Wednesday, 15 July 2015

Always listen when a bellweather stock speaks: insights from Sweden's SKF

I have talked before about the insightful comments on the global economy from the bearings/lubricants company SKF due to their range of industrial products in multiple different end sectors:

Today's Q2 update saw a profits increase...


...but this was largely driven by the weak SEK:


The underlying reality however was weaker local currency sales...


...and notably poor sequential year-on-year sales in North America and Asia:

 
Judging by the outlook statement the second paragraph comment below about poor general demand is not the strongest outlook.  


Some key insights from the conference call were downbeat: 

Asia - 'China more uncertain demand...destocking' 

US - leveling off of destocking but admits behind in automotive side which they are hoping to remedy

Admitted global pricing potential poor

Cash flow remained reasonable...


...however net debt reduction remains relatively modest:



Thoughts?  Well a downbeat update and conference call. SKF is a good company but inevitably exposed to the movement of the shorter-term cycle accentuated by a poor showing by the automotive sector (where there were further indications of ongoing large potential change).  Interestingly back a year ago I noted:

'I covered my SKF short recently but at x12s EV/ebit and 3.2% yield it is ok value only viewing a level in the low SEK160s (current share price SEK173) as more of a level to start to consider getting involved on the long side'

In my view not too much has changed over the last year despite a share price that pushed up strongly...and more recently (with fears over the global economy slowing) has fallen back.  I like the stock at around SEK165 (<x12 EV/ebit) for a starter position.


Above all, however, what SKF does indicate is some of the macro pressures and issues that are potentially afflicting corporates in the rest of 2015.  This is why it is a fascinating current / upcoming results season...but also why waiting for the numbers to publish and extracting stock specific performances and insights are also key.  

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