Forging Ahead: 2 Stocks Fueling the Manufacturing Revival

Key Points

• Timken's legacy of innovation and strategic acquisitions demonstrate its commitment to growth in the engineered bearings and industrial motion space.
• Eaton Corporation is strategically positioned to capitalize on global megatrends like electrification and digitalization.
• These two companies are recognized leaders in their respective fields, demonstrating a dedication to sustainable practices and achieving significant, consistent operational growth.

The manufacturing sector is a cornerstone of the American economy, and it is experiencing a revival. Technological advancements and a renewed focus on sustainability drive this revival. Manufacturing is shedding its image as a relic of the past and embracing a future defined by innovation and efficiency. 

At the forefront of this transformation stand two distinguished companies with histories spanning over a century each. These two industry giants are adapting to the changing sector terrain and actively shaping it to their benefit, demonstrating that legacy companies can be at the forefront of progress. 

Timken: Engineered for Enduring Success

The Timken Company NYSE: TKR was founded in 1899 and it has a rich history of contributing to some of the most significant technological leaps of the past century. From the Wright brothers' first flight to space exploration, Timken's engineered bearings and industrial motion products have played a critical, though often unseen, role. Today, with a workforce exceeding 19,000 across 45 countries and 2023 sales reaching $4.8 billion, Timken continues to be a global technology leader.

The company operates through two primary segments: Engineered Bearings and Industrial Motion. The Engineered Bearings segment offers a wide variety of products, including tapered, spherical, and cylindrical roller bearings. These components are essential for reducing friction and enabling smooth movement in a variety of applications across industries such as renewable energy, agriculture, construction, and aerospace. The Industrial Motion segment complements this with offerings such as industrial drives, automatic lubrication systems, and linear motion products, serving diverse sectors including automation, marine, and medical.

Timken's earnings report for the third quarter of fiscal year 2024 (Q3 FY2024) revealed sales of $1.13 billion, a slight decrease of 1.4% compared to the same period in 2023. This dip was attributed primarily to lower-end-market demand in Europe and China. Earnings per share (EPS) for the quarter stood at $1.16, with an adjusted EPS of $1.23. Net income was reported at $81.8 million. Despite the modest year-over-year decline, Timken generated a healthy $123.2 million in operating cash flow and $88.2 million in free cash flow. As of the third quarter, the company maintains a healthy net debt-to-adjusted EBITDA ratio of 2.1 times.

Strategically, Timken has been actively expanding its capabilities and market reach. A notable recent move was the acquisition of CGI, Inc., a manufacturer of precision drive systems. This acquisition strengthens Timken's position in the growing markets for medical robotics and automation. In a significant leadership transition, Tarak Mehta assumed the role of President and CEO in September 2024, signaling a continued commitment to innovation and growth. The company recently celebrated its 125th anniversary, using the occasion to ring the opening bell at the New York Stock Exchange.

Eaton: Electrifying the Path to Progress

Founded in 1911, Eaton Corporation plc NYSE: ETN has evolved over its lifespan into a global leader in intelligent power management. With a presence in over 160 countries and 2023 revenues of $23.2 billion, Eaton's mission is to improve the quality of life and the environment through the use of its power management technologies and services. The company's operations are divided into five segments: Electrical Americas, Electrical Global, Aerospace, Vehicle, and eMobility.

The Electrical Americas and Electrical Global segments provide a comprehensive range of electrical components, power distribution systems, and related services. These segments cater to a diverse clientele, including data centers, utilities, and industrial facilities. The Aerospace segment is a key supplier to commercial and military aircraft manufacturers, offering hydraulic systems, fuel systems, and other critical components. Eaton's Vehicle segment supplies the automotive industry with transmissions, clutches, and engine valves. Lastly, the rapidly growing eMobility segment focuses on developing innovative solutions for electric vehicles, such as voltage inverters, converters, and power distribution systems.

Eaton’s earnings report for the third quarter of fiscal year 2024 broke records with the company’s strong financial results. Sales reached an impressive $6.3 billion, reflecting an 8% organic growth rate. The company achieved record segment margins of 24.3% and reported earnings per share of $2.53, with an adjusted EPS of $2.84. Operating cash flow was a robust $1.3 billion, with a free cash flow of $1.1 billion.

Eaton's strategic vision is closely aligned with global megatrends such as electrification, energy transition, and digitalization. The company is actively involved in numerous infrastructure "megaprojects" across North America, demonstrating its commitment to these growth areas. A notable collaboration with Tesla aims to streamline the deployment of home energy storage solutions, further solidifying Eaton's position in the expanding residential market. To support its growth ambitions, Eaton has announced plans for $1.5 billion in incremental capacity investments.

Comparative Financial Analysis and Growth Outlook

While Timken and Eaton operate within the broader manufacturing sector, their financial profiles and growth trajectories present an interesting contrast. Timken, with its focus on engineered bearings and industrial motion, exhibits a steady and more moderate growth path. Eaton, with its broader portfolio encompassing electrical systems and a strong focus on electrification, displays a more aggressive growth trajectory, evidenced by its record-breaking financial performance.

Both companies have demonstrated a commitment to shareholder returns through consistent dividend payments. Timken's current dividend yield stands at 1.92%, with an annual dividend of $1.36 per share. Impressively, Timken has increased its dividend for 11 consecutive years. Eaton's dividend yield is slightly lower at 1.12%, with an annual dividend of $3.76 per share. Eaton has paid dividends every year since 1923, showcasing its reliability as a long-term dividend-paying stock.

The Future of Manufacturing

The resurgence of American manufacturing is a fundamental sector shift driven by innovation and a growing emphasis on sustainability. Timken and Eaton are excellent examples of companies thriving during this transformation. Their commitment to developing cutting-edge technologies, expanding into high-growth markets, and prioritizing sustainable practices positions them for continued success in the years to come. Both companies are actively embracing the challenges and opportunities presented by the evolving global terrain. Timken's focus on precision engineering and its expansion into growth sectors like automation, coupled with Eaton's leadership in electrification and power management, demonstrates its readiness to meet the demands of a rapidly changing world.

Timken and Eaton offer compelling investment opportunities to investors. They represent stakes in established, well-managed companies and a chance to participate in the ongoing revitalization of a crucial market sector. While past performance is never indicative of future results, the strategic direction, financial health, and market positioning of these two industrial anchors suggest that they are well-equipped to forge a successful future in the new age of manufacturing.