This Swedish Company Makes Parts for the Hot EV Sector. Why the Stock Is Still Undervalued.
SKF, the world’s largest maker of ball bearings, is well diversified.
UILLAUME SOUVANT/AFP/Getty Images
Sweden’s SKF , which makes parts for Tesla, Nio, and other electric-vehicle manufacturers, has been dragged down with others in the sector over fears delays in getting some raw materials will have an impact on manufacturing and demand for products.
Shares in the company (ticker: SKF.B.Sweden)—which designs and manufactures bearings, seals, and lubrication systems for the mining, heavy industry, construction, agriculture, and transportation industries—have tumbled 16.1%, to 205 Swedish kronor (about $23), in the past six months.
Investors were spooked when rival ball-bearing maker Timken (TKR) in September warned about “unabating customer and supply-chain disruption.”
But SKF, the world’s largest maker of ball bearings, is well diversified. The business has been revamped in the past five years, and SKF has developed new technology that remotely monitors and services wind-farm and railway equipment to avoid costly repairs.
Only 20% of SKF’s sales—and 15% of operating profit—comes from the automotive sector, which has been hit by shortages in chips that are the brains controlling cars. While SKF dominates the bearings market for electric vehicles—it provides much of Tesla’s and Volkswagen ’s (VOW) bearings for their electric motors—it has limited exposure to cars fitted with internal combustion engines, with just a 5% market share in bearings.
A cost-cutting plan aims to achieve savings of SEK5 billion by 2025, with consolidation of facilities and investments in factory automation to reduce manufacturing costs. CEO Rickard Gustafson, who took the helm at the beginning of the summer, is conducting a strategic review.
Some analysts think the shares are cheap and set to soar. Anders Roslund, an analyst at Norwegian investment bank Pareto, has a Buy rating, and he estimates that the stock could increase 60%, to SEK330. SKF is “one of the most undervalued Nordic industrials,” he says, adding that the company’s transformation continues.
Based in Gothenburg, SKF has a market value of SEK94 billion and employs more than 40,000 workers. It fetches a low multiple of 11.6 times this year’s expected earnings and is valued at a 10% discount to its peers.
SKF posted pretax profit of SEK5.2 billion for the six months through June, on sales of SEK40 billion. This was up from the SEK2.4 billion for the same period in 2020, on sales of SEK36.6 billion.
“SKF has a really strong brand and leadership position—especially when it comes to application knowledge,” CEO Gustafson told Barron’s. “Being able to offer the products and services that help our customers’ machines rotate more efficiently, longer, and sustainably is what sets us apart.”
The company forecasts 10% organic revenue growth in the third quarter from the same period in 2020. Gustafson said in the last earnings statement that while demand remains strong, “there is also uncertainty related to both Covid and to the supply situation.”
SKF’s customers, such as car makers, have received large orders in the first and second quarters—10% more than expected. That should make for bigger ball-bearing sales for SKF. “Overall, management sees a strong demand environment across all regions and segments,” says Gael de-Bray, a Deutsche Bank analyst. “Even in China, demand remains strong.”
Sebastian Kuenne, an analyst at RBC Capital Markets, has an Outperform rating and a price target of SEK300. SKF is an “exceptionally attractive investment” because shares trade at only 12 times estimated 2021 earnings, despite 70% exposure to a “high-margin and robust industrial end market.”
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