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Does SKF’s High Value Creation Deserve a Re-Rating?


  • Consolidation of manufacturing sites drives margin expansion
  • High single-digit industry growth mainly driven by Asia
  • Consistent value creation while peers struggle

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SKF’s revenue breakdown 2020

Price could turn bullish soon; but no support from volume

  • Overall, the stock price stayed flat over the past year
    • The 50DMA line stayed below the 200DMA since 2H21
    • However, most recently, the 50DMA moved closer and could cross it soon, which would be a positive signal
  • The Volume RSI has been weak recently, which we would interpret as bearish

Consolidation of manufacturing sites drives margin expansion

  • Since 2013, SKF has divested 74 of its manufacturing units
    • This equals a reduction of 44% and freed up more than SEK7bn
  • The company focused on consolidation and expansion of its primary manufacturing sites

Stable and growing margin shows its resiliency

  • The consolidation strategy paid off as SKF has now the second-highest operating margin among the 6 biggest manufacturers of bearings
    • Overall, the 6 players make up more than 70% of global output
  • It’s also worth noting that SKF’s margin has been the most stable among all peers

High single-digit industry growth mainly driven by Asia

  • In 2020, the global bearings market was about SEK390bn
    • Asia makes up around 50% of it (China 30%)
  • In 6 years, the market value could reach SEK690bn, a 77% increase from 2020
    • Rapid urbanization in Asia drives demand for bearings that are used in infrastructure, industrials, and automobile industries
  • SKF expanded its presence in China which makes me optimistic that it can reach 5%+ EPS growth over the next 5 years

Consistent value creation while peers struggle

  • SKF has shown an impressive ROIC over the past years that has led to value creation
  • It generates the highest return among all its closest competitors
  • Management’s objective is to return to an ROIC of 15%
    • I believe it could exceed this target by 2-3ppts in 22E

FVMR Scorecard – SKF

  • A stock’s attractiveness relative to stocks in that country or region
  • Attractiveness is based on four elements
    • Fundamentals, Valuation, Momentum, and Risk (FVMR)
  • Scale from 1 (Best) to 10 (Worst)

Consensus sees small upside

  • Majority of analysts issued a BUY recommendation while 4 have a SELL
  • Consensus expects two strong years in terms of revenue that make up for the decline in 2020
    • 23E onward, analysts assume rather slow but steady growth

Get financial statements and assumptions in the full report


  • Revenue could return to the pre-pandemic level in 22E
    • Especially, demand from China contributes to a strong rebound

Balance sheet – SKF

  • SKF recognized a larger inventory in 21E
    • Inventory days have increased to 120 days in 3Q21, which is a 20% increase to the previous year
  • The company did not significantly increase its LT-debt during the pandemic
    • Net debt-to-equity is likely to stay around 0.2x in the near future

Ratios – SKF

  • Record margin in 21E and 22E expected due to strong demand from the Industrials sector, where SKF makes a higher margin than from its automobile customers
  • Increased working cap requirements lengthen the cash conversion cycle
    • Bottlenecks in logistics and customer shutdowns have increased inventories

Long-term share price performance potential

Free cash flow – SKF

  • SKF likely to record a negative FCFF in 21E due to an increase in inventory
    • The company should be able to return to positive FCFF in 22E and maintain it over time

Value estimate – SKF

  • I am a bit more optimistic about the growth outlook than consensus
    • SKF should benefit from strong global demand for bearings over the next 5 years

World Class Benchmarking Scorecard – SKF

  • Identifies a company’s competitive position relative to global peers
  • Combined, composite rank of profitability and growth, called “Profitable Growth”
  • Scale from 1 (Best) to 10 (Worst)

Key risk is intensifying competition

  • Market could become more fragmented with rising local manufacturers (e.g., China)
  • Failure to adapt to changing product requirements by customers
  • Fluctuating input prices and inflation could pressure margins


  • Sector-leading margin results in ongoing value creation
  • Industry faces good and stable growth prospects
  • Valuation appears cheap; could be a good opportunity to buy

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