October 22, 2019 / 11:24 AM / 22 days ago

SKF shares drop as demand outlook renews cyclical worries

STOCKHOLM (Reuters) - Sweden’s SKF (SKFb.ST), the world’s largest ball-bearing maker, forecast lower year-on-year demand in the fourth quarter, overshadowing in-line quarterly operating earnings and sending shares lower on Tuesday.

The rival of Germany’s Schaeffler (SHA_p.DE) said it expected fourth-quarter demand to be lower versus the year-ago quarter, with slightly lower demand seen for its industrial business and lower demand seen for its automotive business.

SKF shares fell 3.5% following the results, reversing earlier gains.

Many analysts have questioned SKF’s ability to defend its margins when demand is weakening for a business which has historically been sensitive to cyclical downturns. SKF’s outlook has renewed those concerns.

But while weak car markets and slower industrial activity has now begun to eat into sales at the bearings maker, its profitability has so far proven quite resilient with an operating margin of 10.9% in the quarter, down from 12.2% a year ago.

“SKF has managed the business well in a weakening economic environment and our efforts to reduce costs are contributing to a strong and stable operating margin in the quarter,” Chief Executive Alrik Danielson said in a statement.

Third-quarter operating earnings at the Gothenburg-based company fell to 2.29 billion Swedish crowns ($238 million) from 2.60 billion a year ago, to come in roughly in line with the 2.33 billion mean analysts’ forecast in a Refinitiv poll.

The earnings also included a charge of 92 million crowns for non-recurring items.

SKF’s higher-margin industrial business accounts for around 70% of group sales, while its automotive business makes up for the rest.

The company’s earnings came after stronger than expected results from Swedish industrial peers Sandvik (SAND.ST) and Atlas Copco (ATCOa.ST) over the past week. SKF shares had risen 13% in October in the run-up to the results.

Reporting by Johannes Hellstrom; editing by Niklas Pollard

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