Sandvik Dogged By Short-Cycle Concerns As Mining Recovers Strongly

 

I was lukewarm on Sandvik (OTCPK:SDVKY) when I last wrote about the stock in October of 2020, and the shares have basically tracked the performance of the broader industrial space since then, as abundant signs of strength in the mining operations have been offset by disappointments and concerns in the tool business. While Sandvik has outperformed other industrial peers like Kennametal (KMT) and SKF (OTCPK:SKFRY), as well as some mining players like Komatsu (OTCPK:KMTUY) and Weir (OTCPK:WEGRY), Epiroc (OTCPK:EPOKY), at least, has done noticeably better.

While I think underlying demand conditions for the tools business is better than the bears fear, I am concerned about a pretty dicey history of margin performance here (relative to expectations) stretching back before the pandemic. With mining, I think the issue is more whether Sandvik can meet all the demand they are seeing without hurting margins.

The market seems to be cooling on shorter-cycle names, and that’s a sentiment risk for these shares. From a fundamental view, though, the valuation isn’t too bad, with double-digit near-term return potential and a long-term annualized return potential in the high single-digits. If Sandvik can start showing better results from the Manufacturing and Machining business (or SMS), outperformance is possible.

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Sandvik Dogged By Short-Cycle Concerns As Mining Recovers Strongly