Autoliv is demerging into two, as is Atlas Copco. Is Volvo next? There are plenty of indications.
A three-month slide abruptly reversed, and the Stockholm exchange rose sharply in one of the largest September upticks for a long time. Suddenly the scent of records is back in the air; more companies are listing share-price highs, the market has risen for many days and macro numbers are gaining strength.
The ISM and European PMI numbers, which sample the mood of purchasing managers, suggest enormous pressure in the economy, and we are probably heading for a fairly strong report season. One small caveat, though, is that the same mood and gains guided us into the second-quarter season and that ended in disappointment and large, often negative, share-price movements.
The big news this month was that the US will probably pass some kind of tax reform, which is likely to benefit both US and Swedish companies with major operations in the United States. The dollar has also begun to rise, probably because the Fed is to cut its stimulus and is leaning towards another rate hike in December. On the downside are a number of political factors, ranging from North Korea to unrest in Spain.
But it is impossible to ignore the intense economic climate spurring profits, and as long as profits rise the stock market is likely to rise. Here at home, one of the month’s winners was Autoliv, which is jumping on the demerger bandwagon and will soon become two companies, one in active safety and one in passive safety. Next in line is Atlas Copco, which will soon spin off its mining business under the name Epiroc. Ultimately, Volvo will probably set its construction machinery arm VCE on the same path, but meanwhile the company has delivered new financial targets. One interpretation is that Volvo will be essentially debt free in its operations. On the other hand, given the seasonally strong cash flow and rising profits we expect the company to have fairly substantial net cash, which may suggest that Volvo will want to adjust its balance sheet and pay an extra dividend in the spring.
We significantly increased our holding in Essity this month. A safe and dull company with good margins – which should even increase in coming years – fine cash flow and cyclical operations should be bought when everyone else is seeking out hotter and more risky stocks. That’s where we are now.