DATA WATCH…. SHORT SANDVIK AND VOLVO
Data has seemingly turned in both Europe and the US; the poor ISM Manuf has been compounded more worryingly by the ISM non manuf. The German IP print today was the worst month on month drop in 2 years. CESIUSD and CESIEUR have both turned negative after a strong showing in July/August, which drove the market higher. And all this has been confirmed today by FAST US, which has reported flat sales for August and another sequential deceleration.
At 18.5x next years earnings SANDVIK is pricing in a lot of positives and it is certainly the case that the market has become much more constructive on mining capex. But this is as expensive as the stock has been and doesn’t leave any room for error psot the margin expansion that the new management recently detailed. Recent company contact suggests Q2’s momentum may not have continued into Q3 in the same way – we would be short here.
After yesterday’s move VOLVB now faces a stronger peer in the US after VW has teamed up with NAVISTAR in an already disastrous US trucks market. It is also the most IP sensitive name in the industrial space and is a prime candidate for profit taking as the data turns. TACTICAL SHORT.
CMD OUT OF THE WAY
Sandvik’s capital markets day passed without event and puts the short case back into play. Instead of extensive portfolio restructuring that the market wanted we got a reshuffle and no sale of SMT. We got 2018 guidance that aims for margin improvement to 15% through cycle (which won’t be an easy task) and we still only ended with 3% upgrades after accounting for FX.
There may still be some more self help in the story and the market absolutely loves the new management team. However that will take several years to play out now and in the short term the risks are to the downside. The valuation is expensive vs peers and history on 13x next years EBIT on what are still not yet trough earnings.
The early cycle data also appears to be pausing in the US. Regional ISMs were poor and saved by a blowout supplier delivery number which doesn’t reflect particularly well on demand. Fastenal which has been seen as the bellweather is reporting a slowdown in YoY sales again. The +7.7% print in Feb signaled the end of the industrial downturn in the US, they printed -0.9% in April. The May print comes on June 6th.
The mining rally is running out of steam (SAND vs SXPP correlation is very good) with commodity prices plummeting after the curbing of speculation in China. Renewed growth concerns following a slowdown in the data after the lending binge in Q1 and the article in the local press from an authoritative figure citing continued credit growth as ineffective in creating economic growth. We agree. We think increasing short exposure to China related stocks is sensible here.
The short interest has come down to 7% of the freefloat from 11% 3 months ago which is helpful, and you sense a sentiment shift at the same time. The short is worth revisiting since we last put in on in January with a 20% return.
PT 65 SEK.
SELL IP LEVERAGE
Investor briefing this afternoon as the new CEO addresses the market for the first time since he began 7 months ago. Expect the strategy to be more about vision than hard targets.
Sentiment on trucks is already very poor given numerous recent warnings, which could provide upside. Expect comments on the aftermarket opportunity, market share possibilities and margin and pricing strategy (market is hopeful of improvement here).
If there is a pop on any of this this afternoon, we would be using it as an opportunity to sell. The stock is the most leveraged to European IP. Runing -2% IP would lead to a 40% cut to earnings (marginally offset by SEK weakness) making the relatively cheap valuation meaningless.
On top of that is the 1SEK hit today from increased provisioning for the 2014 EU truck fine. The market is attacking stocks with financial and IP leverage. VOLVB falls into this bracket.