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Morningstar | Sandvik Reports Weak Second Quarter; Shares Overvalued

No-moat Sandvik missed expectations on revenue and EBIT with flat year-over-year revenue and a 2% decline in adjusted EBIT. Orders were down 5% year over year.  Similarly to other automotive suppliers so far this quarter, Sandvik saw a decline in demand from autos but also in general engineering. First-half revenue grew by 1%, below our 2% full-year forecasts. Full-year EBIT, however, is tracking in line with our full-year forecasts, as we have baked a slightly weaker margin than first-half results. While we expect to make minor adjustments to our forecasts, we do not expect this to change our SEK 111 fair value estimate. Shares look rich, trading in 2-star territory even after the sell-off following results.

The machining division's orders and sales fell by 4% organically in the quarter with a negative operating leverage effect compressing margins by 350 basis points. Pricing pressure also played a factor, albeit a smaller one. Regionally, Asia showed the greatest weakness down 9% year over year with the leading factors being weakness in automotive end markets but also general engineering, which hints at a broader softening in demand. General industrial demand decline was also cited by ball bearings supplier SKF in its second-quarter results. The machining contributes to 40% of group orders and demand visibility is low in the division as well as being sensitive to the cycle with a relative high degree of operating leverage causing volatility in division profits.

The mining division is equal in size but managed to post somewhat better results. Orders were flat while revenue was up 3% organically. The division's EBIT margin expanded by 110 basis points. Even with this division's somewhat better results, the machining division's results are somewhat concerning.