Friday, 17 July 2015

Swedish numbers frenzy - Ericsson, Electrolux & Volvo

We are now getting deeper into the Q2 earnings reporting and today in Europe three interesting Swedish names have reported.  I am hopeful of some insights given I noted earlier in the week from country peer SKF (link here):

'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'

I have written thematically positively about Ericsson before (link here) and today's numbers showed some progress at the operating income level - although the good volumes influence was counterbalanced by North America/China 'mix' and ongoing restructuring costs.

Nevertheless I took three positives from the numbers.  First the cash flow side firmed up...

...second the key networking division saw higher sequential margins albeit not to the typical double digit level seen for most of the last couple of years...

...and third as described in the link above there are good structural underpinnings / opportunities.  I concluded last time that:

For me a x14 EV/ebit multiple based on the above criteria is closer to an interesting level which would imply the middle of the SEK90-95 range.  

With the shares back to the c. SEK95 they remain opportunistic but at the margin I would still prefer the company's peer Nokia which has the added advantage of self-help via synergies/benefits from the ongoing Alcatel-Lucent merger they are undertaking.  Nevertheless a positive theme and a good stock to be thinking about. 

I wrote earlier in the month about Electrolux observing back then that:

'I like some of the trends here (pricing positive, happy to keep pricing up at cost volume) but buying here clear hope on US deal not only occurring but also adding value for them.  So a ‘trust management’ call especially with the shares trading at a mid-teens EV/ebit multiple.  

I would prefer wait for the full set of Q2 numbers in a few weeks time and maybe the c. SEK225 level where support where the shares have exhibited some historic resistance/support.  One to watch however in the earlier part of the Q2 European earnings season'

The Q2 numbers surprised me by how good they were with good local currency organic growth...

...and generally positive outlook comments:

With the shares back into the SEK260s I am prepared to wait BUT the 'trust management' element of the valuation does appear to be well underpinned and I would say that the recent support for the shares below SEK240 is a noteworthy point. 

Finally Volvo.  Recently I have not liked the stock and whilst today's results showed progress across all their divisions (trucks, construction equipment, buses etc.) a stake sale capital gain did flatter the numbers further.  

If you extrapolate the underlying numbers the shares are trading at just over x10 EV/ebit which does not seem either excessive or cheap at face value.  I do note (using some excellent new presentation data provided) a suitably mixed truck backdrop with China bad...

...US good...

...but Brazil bad:

For me Volvo is cheap at c. SEK80, in cover territory at SEK90 but just north of SEK100 it provides solid industrial cover short-side scope (despite the activist shareholder). 

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