August: Ericsson, H&M and Electrolux
Following high pressure and continuous bathing weather throughout June and July, August was completely different − a rainy month. We experienced something similar on the Swedish stock exchange.
The reporting season was largely over, and a month with little news meant low volatility and a lack of clear trends. It was noteworthy that the OMX index for the largest companies was down just under one percent in August, while the broader SAX index rose slightly. On the macro front, we saw relatively stable interest rates and currencies, while commodities fell slightly.
We believe that Ericsson received far too much of a beating after a perfectly okay report for the second quarter. It should already be well known that Ericsson’s market share in China is far below what it once was, and it should be taken into account that the market is generally healthy and the need for mobile infrastructure remains strong. It was therefore gratifying to see Ericsson among the large cap winners in August.
We took the opportunity to increase our holding in H&M towards the end of the month. The stock has been under pressure after a somewhat lacklustre trading update for June in connection with its report for the second quarter (March-May), and important markets such as Germany were held back by pandemic restrictions during the summer.
Analysts have now lowered their sales estimates for the third quarter. We believe, however, that H&M’s margins are holding up well and that the company is now entering a period of easier comparative figures and that it will benefit from societies gradually returning to normal. A solid balance sheet and strong cash flow also suggest a good dividend.
Electrolux is another share that we took the opportunity to buy this month. The company failed to live up to market expectations in Q2 due to disturbances in supply chains and higher input costs, leading the share to lose ground. However, Electrolux is in far better condition than in the past.
Its margins are still historically good, action is being taken, cash flow is sound and the balance sheet is very strong. The company is comfortable with a debt ratio of twice operating profit, which gives scope to distribute approximately 25 billion to shareholders. In July, the company raised its dividend target to 50 percent of profits from 30 percent, and announced that it intends to distribute 4.9 billion via a redemption programme this autumn.