Sandvik Shares Decline Following BofA Downgrade to ‘Underperform’

Shares of Sandvik experienced a decline on Tuesday following a downgrade by BofA Securities, which moved its rating from “neutral” to “underperform.” This decision stems from ongoing concerns related to the pressures in Sandvik’s Machining and Manufacturing Solutions sector, particularly anticipated for the latter half of 2024.

After a notable rise in share value, BofA analysts pointed out that Sandvik’s current valuation does not sufficiently account for the challenges predicted within the short-cycle segments of its business. While there are positive trends in mining capital expenditures, BofA believes that investments in downstream opportunities may present better prospects, especially with the increasing momentum for greenfield projects in this area.

On the other hand, the construction industry is expected to exert a negative influence on Sandvik’s Rock Processing Solutions division. Analysts noted that after experiencing favorable price-cost dynamics for several years, Sandvik is now facing challenges as it heads into the latter half of the year.

BofA has revised its earnings forecasts, predicting that Sandvik’s figures for 2024-2026 could fall 5% to 7% below consensus estimates. As part of this adjustment, the target multiples for Sandvik have been changed to 11.7 times its estimated EV/EBIT for 2025, reflecting a 10% discount from the long-term average of 13 times due to the expected weak short-cycle environment. Consequently, the price target for Sandvik has been set at SEK 192.

Further compounding concerns is the ongoing weakness in Sandvik’s SMM business, which has experienced a compound annual growth rate (CAGR) of negative volume growth around 5% since 2019. The second half of 2023 was particularly challenging, impacted by a strong destocking cycle, and current trends suggest that overall market conditions remain sluggish.

Sandvik derives about 17% of its sales from the automotive sector, and analysts caution that the indirect exposure—especially in its general industrial segment—could be significantly greater, which could further threaten its performance as the auto industry encounters mounting challenges. Additionally, while the aerospace sector has been a positive contributor to Sandvik’s growth, risks are expected in late 2024 due to ongoing production issues.

Despite a gradual improvement in mining capital expenditures, highlighted by encouraging announcements from major mining companies, BofA notes that original equipment demand remains weak. They recognize the potential for large orders to be announced in the latter half of 2024 but view this as the bottom of the OE cycle, with any substantial improvement likely not happening until 2025.

Although aftermarket services are expected to demonstrate some resilience, the mid-term outlook indicates that profit margins may face pressure from rising mid-life upgrades. BofA’s Mining capex tracker indicates slight improvements month-over-month since August, with a 15% growth projection for 2024 capex compared to previous forecasts of 14%. The outlook for 2025 capex has also improved slightly, now projecting a 3% decline.

In the midst of a recent virtual event discussing mining capex, companies reported that while original equipment demand may be lacking, aftermarket sales are holding strong, which supports margin expansion. Currently, Sandvik’s shares are trading slightly above long-term averages for price-to-earnings and EV/EBIT ratios relative to the broader market. Given the challenging outlook regarding short-cycle exposure, BofA recommends a more cautious approach, justifying the 10% discount to target multiples.