Ball bearings sound humdrum. But without them, industry would grind to a halt. So when Sweden's SKF AB (SKF-B.SK), the worlds largest ball-bearing manufacturer, reports fourth-quarter results Thursday, the company's performance and outlook will be an important barometer of how much more the industrial cycle will turn against the Nordic engineering sector.

SKF's own fourth-quarter performance in the period may well be overshadowed by what it says about its outlook, said Ulric Gronvall, senior portfolio manager at Danske Bank.

"The economic signals that have started to become stronger have appeared recently and of course won't show in the fourth quarter (of Swedish industrial companies)," Gronvall said.

A relatively bullish outlook from SKF might encourage investors to return to a sector which has under performed the wider market. The Nordic OMX Industrials index has fallen 6.9% in the past six months, with shares in SKF down 9.0%, compared with a 5.9% fall in the broader OMX Nordic 40 index.

SKF is a global supplier to the automotive and energy sectors like many of its Nordic engineering peers. It generates about half of its sales in Europe and a quarter in Asia, a growing market for the sector at large. Ball bearings are used to reduce rotational friction in rotating parts such as cars, industrial machinery, and turbines.

With its products being such vital industrial components, SKF has proved prescient in warning about slowing activity sectors like mass-market auto manufacturing, truck-making, and renewable energy when it reported third-quarter earnings in October. Since then, wind-turbine maker Vestas Wind Systems (VWS.KO) and energy-equipment giant Siemens AG (SI) have reported disappointing results for the three months to end-December as car makers Peugeot-Citroen (UG.FR) and Renault SA (RNO.FR) have grappled with a fast-contracting French market and generally sluggish sales in Europe. Swedish truck maker Scania (SCV.-A.SK) has cut production twice in recent months.

For the three months ended Dec. 31, analysts polled by Factset expect SKF's net income to grow by on average 3.7% compared with the same period 2010, a slowdown from a 12% year-on-year increase in the third quarter.

"Industrial activity probably won't be as bad as many have expected, which implies that there is a possibility that people will have to make upward revisions to their profit forecasts during 2012 and 2013," Gronvall said.

Valuations in the Nordic engineering sector have come down substantially during the fall. "We believe they are relatively attractively valued at the moment," Danske's Gronvall said. Danske Invest's Swedenfund is overweight in industrials which make up around 40% of the portfolio.

SKF is trading at an enterprise value multiple of around 7.5 times forecast earnings before interest, taxes, and amortization according to a recent report by Deutsche Bank.

That's a discount to the forecast 2012 trading multiples of engineering peers like Swedish compressors and mining tools manufacturer Atlas Copco (ATCO-A.SK) on 10.3 times, industrial tools company Sandvik (SAND.SK), 8.7 times, and Finnish elevator company Kone (KNEBV.HE), 11.8 times. Scania is trading on a 2012 EV/Ebita multiple of 7.8 times, according to Deutsche Bank.

-By Christina Zander, Dow Jones Newswires; +46-8-5451-3104; christina.zander@dowjones.com

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