Comment: overreaction of Alfa creates buying opportunity – Private Businesses

Departing CEO Lars Renström found no fireworks in the stock market when he left his last report to the chief manager of Alfa Laval. Sales were in themselves higher than expected, but the result slightly lower and, above all, the outlook for the first quarter, much worse than expected.

It is above all pump systems in the marine division, where previously placed orders during the fourth quarter now will affect the first quarter negatively by approximately SEK 1.2 billion. It is not missed orders but that they ended up on the “wrong” side of the year.

But along with lower margins and somewhat lower dividend than expected (4.25), the stock market reacted negatively and significantly lowered the shares fairly rapidly by 10 percent and at lunchtime decline had increased to over 14 percent.

Is then this drastic course reaction reasonable in light of what was actually said in the report? It can really think about. For Alfa Laval belong in most ways the top cream of Swedish engineering companies with well-timed acquisitions over the years alternated with organic growth as the company operates in activities such as energy, environment and food.

These are sectors globally has underlying growth, that is, can develop decently even during difficult times, and therefore also the company has shown a positive trend over a number of years even if the individual quarters showed signs of weakness.

to the company affected to some extent by the oil price decline is unambiguous – Norwegian acquisition Frank Mohn has a certain portion of its business in sales to companies that extract oil. At the same time, they also deliver pumping systems for ships – something that gets a boost when oil prices fall.

Alfa Laval also believes that the report shows that they are not affected much by the weaker growth in China. And India is growing fast for the company – therefore emerging markets overall, no worries in the company.

The valuation at a rate of almost 130 SEK located at p / e 14 if we expect a largely unchanged earnings per share in 2016 of approximately SEK 9. There is no direct low score, but the relative stability of the company’s revenue and earnings should be valued premium compared to other engineering colleagues – and there is not much evidence to suggest that 2016 was going to be something special weak year for the company. Dividend increase of 6 per cent also shows some optimism for the current year.

Therefore, it is wise to consider whether Alva Laval can defend a place in a long-term portfolio. Certainly, the decline to continue for another few percent, but likely course now near the bottom for the stock.