(B)(N) TKR Timken Company

Deal Book. Activist investors who own about 7% of the Timken Company, or $380 million worth at the current prices, want the company to split up, figuring that the sum of the parts is worth more than the whole and would add up to $68 per share instead of the current $56 per share, which, by the way, is “miraculously” up from $36 last year, all in one piece (Reuters, April 1, 2013, Timken says top shareholder’s break-up analysis flawed).

Well, we don’t agree because, first of all, on a “risk-adjusted” basis the company is worth only $42 to $44 per share so that at the present time, $14 per share is a “free economic good” – that is, the investors “like” it so much – like its products, markets, management, and prospects – that they are willing to buy and hold it at these prices above its demonstrated and provable “worth” and believe that the company will earn those prices (and probably more) while they own it. Please see our Posts, The Price of Risk, August 2012, and The Nash Equilibrium & Its Stock Price, October 2012, for more background on these assertions.

Secondly, the company pays a dividend of $0.23 per share per quarter or $88 million per year to its shareholders for a current yield of 1.6%, and we’re doing better than that because we bought the company at a much lower price of $38 two years ago (please see Exhibit 1 below, Red Line Stock Price (SP) above the Black Line Risk Price (SF), with our usual “selling discipline” applied to that position). What should we do with “cash” instead?

Obviously, the activist shareholders have never made or sold a “ball bearing”, and they don’t say who would buy the “parts” at those prices – things for sale seldom get the price one asks for, and what have they sold recently? Our prophylactic is to set the $Stop/Loss at the current price less the demonstrated downside volatility of minus ($4) per share, or $52, which might not be a surprising price once the excitement dies down, or, if the activist investors succeed, there might be a higher price in the offing on the basis of the “greater fool” theory of investment. (Maybe, they want to buy all of it at $68 per share and “unlock” the hidden value for us.) Alternatively, we can buy the May put at $55 for $2.30 per share today, and sell or short an offsetting call at $57.50 for $1.60 so that for a net cost of $0.70 per share today ($2.30 less $1.60) against our long position and some of our profits, we can just sit this out pending the shareholders meeting on May 7.

Exhibit 1: (B)(N) TKR Timken Company – Risk Price Chart

Timken Company manufactures and markets high-performance mechanical components and engineered steel.

It operates through four segments namely Mobile Industries, Process Industries, Aerospace and Defense and Steel.

(Please Click on the Chart to make it larger if required.)

For more of our views on Maximising Shareholder Value (LOL), please click on the Tag or Search by the company name.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

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Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.