Sandvik Shares Downgraded

Investing.com — Shares of Sandvik (ST:SAND) traded lower on Tuesday after BofA Securities downgraded Sandvik to “underperform” from a “neutral” rating.

This downgrade comes amidst concerns regarding the ongoing pressures within the Sandvik Machining and Manufacturing Solutions business, particularly in the second half of 2024.

After seeing a strong increase in share value, analysts at BofA have expressed that the current valuation of Sandvik does not adequately reflect the challenges anticipated in the short-cycle segments of its operations.

The sentiment around mining capital expenditures is showing signs of improvement; however, BofA believes that investing in downstream opportunities offers better potential, especially given the growing greenfield momentum in this area.

Conversely, the construction sector is expected to remain a drag on the Rock Processing Solutions business.

The analysts have noted that, after benefiting from several years of favorable price-cost dynamics, Sandvik now faces headwinds as it enters the second half of the year.

BofA has adjusted its earnings expectations, forecasting that Sandvik’s figures for 2024-2026 will fall 5% to 7% below consensus estimates.

To align with this outlook, BofA has revised its target multiples for Sandvik to 11.7x its 2025 estimated EV/EBIT, reflecting a 10% discount from its long-term average of 13x due to the anticipated weak short-cycle environment. As a result, the price objective for Sandvik has been set at SEK 192 ($19.05 for ADRs).

Further compounding concerns is the continued weakness in Sandvik’s SMM business, which has seen a CAGR of negative volume growth at around 5% since 2019.

The second half of 2023 was particularly challenging, impacted by a strong destocking cycle, and recent trends indicate that the overall market conditions remain subdued.

Sandvik has about 17% of its sales directly linked to the automotive sector, but analysts believe that the indirect exposure—especially within its general industrial segment—could be significantly higher, placing further risks on its performance as the auto industry faces mounting challenges.

Additionally, the aerospace sector, which has contributed positively to Sandvik’s growth in recent years, is also expected to pose risks in the latter half of 2024 due to ongoing production difficulties.

While the outlook for mining capital expenditures is gradually improving—highlighted by positive announcements from major miners—BofA emphasizes that the overall original equipment demand remains weak.

They acknowledge the potential for large orders announced in the second half of 2024 but view this as merely the bottom of the OE cycle, with hopes for improvement not materializing until 2025.

Despite some resilience expected in aftermarket services, the mid-term outlook suggests that margins may come under pressure due to rising mid-life upgrades.

BofA’s Mining capex tracker indicates slight month-over-month positive revisions since August, with expectations for 2024 capex now projected to grow by 15%, compared to previous forecasts of 14%.

The 2025 capex outlook has slightly improved, with a projected decline of 3%. This suggests that while the mining sector is nearing a potential recovery, challenges still loom, particularly with ongoing destocking trends in infrastructure markets.

During a recent virtual field trip discussing mining capex, companies indicated that while OE demand remains lackluster, aftermarket sales continue to show strength, supporting margin expansion.

As it stands, Sandvik’s shares are trading slightly above long-term averages for price-to-earnings and EV/EBIT ratios relative to the broader market. Given the bleak outlook for short-cycle exposure, BofA advocates for a more cautious stance, justifying the 10% discount to target multiples.