Sandvik AB: A Hidden Gem in Q2 2025 Results Amid Margin Pressures and Cash Flow Strength

Sandvik AB (SAND.ST), a global leader in advanced tools, machinery, and software solutions, recently reported its Q2 2025 earnings. While the results revealed margin headwinds driven by currency fluctuations and macroeconomic challenges, the underlying fundamentals—strong order growth, robust cash flow, and strategic acquisitions—suggest the company may be undervalued. For investors willing to look past short-term pressures, Sandvik presents an intriguing opportunity.

Key Takeaways from Q2 2025 Results

1. Record Order Intake Despite Revenue Headwinds:
   Order intake rose 10% at constant exchange rates to SEK 32.2 billion, a testament to Sandvik's strong market position across industries like mining, infrastructure, and energy. However, reported revenue fell 5% to SEK 29.7 billion due to currency headwinds. The Swedish krona's weakness against major currencies, particularly the dollar, disproportionately impacted revenue recognition, masking organic growth.

2. Margin Pressures, but Not Structural Weakness:
   Adjusted EBITA margins dipped to 19.0% from 20.5% a year earlier, driven by cost inflation and currency effects. While concerning, management emphasized that these pressures are temporary. A closer look reveals that margins in core segments like Machining Solutions and Advanced Tools remained resilient, while Mining and Rock Tools faced more pronounced cost challenges.

3. Cash Flow Resilience:
   Free operating cash flow surged to SEK 5.1 billion, up 12% year-on-year. This reflects disciplined working capital management and the benefits of higher order backlogs. Sandvik's strong liquidity (SEK 16.3 billion in net cash as of Q2) positions it to navigate macro uncertainty while pursuing strategic growth initiatives.

Strategic Moves to Watch

Sandvik's recent acquisitions—Universal Field Robots (agricultural automation) and Verisurf Software Inc. (precision measurement tools)—highlight its shift toward software-driven solutions. These moves align with its long-term strategy to reduce dependency on cyclical hardware sales and capitalize on high-growth digital markets. While integration costs may pressure near-term margins, these assets could unlock recurring revenue streams and improve long-term profitability.

Valuation: Is Sandvik Undervalued?

To assess undervaluation, consider key metrics:
- Price-to-Operating Cash Flow (P/OCF): At ~8x trailing 12-month cash flow (compared to a 5-year average of ~10x), Sandvik appears attractively priced.
- EV/EBITDA Multiple: The current 8.5x multiple lags behind peers like Atlas Copco (~12x) and Rockwell Automation (~16x), suggesting a discount for its cyclical business. However, Sandvik's cash flow generation and software-driven diversification may warrant a premium.

Sandvik's shares have underperformed the OMXS30 by ~15% year-to-date, largely reflecting sector-wide concerns over global manufacturing slowdowns. Yet, the stock's low valuation and improving cash flow metrics make it a compelling contrarian play.

Risks to Consider

• Currency Volatility: A prolonged weak krona could continue to distort revenue figures.
• Geopolitical Uncertainty: Trade tensions and supply chain disruptions in key markets like China and the U.S. could delay order conversions.
• Execution Risk: Software integration may take longer than anticipated, delaying margin benefits.

Investment Thesis

Sandvik's Q2 results underscore a company navigating near-term challenges while building a stronger, more diversified business. The record order intake and robust cash flow indicate that demand for its industrial and software solutions remains robust. At current valuations, the stock offers a margin of safety for investors willing to look past short-term margin pressures.

Recommendation: Investors with a 12–18 month horizon should consider a gradual build in Sandvik's shares. The stock's low multiple, combined with its cash-rich balance sheet and strategic shift toward software, positions it to outperform when macro conditions stabilize.

In conclusion, Sandvik AB's Q2 results are a reminder that undervaluation opportunities often emerge when short-term pressures overshadow long-term resilience. For those focused on fundamentals over noise, Sandvik could be a rewarding addition to a diversified portfolio.