EUR 850.00 For Business Accounts Only

Morningstar | Sandvik Reports Solid 1Q

No-moat Sandvik reported in-line first-quarter results with most end markets showing stable order growth aside from automotive. With a turn in the cycle being top of mind for markets, Sandvik's management echoed sentiments we have heard from other European capital goods suppliers in the quarter so far, namely a more cautious outlook for 2019 versus 2018 largely due to geopolitical risks, including trade wars and Brexit. Aside from the automotive sector, order book growth for companies in our universe seems to be pretty stable. Some companies are benefiting from late-cycle spending by the energy sector and increased automation investment. Sandvik is benefiting from mining sector investment cycle spending in autonomous excavation vehicles for underground mining. For now, we are maintaining our SEK 111 fair value estimate and see the shares as expensive.

Sandvik's mining and rock technology segment increased its order book by 9% organically in the first quarter, following double-digit growth in 2018. That's pretty impressive for a division with a four-year streak of a shrinking top line just a couple of years ago. Given that most of the current demand is narrowly focused, coming from existing underground mines and specifically for autonomous vehicles, the upgrade cycle should cool down in the medium term. However, in the near term, the division is likely to keep supporting good growth even against the cycle.

The machining solutions division is more cyclically sensitive and posted a 1% decline in revenue and orders in the quarter, with sluggish demand from the automotive segment dragging down growth in Europe (down 1%) and Asia (down 7%). Critically, the EBIT margin expanded by 100 basis points despite the top-line pressure. Current management has gone a long way towards downsizing the division's cost structure, including the supply chain and manufacturing footprint, with noticeable results that should cushion the margin in the next downturn.