Jul 6, 2011|
SKF vs FAG: Bearings biggies face off (Part IV)
In the previous article, we discussed the margin trend of the two largest bearing manufacturers viz.
SKF India and
FAG Bearings. We will now focus on how the two companies stack up on the capital efficiency front.
Just as in the case of margins and growth, there isn't much to choose between the two when it comes to RONW (return on net worth) as well. For the five year period between CY06 and CY10, the average RONW for FAG stood at around 23% while the same for SKF stood at around 22%. This is a very good performance by both the companies as the returns are much higher than the cost of capital of these companies and indicate the wealth created for their respective shareholders. Furthermore, these returns have been achieved using practically no debt at all as both the companies are nearly debt free. It should be noted though that FAG has been hoarding more cash than its counterpart. Its average dividend payout of around 9% over the past five years is much lower than the 21% that SKF has averaged over the same period.
Source: Ace Equity
As far as valuations are concerned, SKF has had an edge over FAG Bearings if the data for the last five years is any indication. While SKF's P/E has averaged 15 times during the period, the same for FAG has come in at 11.5 times. With most of the parameters for both the companies being pretty much similar, the premium for SKF seems to have stemmed from its better dividend payout and superior brand equity that its products command in the market. However, only time will tell whether this premium will persist in the long term or not.
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