Timken (TKR)

Industrial component provider Timken (NYSE:TKR) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 2.7% year on year to $1.16 billion. Its non-GAAP profit of $1.37 per share was 10.1% above analysts’ consensus estimates.

Company Overview

Established after the founder noticed the difficulty freight wagons had making sharp turns, Timken (NYSE:TKR) is a provider of industrial parts used across various sectors.

Engineered components and systems companies possess technical know-how in sometimes narrow areas such as metal forming or intelligent robotics. Lately, automation and connected equipment collecting analyzable data have been trending, creating new demand. On the other hand, like the broader industrials sector, engineered components and systems companies are at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.

Competitors offering similar products include Amphenol (NYSE:APH), Barnes (NYSE:B), and Illinois Tool Works (NYSE:ITW).

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Timken grew its sales at a tepid 5.3% compounded annual growth rate. This fell short of our benchmark for the industrials sector and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Timken’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 2.3% annually.

We can dig further into the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Timken’s organic revenue averaged 4.1% year-on-year declines. Because this number is lower than its two-year revenue growth, we can see that some mixture of acquisitions and foreign exchange rates boosted its headline results.

This quarter, Timken reported modest year-on-year revenue growth of 2.7% but beat Wall Street’s estimates by 3.6%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months. Although this projection suggests its newer products and services will fuel better top-line performance, it is still below the sector average.

Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.

Timken’s gross margin is slightly below the average industrials company, giving it less room to invest in areas such as research and development. As you can see below, it averaged a 29.9% gross margin over the last five years. Said differently, Timken had to pay a chunky $70.08 to its suppliers for every $100 in revenue.

Timken’s gross profit margin came in at 30.2% this quarter, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Timken has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 13.1%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Timken’s operating margin decreased by 1.1 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Timken generated an operating margin profit margin of 12%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Timken’s unimpressive 5.5% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

Timken’s two-year annual EPS declines of 11.8% were bad and lower than its two-year revenue losses.

Diving into the nuances of Timken’s earnings can give us a better understanding of its performance. While we mentioned earlier that Timken’s operating margin was flat this quarter, a two-year view shows its margin has declined. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q3, Timken reported adjusted EPS of $1.37, up from $1.23 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Timken’s full-year EPS of $5.35 to grow 7.8%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Timken has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 6.9% over the last five years, slightly better than the broader industrials sector.

Taking a step back, we can see that Timken’s margin expanded by 2 percentage points during that time. This shows the company is heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Timken’s free cash flow clocked in at $163.8 million in Q3, equivalent to a 14.2% margin. This result was good as its margin was 6.3 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Timken’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 10.8%, slightly better than typical industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Timken’s ROIC averaged 2.4 percentage point decreases each year. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Timken reported $449.1 million of cash and $2.21 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $796.2 million of EBITDA over the last 12 months, we view Timken’s 2.2× net-debt-to-EBITDA ratio as safe. We also see its $100.3 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Timken blew past analysts’ revenue expectations this quarter. We were also glad its organic revenue outperformed Wall Street’s estimates. Zooming out, we think this was a solid print. The stock traded up 3.8% to $80.15 immediately following the results.

Updated: December 3, 2025 at 10:29 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Timken.

Timken doesn’t pass our quality test. First off, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its strong operating margins show it’s a well-run business, the downside is its organic revenue declined. On top of that, its diminishing returns show management's prior bets haven't worked out.

Timken’s P/E ratio based on the next 12 months is 13.9x. While this valuation is fair, the upside isn’t great compared to the potential downside. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $87.85 on the company (compared to the current share price of $82.53).