Sandvik Earnings: Raising Fair Value to SEK 200 From SEK 193 After Impressive EBIT Margin Expansion

Narrow-moat Sandvik SAND delivered a notable second quarter, which shows the group is outperforming its closest competitor Epiroc, who reported earnings yesterday. We are most impressed with Sandvik’s better-than-expected 120-basis-point EBIT margin progression to 18.9%, which has led us to raise our margin estimates, and subsequently increase our fair value estimate to SEK 200 from SEK 193. We anticipate Sandvik will be able to maintain its current EBIT margin, supported by robust demand for higher-margin aftermarket mining services. We view shares as fairly valued.

Organic order intake grew 3% during the second quarter, which was driven by 6% growth from Sandvik’s mining and rock solutions segment, outperforming Epiroc, which failed to report any organic growth. Sandvik booked two large orders totaling SEK 1.0 billion during the quarter, highlighting that investment appetite remains healthy from mining customers. The group’s short-cycle machining segment reported a mere 1% decline in organic orders, which highlights that the global economy remains stable. Group revenue grew 19% year over year, of which 12% was organic.

EBIT growth of 27% outpaced revenue, supported by margin expansion across both the mining and machining segments, which offset weakness in the rock processing solutions segment. We are confident Sandvik will be able to support its current EBIT margin level and raise our five-year average EBIT margin to 19.2% from 18.5%. Our revised forecasts translate into an average EBITA margin of 20.6%, in line with Sandvik’s target of between 20% and 22%.