SKF To Shed Light On Nordic Engineering Sector Outlook
January 25 2012 - 12:52PM
Dow Jones News
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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