Swedish-based SKF (SKFRY, Financial) is the largest ball bearing manufacturer in the world with an 11.4% market share. The company has high profit margins, but earnings and sales have fallen with a slowdown in global markets.
The company has 455 million shares and trades at a market cap of SEK66.5 billion ($8 billion). It takes SEK8.26 to buy $1. The dividend was SEK5.5, and the dividend yield is 3.76%. Earnings per share were SEK8.52 in 2015, and the price-to-earnings ratio was 17.17. Free cash flow was SEK5.7 billion ($690 million), and the free cash flow yield was 8.6%.
Sales were SEK76 billion ($9.2 billion) in 2015. Sixty percent of sales were industrial which is mining and machine tools and the like, 26% were automotive, and 14% were specialty which is aerospace and divisions with one focus. North America accounts for 21% of sales, Europe 39%, Latin America 7%, Middle East/Africa 4% and Asia 29%. Sales fell from SEK66.2 billion ($8 billion) in 2011 to SEK63.6 billion ($7.7 billion) in 2013 before rebounding.
Management has the following goals: 5% growth in organic sales, 12% operating margins, 16% return on capital employed, and 80% net debt to equity ratio. The balance sheet showed: SEK4.6 billion ($540 million) in short-term investments, SEK7.2 billion ($871 million) in cash, SEK11.8 billion ($1.43 billion) in receivables and SEK14.5 billion ($1.76 billion) in inventories. The liability side shows SEK22.4 billion ($2.7 billion) in debt, SEK5.7 billion ($690 million) in accounts payable and SEK1.4 billion ($170 million) in loans. Standard & Poor's rates its debt as BBB. Not bad.
Total sales were down 8.9% in the first quarter from last year. Yikes! Management was able to cut costs and increase the operating margins to 10.6%. Because of the drop in sales, SKF is closing its plants in Baltimore and San Diego and consolidating in Georgia. Too bad for workers in those two places.
There is an annoying dual share class of A and B shares, with different voting rights. FAM AB owns 29% of the company and thus is the principal decision maker. The Wallenberg family owns this partnership, along with controlling interests in many other companies. I found out about the stock by reading Oakmark's annual report.
This link will take you to an interesting paper on SKF's role in World War II. Sweden became famous for supplying Germany and Britain ball bearings for the war effort. SKF produced the best ball bearings in the world at the time.
SKF is a neat company. I don't see it increasing sales or earnings anytime soon. SKF's ball bearings and seals go into wind turbines, automotive, rail, energy, mining, aerospace, appliances, and any other application to decrease friction. One would think that these industries are bound to slow and the company's quarterly reports seem to bolster this idea. I'm not going to buy shares but will put it on my radar. The company is probably about the best in the business and will do well when the overall economy does well. That probably won't be for awhile.
Disclosure: I have no position in any of the stocks mentioned in this article.
Start a free seven-day trial of Premium Membership to GuruFocus.
