SKF's Third-Quarter Margin Under Pressure From Energy Prices

Higher energy prices put increased pressure on SKF's already underperforming margins in the third quarter. However, demand for both divisions was strong. Organic revenue grew 8% and 18% in the industrial and automotive divisions, respectively, although automotive growth was flattered by easy year-over-year comparisons. The group adjusted EBIT margin came in at just 8.5% before any restructuring charges and costs associated with exiting Russia. Inflation has been rising faster than the company's price/mix benefit for the last five quarters, pressuring margins. However, in the third quarter, a SEK 1 billion increase in energy costs pushed the gap wider to 110 basis points, with costs up 2.9% and not fully offset by the 1.8% increase from price/mix. While this year is challenging from a cost perspective, we expect some margin expansion next year from a combination of restructuring efforts and easing of some of the inflationary pressure, such as logistics costs. We are therefore maintaining our SEK 210 fair value estimate and narrow moat rating.