Tuesday, July 23, 2019

SKF Sees Industrial Revenue Contract On Broad Weakness

There are a lot of reports left for the second quarter reporting cycle, but so far it’s looking like my call for weakening industrial markets (particularly short-cycle markets) is playing out, as several high-quality industrial players are seeing weakness, including SKF (OTCPK:SKFRY). Although management tried to strike a positive tone, industrial organic sales slipped into contraction, the weakness is broad-based across its markets, and the company hasn’t been working down its inventory.

Even with the prospects of a U.S. rate cut increasing, I’m concerned about how industrial stocks like Atlas Copco (OTCPK:ATLKY), Illinois Tool Works (ITW), Parker-Hannifin (PH), Sandvik (OTCPK:SDVKY), and SKF will perform over the next 12 months given how past cycles have played out. A more meaningful decline in inventories would be a welcome sight (in the past, inventory corrections have usually predicted rebounds), but that could still be some distance away. As is, while SKF’s valuation is not demanding on a margin/returns basis, the high single-digit annualized return implied by discounted cash flow isn’t enough to coax me into taking the risk that things get worse before they get better.

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SKF Sees Industrial Revenue Contract On Broad Weakness

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