The long-term debt as of Sept. 30, 2024, was $2.19 billion, up from $1.79 billion as of Dec. 31, 2023. Net debt to adjusted EBITDA was 2.1 as of the same date, in-line with the figure as of Dec. 31, 2023.

During the quarter, Timken completed the acquisition of CGI, Inc., a manufacturer of precision drive systems for medical robotics and other automation sectors.

Timken’s 2024 Guidance

Timken expects total revenues to decline 4% from the 2023 level. The company anticipates adjusted EPS to be between $5.55 and $5.65. The midpoint of the range indicates a year-over-year decline of 21%.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

The consensus estimate has shifted -24.31% due to these changes.

VGM Scores

Currently, Timken has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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 broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Timken has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

Performance of an Industry Player

Timken is part of the Zacks Electronics - Miscellaneous Products industry. Over the past month, Flex (FLEX), a stock from the same industry, has gained 1.3%. The company reported its results for the quarter ended September 2024 more than a month ago.

Flex reported revenues of $6.55 billion in the last reported quarter, representing a year-over-year change of -12.4%. EPS of $0.64 for the same period compares with $0.68 a year ago.

Flex is expected to post earnings of $0.63 per share for the current quarter, representing a year-over-year change of -11.3%. Over the last 30 days, the Zacks Consensus Estimate remained unchanged.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #2 (Buy) for Flex. Also, the stock has a VGM Score of A.

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