Morningstar | SKF Not Feeling a Pinch in the Cycle Yet; 3Q Posts Good Results; Shares Undervalued
SKF posted modestly better than expected third-quarter results, and we continue to see the shares as attractively valued. The company has been making good progress in restructuring its automotive segment with the division's EBIT margin up nearly 300 basis points in the quarter and 210 basis points for the first nine months. We expect to make upward revisions to our full-year forecasts but not enough to materially change our SEK 195 fair value estimate. We retain our wide moat rating.The group EBIT margin expanded by 170 basis points in the third quarter, helped by the automotive segment's restructuring program as well as operating leverage from strong group revenue growth. Group revenue grew 6.9% organically with industrial revenue up by the same percentage. We see fewer strong competitors for SKF in its industrial end markets versus its automotive segment, and the EBIT margin in this segment has been higher as a result, coming in at 14%, double that of the automotive segment where customers have stronger bargaining power.
Organic revenue in the automotive segment grew by just 1.7% with particular weakness in the light vehicle segment in Europe. Sandvik, a leading supplier in machine tool inserts used in automotive production, was also hit by this. The weakness is namely driven by a new emissions testing procedure in Europe.
AB SKF is the parent company of the SKF Group, which supplies products, solutions and services within rolling bearings, seals, mechatronics, services and lubrication systems. Services include technical support, maintenance services, condition monitoring, asset optimization, engineering consultancy and training. Co.'s business areas are: SKF Industrial Market - Strategic Industries, which includes bearings and bearing accessories and lubrication systems; SKF Industrial Market - Regional Sales and Service, which develops SKF Solution Factory facilities providing engineering capability; and SKF Automotive, which develops and manufactures bearings, seals and related products and services.
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