SKF Reaping the Benefits of Automation and Cyclical Demand Bounce

Similar to European industrial peers reporting results so far, SKF benefited in the second quarter from the postcoronavirus cycle bounce as well as easy year-over-year comparisons and continues to see strong demand going into the third quarter. Organic revenue was up 33% at the group level and the EBIT margin of 15% was at its highest levels since the first quarter of 2019. SKF is executing a multiyear cost-reduction program, which includes increased usage of automation. Pricing power along with cost flexibility, from the company's adoption of robotics and other automation, has enabled SKF to weather its mostly procyclical end markets, and we believe permanently lower its cost structure. Since 2019, it has closed six manufacturing sites with another 11 still to go. We do not expect to make any material changes to our fair value estimate on the back of the results and maintain our narrow moat rating. Shares look fairly valued.