EUR 850.00 For Business Accounts Only

Morningstar | Sandvik's 3Q Shows No Signs of Major Turn in Cycle Yet

Although Sandvik's third quarter looked strong without signs of a slowdown, we view this year as peak demand. The company has been growing above midcycle levels for seven quarters since the trough in 2016, and year-over-year comparables are becoming increasingly tougher. Its end markets, including mining, automotive, and construction, are highly cyclical, and many of its products are delivered within 24 hours of being ordered, so visibility from one quarter to the next can be pretty poor. In addition, some of its end-market indicators point to slowing growth, including decreasing PMI figures, lower light-vehicle sales in some regions, and recent weaker copper prices. We are maintaining our SEK 111 fair value estimate and no-moat rating. The shares look moderately overvalued.

Group revenue was up 10% on an organic basis and the EBIT margin at 18.9% was up 350 basis points, two thirds of which came from operating leverage. Sandvik's largest division, mining and rock, posted impressive results with revenue up 14% on an organic basis, while the EBIT margin reached a cyclical high of 18.1%, expanding 190 basis points year over year. Order growth slowed slightly to 8% organically, which is still a good result; however, management indicated that it had been expecting closer to 10% growth, with the gap coming from potential delays in larger orders. One of the drivers in the division has been copper mining. While the copper price has pulled back in the last quarter, prices in the second half of 2017 and the first half of 2018 were still well above the 2016 trough. Copper miners were late in restarting investments, and Sandvik has been seeing the benefits from orders up an average of 20% in 2017 and 9% in the first half of the year. Demand for automation equipment has been a focus of customer investments in the sector. Even so, we believe the tougher comparables and moderated commodity prices are likely to lead to slower growth in 2019.