Friday, 16 October 2015

SKF tells you how it is out there

I have observed 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 typically from a short cycle perspective:

Today's downbeat statement and the immediate 4% share price fall is not the best signal for European/global industrial prowess.  And what's the issue?  Basically it is a lack of organic sales growth which - to use a word uttered by the SKF management in the conference call - intensified during the quarter with both China (much of the industrial footprint ex energy) and North America (automotive - seems as if they are losing some share) getting a particular negative impact shout out (especially as Latam and European sales were relatively unchanged year-on-year): 

Given SKF reports in SEKs currency factors were actually a positive factor (falling European currencies versus say the US dollar over the last year) and the company continued to cut costs but the negative organic sales movement plus a broad range of 'other' impacts (purchasing, R&D, IT and inflation impacts).  

And no shorter-term turnaround is anticipated where many of the elements above (North America, Asia, automotive) are expected to continue.  

So not the greatest read through - and consistent with those shabby manufacturing PMI statistics that keep on popping up globally. In such an environment what clearly works is cost cutting and SKF are continuing with this.  Economically it tells you that a global environment which supports more stimulus and generally 'lower (interest rates) for longer' is apparent.  

So what valuation do you pay for industrial assets then?  It is slightly dangerous I feel to extrapolate the c. SEK2bn quarterly profitability given the FX influence (positive) and the preponderance of one-offs (restructuring/related).  Nevertheless assuming SEK7-8bn puts the valuation into the x12s EV/ebit which is not very high.  Cash flow generation is currently solid and more than enough to pay the current 3.75% dividend yield.  It has to be however with a gearing ratio currently of c 115%.  The company has a good debt maturity spread however.  

With the shares currently trading just below SEK150 we are at levels where some historic support has started to kick in. 

Clearly it is not easy out there - as most observers should already know.  SKF shares are indicating and starting to discount a shabby backdrop. That makes SKF very correlated with any new stimulus application. With getting on for a third of sales in Asia it is impacted by any news out of China as well as stimulus efforts elsewhere.  

The contrarian in me is saying that SKF is a buy in the midst of further market uncertainty assuming we are not sliding into overt global recession (i don't think we are).  For the broader world and market however SKF is indicating that caution must be exercised and that only through matters such as cost cutting, shareholder remuneration and other positive initiatives should industrial shares be bought.  

Which brings us nicely to General Electric and Honeywell both of whom have numbers out today and which will be written up here on Financial Orbit later today.  

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