SKF: A Long-Term Owner's Perspective

Fact: On the cost side, SKF's income statement is a classic manufacturing structure. In 2025 the company generated sales of SEK 91.583 billion, cost of goods sold of SEK 67.058 billion, and gross profit of SEK 24.525 billion; R&D expense was SEK 3.409 billion, selling expense SEK 12.657 billion, and administrative expense SEK 0.961 billion. Q1 2026 gross profit was SEK 6.413 billion, a gross margin of about 29.3%, but this is a single quarter and cannot be directly extrapolated to the full year.

Fact: The company does not depend on a single customer or a single region. In 2025 the industrial business spanned multiple industrial end markets, and while the automotive business has an OEM-concentrated profile, the group as a whole remains globally distributed. The annual report frames SKF's global manufacturing, supply, and service capabilities as core infrastructure; at the same time, management openly acknowledges the company faces uncertainty across supply chains, tariffs, currency, cybersecurity, compliance, and macro demand.

Opinion: If I treat it as a candidate to "acquire and own for the next 10 years," my level of understanding of SKF is high but not perfect. The industrial core itself is not complex; what is complex is the global manufacturing footprint, the automotive spin-off, and currency and inventory management. If the stock market closed for 5 years, I would be willing to hold its industrial core business; but for "the current whole, still carrying the automotive business and spin-off noise," I would not place a large bet at the current price.

Business Understandability Score: 4/5. The barrier to understanding is not high, and operating quality is reasonably traceable; but the spin-off and global manufacturing swings keep it from being the kind of "simple enough to hold blindly for 10 years" consumer-staple business.

Industry and Moat

Industry Attractiveness and Competitive Landscape

Fact: In its annual report, SKF puts the global bearing market at roughly SEK 500 billion, and notes that the market is dominated by SKF together with international players such as Schaeffler, Timken, NSK, NTN, and JTEKT, with Asia-Pacific being the largest and fastest-growing region. This shows the industry is not a fragmented, low-barrier hardware market, but a mature industrial-goods market with strong global-oligopoly characteristics that remains competitive.

Fact: Long-term demand itself is relatively stable: whether in industrial machinery, wind power, rail transit, aviation, mining, food, automation, or vehicle systems, wherever rotating parts exist, bearings, seals, and lubrication systems are indispensable. SKF itself ties its industrial business to long-term trends such as digitalization, automation, decarbonization, energy-efficiency improvement, and critical-infrastructure investment.

Inference: So this is not a high-growth industry, but neither is it one easily and completely displaced. The real change happens more at the end-market structure: vehicle electrification will alter the product mix and certification requirements; industrial customers will place more value on condition monitoring, reliability services, and total lifecycle cost; supply-chain regionalization and tariffs will reshape global capacity layout. The industry will not disappear, but the profit pool will shift across different end markets.

Fact: At its Capital Markets Day, SKF's management described the post-spin Industrial business as the "global industrial bearings leader," and proposed post-spin industrial medium-term and long-term adjusted operating margin targets of >17% and >19% respectively, with an adjusted ROCE target of 20%. This indicates the company believes the truly high-quality asset sits on the industrial side, not the automotive side.

Opinion: My judgment is that SKF operates in an industry that is mature, capital-intensive, demanding in operations and application engineering, but without an exceptionally high ceiling. It looks closer to "an excellent company in a merely decent industry" than "a great company in a great industry." Long-term demand is steady, but cyclicality, price competition, the automotive drag, and capital expenditure all cap its "compounding quality."

Industry Attractiveness Score: 3/5. Demand is stable, barriers are moderate-to-high, and leader concentration is decent; but growth is mediocre, and cyclicality and capital intensity are not low.

Moat Strength

Brand Advantage: Yes. SKF is one of the oldest and most established bearing and industrial-transmission brands in the world. In high-reliability settings, customers care more about "probability of failure" and "cost of downtime," so the brand naturally carries more value. Management places its trusted brand, strong customer relationships, and deep engineering capabilities at the foundation of its strategy.

Cost Advantage: Moderate. SKF does not compete on "absolute low price," but its global manufacturing network, regionalized footprint, and procurement scale bring some cost advantage. In recent years the company has steadily pushed regionalization, automation, rightsizing, and footprint optimization, showing that cost efficiency is a core lever for management.

Scale Advantage: Yes. Large-scale manufacturing, a global service network, application certifications, and a product matrix spanning many end markets make it very hard for new entrants to replicate at global scale. Particularly in applications such as aviation, rail, wind power, high-speed machinery, and electric vehicles, certification cycles, quality thresholds, and localized service cannot be filled in a year or two. This judgment is an inference, but it is supported by ample operating facts.

Network Effects: Essentially none. SKF's business is not a typical platform business, and network effects are not a primary moat.

Switching Costs: Moderate-to-high. In many industrial settings, the bearing itself is not expensive per unit, but downtime losses, re-qualification, maintenance habits, inventory systems, and service responsiveness create real switching costs; in the automotive business this shows up more as platform integration, quality certification, and long-term supply relationships.

Channel Advantage: Fairly strong. The large aftermarket share of the industrial business is, in essence, an expression of channel and service capability. Customers buy not just parts, but spare-part availability, training, monitoring, remanufacturing, and maintenance engineering.

Patents, Licenses, and Regulatory Barriers: Yes, but not core. The industry's real barriers come more from process, quality consistency, certification, and application know-how, rather than holding a monopoly through a single patent the way pharmaceuticals do.

Data Advantage: Forming, but not yet dominant. Condition monitoring, asset-efficiency optimization, and digital maintenance are indeed directions through which SKF improves customer stickiness, but at present they cannot define the company's core competitive advantage the way a software platform would.

Corporate Culture and Operating Capability: Moderate-to-strong. Management emphasizes disciplined pricing, mix optimization, regionalization, and cost governance. One important piece of evidence: despite a soft market, currency headwinds, and rising spin-off costs in 2025, the company stayed profitable; in Q1 2026, under clear currency headwinds, it still held an adjusted operating margin of 13.5%.

Capital Allocation Capability: Moderate. Not bad, but not yet "exceptional." It looks more like an industrial management team doing most things right than an extraordinarily rare owner-operator team that hits a high success rate on every capital-allocation step.

Overall Judgment on the Moat: SKF's moat looks more like a combination of brand, engineering capability, global service network, application certification, and aftermarket structure than a single barrier. In terms of direction, I believe the moat of the industrial business is stable to slightly widening, while the automotive business sits in a "being reshaped" state ahead of the spin-off. In an inflationary environment it has partial pricing power, and management has explicitly stated that 2025 and Q1 2026 tariff costs were broadly offset by price increases and other measures; in downturns, the company has historically maintained profitability and positive cash flow, but margins compress markedly. Its high margins are not purely a cyclical windfall, but they are by no means a structural franchise that is entirely immune to the cycle.

Moat Strength Score: 3.5/5. Stronger than the typical industrial-component maker, but weaker than software, payment networks, or top consumer brands that genuinely enjoy very high pricing power, very low capital needs, and high switching costs.

Management and Capital Allocation

Is Management Trustworthy

Fact: SKF's current CEO is Rickard Gustafson, and over the past few years the company has steadily pushed decentralized operations, regionalization, cost control, mix optimization, and the Automotive spin-off. The annual report and the Q1 2026 report are quite direct about a soft market, dis-synergies from the spin-off, working-capital tie-up, currency headwinds, tariff impact, and cash-flow pressure, without deliberate window-dressing. In Q1 2026, management even explicitly noted that operating cash flow was SEK -0.446 billion, mainly due to restructuring and spin-off costs, spin-off-related safety inventory, elevated receivables, and timing factors in payables. On candor, this is better than many industrial companies that talk only about "adjusted results."

Fact: The ownership structure also provides some governance discipline. By the end of 2025, FAM AB held 15.20% of the share capital and 29.23% of the voting rights, the only shareholder with voting rights above 10%; Cevian Capital held 8.14% of the share capital and 5.18% of the voting rights, and its partner Niko Pakalén serves on the board. In other words, SKF is not an "ownerless company," but one where a strong long-term shareholder and an activist governance shareholder coexist.

Fact: But the degree to which management's interests are aligned with ordinary shareholders' can only be called moderate. The CEO's total 2025 compensation was about SEK 37.94 million, while he personally held 30,037 SKF B shares; this holding is of course not zero, but relative to the scale of his pay it falls short of an owner-operator structure of being "deeply in the same boat as shareholders." Management incentives come more from the pay system and performance-share plans than from large personal holdings of their own money.

Is Capital Allocation Rational

Fact: SKF's dividend policy is clear: the ordinary dividend over a business cycle should roughly equal half of average net profit; if the capital structure is stronger than target, additional distributions can be made through higher dividends, redemptions, or buybacks. For fiscal 2025, the board proposed a dividend of SEK 7.75 per share, flat with the prior year.

Fact: On share count, I have not seen meaningful buyback-and-cancellation activity in recent years. Year-end 2025 total shares were 455.35 million, and Reuters/LSEG pages show the ordinary share count has been broadly stable in recent years; the main change in share capital in 2025 came from A-to-B share conversion, rather than a large reduction in total shares. That is, the company's main cash return to shareholders is still dividends, not "large buybacks when undervalued."

Fact: On M&A and portfolio management, recent moves look more like "pruning" than "blind expansion." In 2025 the company divested its U.S. Hanover aerospace business and booked a gain; in Q1 2026 it completed the divestment of the Elgin aerospace business, while management continued to advance Industrial footprint optimization and the Automotive spin-off. This direction is on the whole more oriented toward focus and improved capital efficiency than toward piling up M&A to inflate revenue scale.

Fact: On incentives, the CEO's annual bonus is based on metrics such as adjusted operating margin, net working capital, organic growth, and progress on greenhouse-gas reduction, with annual variable pay capped at 100%; under the long-term performance-share plan, the CEO's grant cap is share value equivalent to 75% of fixed salary. The total cost of all performance-share plans in 2025 was SEK 0.104 billion. This system is not outrageous, but it is not extremely restrained either.

Opinion: My assessment of management is that they are reasonably honest, decent in execution, and fairly rational in capital allocation, but not yet exceptional. Their strongest trait is a willingness to acknowledge reality and keep making painful organizational, capacity, and portfolio adjustments; their weakest is that executives' personal "skin in the game" is not high enough, and most of the return-improvement logic still depends on future execution rather than an exceptionally high ROIC that has already emerged naturally.

Management and Capital Allocation Score: 3/5. The kind you can work with, but should not award an excessive trust premium.

Financial Quality and Owner Earnings

Key Financial Metrics

The table below is compiled from SKF's seven-year overview in the annual report, the 2025 annual financial statements, and the Q1 2026 report. One note: for gross margin, this report lists only the directly verifiable disclosure periods; a longer series would require year-by-year backtracking through earlier annual reports.

These figures reflect three things. First, SKF's long-term revenue growth is not fast: the 2019-2025 revenue CAGR is only about 1%, or about 4% if measured from the 2020 pandemic trough to 2025; it is not a high-growth stock, but one that achieves incremental gains through structural optimization, pricing, and cyclical recovery. Second, the company's margins are resilient but not smooth: in the weak years of 2020, 2022, and 2025, margins compress noticeably. Third, the company's capital intensity is not low, with capex intensity running in the 4%-5.5% range year after year, so it cannot be priced as an "asset-light compounding machine."

Cash Flow, Leverage, and Accounting Quality

Fact: In 2025, SKF's operating cash flow was SEK 8.392 billion, with capex adding PPE of SEK 3.821 billion and intangible assets of SEK 0.004 billion, so on the most basic CFO-minus-capex basis, free cash flow was about SEK 4.57 billion. Per management's disclosure and excluding M&A/disposal effects, 2025 "cash flow after investing, before financing" was about SEK 4.914 billion; without excluding disposal gains, it was SEK 6.892 billion. In other words, 2025 reported cash flow looks very good, but part of it comes from asset sales and should not be fully capitalized in valuation.

Fact: Q1 2026 operating cash flow was SEK -0.446 billion, not because the core business suddenly bled cash, but due to restructuring and spin-off costs, spin-off safety inventory, higher receivables, and timing factors in payables. Management also guided full-year 2026 capex of about SEK 5 billion, and one-off items related to the Automotive spin-off and footprint optimization of about SEK -2.5 billion to -3 billion. This means both 2026 accounting profit and cash flow will still be contaminated by spin-off noise.

Fact: The balance sheet overall is solid. Year-end 2025 total assets were SEK 106.422 billion and equity attributable to shareholders SEK 53.558 billion; net debt/EBITDA was 1.0x, and net debt/equity (excluding pensions) was 10.2%. The company's long-term credit ratings are Moody's Baa1 / Fitch BBB+, stable outlook, and it holds an unused EUR 800 million committed credit facility and a EUR 430 million long-term facility from the European Investment Bank.

Fact: Interest coverage is also safely ample. In 2025 operating profit was SEK 7.755 billion against interest expense of SEK 0.611 billion; on a rough operating-profit/interest-expense basis, coverage is about 12.7x. On a net-financial-expense basis of SEK 1.330 billion, coverage is still about 5.8x. This is not a highly leveraged company.

Fact: Net working capital as a share of sales rose from 27.7% in 2019 to 30.4% in 2025, having reached 32.4% in 2022. This shows a genuine weakness of SKF: in weak manufacturing cycles and supply-chain restructuring phases, it is prone to being tied up in cash flow by inventory, receivables, and safety stock. The Q1 2026 cash-flow deterioration confirms this once again.

Opinion: I see no clear signs of fraud or aggressive accounting: cash flow and profit broadly reconcile in most years, share count shows no meaningful dilution, leverage is low, and management openly admits its weaknesses. What truly warrants caution is not "fake profit," but that too many one-off items lead investors to habitually look only at adjusted numbers. In 2025 the impact of items reached SEK 3.918 billion, and for a company like this, focusing only on the "adjusted operating margin" makes it easy to overestimate its distributable cash flow.

Owner Earnings Estimate

Method Note: I use a conservative estimate closer to the Buffett definition: Net profit attributable to shareholders

• non-cash charges such as depreciation and amortization
• maintenance capital expenditure
• normalized working-capital absorption.

Fact: In 2025, net profit attributable to shareholders was SEK 3.927 billion; depreciation, amortization, and impairment together were about SEK 4.031 billion, of which depreciation was about SEK 3.482 billion and intangible-asset amortization about SEK 0.593 billion.

Assumption: SKF does not disclose "maintenance capex." Given that it is a mature industrial company currently in a regionalization and footprint-adjustment phase, I take a conservative assumption: treating 70%-80% of 2025 capex as maintenance capex, that is about SEK 2.7-3 billion. At the same time, I set the normalized drag from working capital at SEK 0-0.3 billion, because full-year 2025 net working capital as a share of sales did not deteriorate, but Q1 2026 already shows that short-term cash absorption recurs. This assumption range is an inference, not a company-disclosed fact.

Inference: On this basis, SKF's conservative Owner Earnings for 2025 is roughly SEK 5-5.3 billion. In the subsequent valuation I use SEK 5.2 billion as a more conservative starting point. Against the current equity value of about SEK 111.8 billion, the market is valuing SKF at roughly 21.5x Owner Earnings, an Owner Earnings yield of around 4.6%. For an industrial company with an unfinished spin-off, an attached automotive business, and capital intensity and cyclical exposure, that is not cheap.

Conclusion: SKF's profit is, on the whole, real cash profit rather than the typical "paper prosperity"; but it is also not the kind of company that needs less capital the faster it grows. It still needs inventory, plants, and capex to maintain competitiveness, which means its "cash-distribution capacity" will be lower than that of many asset-light companies.

Valuation and Margin of Safety

Discounted Owner Earnings

The DCF below is not meant to give a "precise answer," but to tell you: under what assumptions today's price is fair.

Assumption Explanation: The conservative scenario assumes SKF is merely a mature industrial company with steady growth, not-low capex, and middling spin-off results; the neutral scenario assumes the industrial business improves margins post-spin and the automotive business stops dragging on group value; the optimistic scenario implies the industrial business approaches management's long-term targets to a meaningful degree, the Automotive spin-off goes smoothly, and the market is willing to grant a higher quality premium. The most fragile assumption here is not revenue growth itself, but whether margin improvement and cash-flow conversion can be delivered steadily.

Relative Valuation

Fact: On a rough basis at the current price, SKF trades at about 28.5x P/E, about 2.1x P/B, about 2.9x P/TBV, and about 22.8x-24.5x P/FCF for 2025; EV/EBITDA depends on the net-debt basis, roughly around 9.5x-10x. This valuation is not low.

Fact: On a peer basis, Timken currently has a market cap of about USD 9.17 billion and a P/E of about 30x; its 2025 free cash flow was USD 0.406 billion, ROIC 9.8%, and net debt/adjusted EBITDA 2.0x. Schaeffler has a current market cap of about EUR 10.22 billion; because it posted a loss in 2025, the traditional P/E is not comparable; its net debt is EUR 4.915 billion, FCF EUR 0.266 billion, ROCE 2.4%, and ROCE before special items 7.5%. NSK currently has a P/E of about 26.1x, but FY2024 ROIC was only 1.5%. Taken together, SKF's valuation does sit in a range "above lower-quality peers, near better peers." In other words, the market is not pricing it as an ordinary component company.

Inference: My reading is that SKF is not "significantly overvalued," but it is by no means "cheap" either. By buying today, you are in effect paying in advance for the industrial-leader profile plus the potential valuation improvement of becoming a purer industrial business after the spin-off. For conservative investors, this is not the most ideal odds.

Asset and Liquidation Approach

Fact: Year-end 2025 SKF equity attributable to shareholders was SEK 53.558 billion; after deducting goodwill of SEK 10.925 billion and other intangible assets of SEK 3.487 billion, tangible net assets attributable to shareholders were about SEK 39.146 billion, or about SEK 86 per share.

Inference: This shows that most of the value in SKF's current share price does not come from book assets, but from its brand, customer relationships, engineering capability, aftermarket system, and future earning power. Under a very harsh discount on receivables, inventory, and fixed assets, the liquidation value would be far below the current market price. That is, this stock is not an asset-protection investment, but an earning-power-priced investment. For a long-term owner this is not a bad thing; but it means that once operating quality deteriorates, you can hardly count on an "asset floor" to protect your principal.

Final Valuation Judgment

Conservative intrinsic value range: SEK 150-190 per share Fair intrinsic value range: SEK 210-250 per share Optimistic intrinsic value range: SEK 300-370 per share

At the current price of SEK 245.5, it sits roughly near the upper edge of my "fair value range," even slightly rich; relative to conservative valuation there is no margin of safety, while relative to optimistic valuation there is still upside, but that requires you to believe the spin-off and margin improvement will both be delivered almost without a hitch. For an investor with a "balanced but somewhat conservative" risk appetite, this is not an odds distribution I like.

Required Margin of Safety: at least 25%. So my ideal buy range is roughly SEK 150-190; if you already hold it, SEK 190-240 can still be understood as a "hold-and-watch zone"; if the price reaches above SEK 280, before the existing fundamentals are sufficiently delivered, I would tend to treat it as a clearly overvalued zone. This judgment rests on my Owner Earnings assumptions above, not on precise mathematical truth.

Risks, the Bear Case, and Comparisons

The Most Important Risks and the Strongest Bear Case

Competition and Pricing Risk: SKF itself lists "market competitiveness and pricing pressure" as one of its main risks. When industry demand is weak, price wars erode margins; though SKF has brand and service advantages, it is not a monopoly.

Technology and End-Market Structural Change Risk: The automotive business is undergoing an electrification restructuring, and SKF itself acknowledges that Automotive is an industry driven by electrification, with concentrated customers, long contract cycles, and extreme efficiency requirements. Even if EV-related products grow, the shrinkage of legacy product lines and pricing pressure could eat into earnings.

Spin-off Execution Risk: SKF lists the Automotive spin-off as a main risk, and in Q1 2026 explicitly disclosed the impact of dis-synergies, safety inventory, and spin-off costs on cash flow. If the spin-off is delayed, costs overrun, the supply-chain transition goes poorly, or the standalone Automotive fails to meet profit targets, the "potential value release" that shareholders pay for in advance today could fall through.

Macro, Currency, Tariff, and Supply-Chain Risk: SKF was clearly affected by currency headwinds in both 2025 and Q1 2026, and lists tariffs, geopolitics, supply-chain disruption, and weak macro demand as key risks. Although the company can offset partly through pricing, that does not equate to unlimited pricing power.

Cash Flow and Working-Capital Risk: For SKF, what truly needs constant watching is not single-quarter EPS, but inventory, receivables, and safety stock. If these items stay persistently high after the spin-off, Owner Earnings will run materially below accounting profit.

Valuation Risk: If the market ultimately treats SKF again as an "ordinary industrial company" rather than a "high-quality pure-industrial platform after the spin-off," then an Owner Earnings multiple above 20x is very easy to compress downward. This is the risk current buyers most need to face.

The Strongest Bear Case: This investment may go wrong in this way: you mistake a "decent industrial company" for a "good business that is cheap enough." The bear would say that SKF grows slowly, its automotive business is troublesome, the spin-off costs money, Owner Earnings is not high, and capex is not low, yet the market is already willing to grant it a P/E near 28-30x. If margin improvement falls short of expectations over the next two or three years while the valuation returns to a more ordinary industrial-stock level, then even without an operating disaster, investors could earn very mediocre returns. This bear case is not absurd.

What Facts Would Overturn the Investment Judgment

If the following facts emerge in the future, I would consider the original "long-term hold thesis" to require revision or at least a rewrite:

• The Automotive spin-off is delayed for a very long time, canceled, or clearly destroys value.

• After spin-off costs gradually fade, the industrial business's adjusted operating margin remains stuck below 15% for the long term, clearly deviating from management's direction.

• The aftermarket/service share of the industrial business declines, and price/mix can no longer offset inflation and tariffs.

• Operating cash flow is persistently weaker than net profit within a normal cycle, while net working capital as a share of sales keeps rising significantly.

• Leverage rises significantly and the credit rating deteriorates.

Comparison with Other Opportunities

Comparison with the Strongest Competitor: If Timken is taken as a cleaner comparable, then Timken has higher industrial purity, but its valuation is not low either; SKF's advantage is a larger global industrial platform that could become purer after the spin-off, and its disadvantage is that it still carries Automotive and spin-off complexity today. So I do not think SKF is clearly superior to Timken right now; the two simply have their own strengths and weaknesses.

Comparison with a Broad-Based Index: If you are today choosing between "SKF" and a "broad-based index" for an incremental-capital allocation, I would not say SKF is clearly better. The reason is simple: I put its neutral expected annualized return only in the mid-to-high single digits, while for that you must bear industrial-cycle, spin-off, currency, and single-stock execution risk; by comparison, the index gives you higher diversification. Absent a clear undervaluation, I lean toward the index. This judgment is an opinion, not a market fact.

Comparison with the Risk-Free Rate: As of June 2, 2026, the Swedish 10-year government bond yield was about 2.73%. SKF's current dividend yield is about 3.2%, and my estimated Owner Earnings yield is about 4.6%-5.0%. So relative to the risk-free rate it does of course carry a risk premium, but this premium is not very thick, not enough for me to say today that "this is a clearly worthwhile gamble."

If You Could Hold Only 5 Assets, Would It Qualify for the Portfolio? At a lower price, possibly; at the current price, my answer is probably not. Not because it is bad, but because the odds are not yet compelling.

Investment Checklist and Final Conclusion

Checklist

The above judgments synthesize the company's business structure, seven-year financial trajectory, spin-off progress, capital allocation, and current valuation, rather than short-term share-price swings.

Final Investment Conclusion

【Final Rating】 Watch

【One-Sentence Investment Thesis】 SKF is an industrial leader I am willing to research long-term, and would even be willing to own long-term at a lower price, but buying at the current price leaves too thin a margin of safety.

【Core Bull Case】

• The industrial business has advantages in global brand, engineering capability, certification, and aftermarket service, with a high aftermarket and service share on the industrial side.

• Long-term industry demand is stable, and SKF sits among the dominant global players.

• The balance sheet is solid, the credit rating is investment-grade, and its ability to weather cycles is decent.

• In recent years management has shown some execution on pricing, portfolio pruning, rightsizing, and footprint optimization.

• If the Automotive spin-off goes smoothly, the industrial business stands to gain a clearer valuation framework.

【Core Bear Case】

• The current valuation is not cheap, and the market has already paid part of the quality premium and spin-off expectations in advance.

• The Automotive business still drags on group quality, and the spin-off itself costs money and ties up cash and management bandwidth.

• It is capital-intensive with high working-capital absorption, not a high-free-cash-flow compounding machine.

• Management's personal holdings are low, and alignment with outside shareholders is not strong.

• If margin improvement falls short of expectations, the valuation can easily retreat.

【Key Assumptions】

• The Automotive spin-off can be completed within a reasonable time and cost range.

• The aftermarket/service share of the industrial business stays high, and price and mix optimization remain effective.

• Industrial-business margins improve gradually over the next 3-5 years, rather than stagnating.

• Working capital does not deteriorate over the long term.

【Fair Buy Price】 SEK 150-190 per share. The basis is that this is the range after requiring about a 25% margin of safety between my conservative and fair intrinsic value, better suited to "balanced but somewhat conservative" investors.

【Target Holding Period】 Over 10 years. This stock is worth researching only if you are willing to focus on the industrial core competitiveness, return-on-capital improvement, and post-spin value delivery; it is not suited to being held against 12-month EPS swings.

【Expected Annualized Return】

• Conservative scenario: 2%-4%

• Neutral scenario: 5%-8%

• Optimistic scenario: 8%-11%

These return estimates are derived jointly from the current price, future Owner Earnings growth, dividends, and changes in the valuation multiple; they are inferences, not company guidance. At the current price, even if the neutral scenario holds, the return is only "acceptable," not "very attractive."

【Maximum Loss Risk】 If the market re-rates SKF from its current relatively high valuation back to that of an ordinary cyclical manufacturer, while the spin-off delivers mediocre results and industrial-margin improvement falls through, then from the current price a permanent capital loss of 30%-45% is not unimaginable. In an extreme case, if a failed spin-off, a downturn, and valuation compression stack together, the decline would be even larger. This risk does not come from whether the company will "have trouble soon," but from the fact that the price you pay today is already not low.

【Tracking Metrics】 Going forward, I will continue to track:

• Whether the Industrial aftermarket/service share stays high.

• The adjusted operating margins of Bearing Solutions and Specialized Industrial Solutions.

• The Automotive spin-off timeline, one-off costs, and dis-synergies.

• Operating cash flow and working capital, especially inventory and receivables.

• Whether capex intensity runs above management's current guidance.

• Net debt/EBITDA and the credit rating.

• Whether price/mix can continue to cover inflation, tariffs, and wage costs.

• Whether management keeps doing focus-oriented capital allocation rather than scale-driven M&A.

【Signals That Trigger a Re-Evaluation】

• The spin-off is delayed or its terms are materially unfavorable.

• Improvement in the industrial business's margin and ROCE is clearly below the promised direction.

• Cash flow is materially weaker than profit for several consecutive quarters.

• Net working capital as a share of sales keeps rising.

• The credit rating or leverage deteriorates.

【Final Recommendation】 Put coolly, SKF deserves respect, but not necessarily an impulsive purchase at today's price. If you already hold it, it is a business worth continuing to watch and track while waiting for the industrial value to become more visible; if you are preparing to buy in fresh, especially by the standard of a "Buffett-style long-term owner," I lean toward waiting for a better price and a thicker margin of safety, rather than accepting mediocre odds just because "it looks like a good company." What truly matters is not whether SKF will become a better industrial company, but: whether you become its shareholder when it is cheap enough.

Open Questions and Limitations

The three most important limitations of this report are: First, the final distribution terms, tax treatment, and listing details of the Automotive spin-off are not yet finalized, so the current valuation can only treat it as a "management-announced but still-to-be-executed" factual backdrop, not as a completed fact. Second, the company does not disclose maintenance capex, so the Owner Earnings estimate inevitably carries subjective assumptions. Third, some peer valuations use different markets and accounting bases, suitable for "directional comparison" rather than mechanical scoring.

This report is based on public information and does not constitute investment advice. Markets carry risk; invest with caution.