SKF Downgraded on Expected Earnings Weakness

SKF Downgraded on Expected Earnings Weakness SKF AB has received its second significant downgrade in recent months. The downgrades are important because they reflect the investment community's declining confidence that key capital goods bellwethers such as SKF will be able to maintain their current level of performance. Credit Suisse downgraded SKF from "Outperform" to "Underperform," blaming a slowing U.S. economy and a weaker dollar conspiring to make it unlikely to meet estimates for profit growth. The downgrade was part of a wider revaluation of long-term capital goods producers, which CS says reflects its own economists' view that global industrial growth is, "modestly decelerating." Europe is SKF's largest market, but a slowing U.S. market, particularly automotive, causes "spillover" which impacts many large European industrial manufacturers. Automotive sales in the U.S. were down 2.2% in 2006. Overall, Credit Suisse cut its European Capital Goods sector from overweight to marketweight. The downgrade follows an October revision by Dresdner Kleinwort on SKF from "Buy" to "Reduce," due to weak margin maintenance and the company's failure to deliver the expected productivity gains for 2006. In addition, Dresdner slashed its SKF earnings forecasts by 8% for 2006 and 11% for 2007. SKF is expected to release its fiscal 2006 results on January 30, 2007. Analysts said investors should look for signs that earnings momentum for SKF, and Swedish industrial stocks in general, has peaked. Consensus estimates still put SKF fourth quarter pretax profit up 20% to SEK 1.53 billion (USD $219 million), including gains from the company's divestiture of Ovako Steel. Analysts expect 2006 will show SKF industrial and service businesses continued to perform well, with only the automotive group experiencing a 5% decline. Moving into 2007, current estimates are that SKF's service and automotive units will perform modestly better than 2006, while industrial will experience particularly strong growth in sales and profitability.