Alfa Laval Managing Costs Well, But Sector Exposures Are A Concern

 For a company with what would otherwise be looked at as undesirable end-market leverage, Alfa Laval (OTCPK:ALFVY) shares have been surprisingly strong, rising 15% over the last three months and falling about 12% year-to-date, keeping pace with the broader industrial group. Management's strong execution on cost reduction is certainly helping, but with Alfa Laval heavily leveraged to end-markets like ship building, oil/gas, and petrochemicals (around 50% to 60% of revenue) that are likely to be lower for longer, I find that performance pretty interesting.

Make no mistake - I still think Alfa Laval is a well-run company. But when a good company runs into bad market conditions, it's rare for the company to win. I do think Alfa Laval may be buying at or near the bottom with the Neles deal, and perhaps management is right that shipbuilding is troughing, but oil/gas headwinds could still be meaningful. Valuation isn't bad - I'd call the company "fairly valued" with an expected annualized return on the lower end of the high single-digits.

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Alfa Laval Managing Costs Well, But Sector Exposures Are A Concern