Sandvik - End-market weakness makes consensus 2017 margins of 14% look too
optimistic
Growth and EBIT margin recovery potential look limited
We cut our earnings and price target in connection with our latest review on the mining equipment and
services end markets (Mining capex weakness through 2017; downside risks stemming from China still
high, 8 September 2015, Guillermo Peigneux et al). We think Sandvik Mining (SM), Material Technology
(SMT) and Venture (SV) margins will continue to be hampered by high inventory levels, cost underabsorption
driven by further volume declines and an incrementally tougher price environment. We
believe consensus' margin expectations will likely be missed.
New management can change Sandvik, but revenue sacrifices will be needed
We are concerned about Sandvik's end markets and its malleability as a group. We have previously
argued that Sandvik's underlying issues reside in its end markets, vertical integration (Machining
Solutions and SMT) as well as high consensus expectations. Moreover, since 2008, Sandvik has
announced over SKr12bn in cost savings and there have been numerous management changes. We are
now about to embark on another set of far-reaching actions, with potentially further management
changes in a stagnating environment with deflationary pressures in some segments and, in our view,
potentially to the detriment of Sandvik employee morale.
Cutting our numbers further; we are more than 10% below consensus
We cut our EBIT numbers between 5-8% for the forecast period, our EPS cuts are more modest, ranging
2-4% for the forecast period (lower taxes). On an EBIT basis, we are over 10% below consensus on
average for the next three years. We think consensus underestimates the impact from operating leverage
on declining revenues in some of Sandvik's segments. We see consensus' 2017 14% EBIT margins (11-
12% 2014 and 2015) as unrealistic, given limited growth prospects for Sandvik's revenues.
Valuation: Sell rating, price target cut to SKr70 per share
Our PT is the average of our static and FCF valuation methodologies. Our price target cut is in line with
our estimate changes and higher net debt, and results in a 10x EV/EBIT multiple which we consider midcycle
for Sandvik, vs 12x previously (2017E). This, in our view, reflects the Sandvik's cyclical nature and its
long-term sustainable returns. At our price target Sandvik trades on 14x earnings and 11x EBIT 2016E.