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The Coming Energy Boom

Written by: Bret Jensen 04/26/12 - 3:03 PM EDT
Tickers in this article: FRD CBI TKR

Timken Co. (TKR) develops and manufactures anti-friction bearings and assemblies, alloy steels and mechanical power transmission systems. Although it's not a pure play on the energy infrastructure ramp-up, it does get 36% of revenue from custom steel products required for drill pipes and other tubular steel needs. It is building a huge new facility in Ohio to take advantage of the expanding drilling activity in the Utica Shale, which is just beginning to take off. Its industrial and mobile divisions should also benefit from increased demand from the energy sector as well.

Four reasons Timken is undervalued at just under $55 a share:

  • It has a low five-year projected PEG of 0.88 and a forward PE of just over 9, significantly under its five-year average of 18.2.
  • It has easily beaten earnings estimates three of the last four quarters, and consensus estimates for FY2012 and FY2013 have steadily increased over the past three months.
  • It has a solid balance sheet, yields 1.8% and sells for around 1x annual revenues.
  • The median price target is $64.50. Stifel Nicolaus just initiated the stock as a Buy earlier in the month. Given the company again beat estimates easily on the top and the bottom line earlier in the week, I would look for price targets to be raised over the coming few weeks.

Friedman Industries (FRD) engages in steel processing, pipe manufacturing and processing, and steel and pipe distribution activities in the U.S.

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Four reasons Friedman is a good pick for value and dividend investors at $11 a share:

  • The Texas-based company is ideally situated (both geographically and materially) to serve the expanding energy infrastructure demand through its Texas Tubular division.
  • It is cheap at just 7.5x forward earnings and has more than 25% of its $77 million market capitalization in net cash.
  • In addition to a cheap valuation, Friedman provides a 4.6% dividend yield.
  • Given its small-market capitalization, niche product lines and the age of its management team, the company would be an ideal bolt-on acquisition for a larger player.