SKF: Our Refreshed Take Yields a 5% Bump in Fair Value to SEK 220; Reaffirming Our Narrow Moat

A fresh look at SKF leads us to increase our fair value estimate by 5% to SEK 220. We maintain our narrow economic moat and Standard Capital Allocation ratings for the clear leader in the global bearings market. However, we raise our Morningstar Uncertainty Rating to High—from a prior rating of Medium—to reflect the group’s exposure to inherently volatile industrial sector capital expenditure and motor vehicle production cycles. In concert, we lift our cost of capital estimate for SKF to 9.8%, up from a prior 8%. However, SKF’s current capital investment program offers longer-term working capital benefits that we’d not previously credited and that offset the otherwise negative impact that our increased cost of capital assumption has upon our valuation. SKF shares screen as modestly undervalued, trading at a 7% discount to our revised fair value estimate.