Sandvik Earnings: Largest Quarterly Order Decline Since 2020; Maintain Our Fair Value Estimate

Narrow-moat Sandvik SAND reported a 7% decline in organic order intake during the third quarter, its largest decline since fourth-quarter 2020, explained by the short-cycle nature of demand for its products and services, which are exposed to cyclical swings in the economy. Organic revenue grew 1% year over year, supported by the execution of its healthy order backlog for mining equipment and aftermarket services, which was largely offset by its short-cycle machining segment. The daily order intake in the machining segment during the first two weeks of the fourth quarter remained consistent with the third quarter, and thus there appears to be no sign of a significant deterioration in the macroeconomic environment. Shares are currently trading at a slight discount to our SEK 200, which we maintain.

Geographically, the decline in order intake was most notable in South America and Asia, with only the Africa and Middle East segment reporting an increase in orders during the third quarter. Group EBITA margins were stable at 20.1% compared with the previous year. Higher pricing on its order backlog for mining equipment and a decline in freight costs both managed to offset declining profitability in its other operating segments due to lower demand. Sandvik’s restructuring program, implemented in 2022, has also managed to yield cost-savings and protected its profitability in a weak economic environment. Full-year capital expenditure guidance was raised from SEK 4.5 billion to between SEK 4.5 billion and SEK 5 billion.