Strong Demand Powers Sandvik Q2, but Inventory Concerns Weigh on Shares

Swedish Sandvik, which makes metal-cutting tools and mining gear, reported record-high quarterly earnings and orders on Tuesday on the back of a broad rise in demand, with its mining unit a particular stand-out.

But Sandvik shares fell following the results with some analysts pointing to investor concerns over the company building inventory in the quarter.

Boosted by strong demand from industrial and mining customers for the past two years, Sandvik is also reaping the rewards of years of restructuring, cost-cutting and divesting non-core businesses.

While purchasing manager indices in Sandvik’s main markets have remained strong for most of the past two years, the prospect of a global trade war has added to investor worries that the industrial cycle may be at a peak.

Second quarter order intake at Sandvik, which competes with Sweden’s Epiroc in mining equipment and U.S. firm Kennametal in metal-cutting, rose to 27.2 billion crowns, above the 26.5 billion crowns seen in a Reuters poll of analysts.

The biggest rise came in Sandvik’s mining unit, which posted 15 percent organic order growth in the quarter.

Shares of Sandvik, which is the world’s largest maker of metal-cutting tools were trading 2.2 percent lower at 1129 GMT after an initial spike following the results.

“Given that the market might be worried about where we are in the industrial cycle, of course the inventory build and how a company should handle a sort of plateau or eventual drop in demand is of course important,” Handelsbanken Capital Markets analyst Peder Frolen said.

CEO Rosengren played down the inventory-build in a media conference call, saying he did not see it as a big issue.

“We are building some inventory to ensure deliveries during the summer break and also to handle this strong growth,” he said.

Second quarter operating earnings at the firm rose to 5.04 billion Swedish crowns ($573.80 million) from 3.27 billion crowns in the year-ago quarter, beating a 4.87 billion mean forecast

Rosengren also said he had not seen any impact from the escalating dispute between China and the United States and market fears of a trade war.

The stock is up 5 percent so far this year, slightly outperforming the European industrial sector. ($1 = 8.7835 Swedish crowns) (Reporting by Johannes Hellstrom, additional reporting by Esha Vaish Editing by Alexandra Hudson)

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