Goldman Sachs’ Samuel H. Eisner downgraded the rating for Timken Co TKR from Buy to Neutral, while reducing the price target from $31 to $30. Despite the decline in shares, organic growth would need to accelerate to justify the stock’s full valuation, the analyst said.
Timken’s shares are trading at a 9 percent premium to the new price target. Since October 2014, the company’s shares have lost 21 percent, versus an average decline of 12 percent for Goldman Sachs’ and a 3 percent gain for the SPX.
“While our call was predicated on a recovery in short cycle demand, a portfolio transition, and a re-leveraging, we miscalculated the impact of an unwind in the energy complex and associated impact on short-cycle/distribution demand,” analyst Samuel Eisner wrote. He added that although shares had declined to come more in-line with the sector average, this occurred when the company’s fundamentals had weakened.
Headwinds
Eisner expects Timken’s fundamentals to be under pressure due to a limited recovery in industrial distribution and continued OEM headwinds. The company is expected to generate a 5 percent organic decline in 2016.
Although FCF growth could average 3.5 percent in 2016 and 2017, growth is expected to be “relatively nominal” in the near-term, the analyst said. He added that Timken had already achieved its targeted re-leveraging of its balance sheet [of 30-40 percent], and further benefits from re-leveraging is unlikely.
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