UPDATE 4-Upbeat SKF sparks hopes for strong engineering Q3

* Raises targets for operating margin, sales growth

* Buys U.S. Lincoln Industrial in $1 bln deal

* Posts Q3 pretax profit 1.95 bln SEK vs forecast 1.65 bln

* Sees slightly higher demand in Q4 vs Q3

* Shares up 10 percent, lifts Swedish engineering sector

(Adds CEO comments, updates shares)

By Niklas Pollard and Johannes Hellstrom

STOCKHOLM, Oct 19 (BestGrowthStock) – Top world bearings maker SKF
(SKFb.ST: ) raised its financial goals after forecast-beating
earnings and a $1 billion acquisition on Tuesday, in a strong
reporting season start which boosted Swedish engineers’ shares.

SKF, benefiting from a sharp upturn in demand after the
global crisis, reported a record operating profit and margin in
the third quarter and pretax profit of 1.95 billion crowns,
easily beating the 1.65 billion expected in a Reuters poll.

It also unveiled a $1 billion acquisition of U.S.-based
lubrication systems company Lincoln Industrial on a cash and
debt free basis, one of the group’s biggest acquisitions.

“They (SKF) have entered a completely new era now. The
company is considerably more profitable than it was in the
past,” Evli analyst Magnus Axen said.

“It shows that what they have said about having increased
underlying profitability is correct.”

SKF shares jumped to hit a new all time high of 168.70
crowns. By 1053 GMT, they were up 10.16 percent at 168 crowns.

The company was the first of Sweden’s heavyweight engineers
to report on the third quarter and the news boosted stocks
across the sector. Atlas Copco (ATCOa.ST: ) and Sandvik (SAND.ST: )
rose more than 3 percent and Alfa Laval (ALFA.ST: ) 1.8 percent.

The engineering sector index rose 2.6 percent (.SX20PI: )
versus a 1 percent rise for the Stockholm market. (.OMXS30: )

SKF, seen as a bellwether for the manufacturing sector, with
its bearings used in items ranging from jets to dishwashers, has
seen firming demand and costs cuts made during the global
financial crisis boost profit margins.

“Our actions to reduce cost combined with the positive
demand development have resulted in a very strong quarter for
the group with record operating profit and operating margin and
a very strong cash flow,” the company said.

Chief Executive Tom Johnstone told a news conference sales
volumes were expected to grow in the fourth quarter from the
third, but not repeat the soaring 19 percent growth hit in the
third quarter as comparisons became tougher.

In addition, SKF faces headwinds in the shape of negative
currency effects from a stronger Swedish crown (EURSEK=: ) and
rising raw material prices, while greater investments would
eventually be needed to support growth, he said.

“The development in the third quarter was very strong, but
we are in a little bit of a sweet spot at the moment because
you’ve got the benefit of volume coming in, and you still have
the costs at a lower level,” he said.

“But going forward you can’t keep driving growth without
investing.”

HIGHER GOALS

SKF reported a pretax profit of 1.95 billion crowns ($292
million) compared to a year-ago 689 million crowns to beat the
1.65 billion crowns seen in a Reuters poll of 18 analysts and
saw its operating margin more than double to 14.9 percent.

Taking this to heart, the company said it was raising its
financial targets, setting its sights on a 15 percent operating
margin compared to the previous goal of 12 percent and sales
growth of 8 percent versus the previous 6 to 8 percent goal.

After several quarters of above-target operating margins, a
hike to the financial goals had been on the cards, though few
analysts had expected such a move in the third-quarter report.

“It’s a good result, raised targets and an acquisition —
that’s all positive as far as I can see,” Swedbank analyst Mats
Liss said. “The hike of the targets came a quarter or so earlier
than one might have expected.”

Strong earnings and cash flow have also left the group with
the financial muscle to carry out larger acquisitions and SKF
said the purchase of Lincoln Industrial would strengthen its
product range while offering substantial synergies.

Lincoln, based in St Louis, Missouri, and owned by private
firm Harbour Group, has about 2,000 employees and was expected
to generate sales approaching $400 million this year with an
operating margin of about 24 percent, SKF said.

DEMAND FIRMING

The company and its peers across the manufacturing industry
were slammed by a head-long fall in demand as the financial
crisis ended years of access to credit in 2008, forcing SKF to
cut thousands of jobs to stem the bleeding.

Since then demand has gradually strengthened amid booming
growth in emerging markets in Asia and Latin America, leaving
companies such as SKF to reap the benefits of smaller cost bases
as they move closer to full capacity in their existing plants.

“Demand is expected to be slightly higher for the group, the
divisions and for the different geographical areas,” the company
said, adding it planned to keep its manufacturing level
unchanged in the fourth quarter from the third.
(Additional reporting by Helena Soderpalm and Oskar von Bahr;
Editing by Mike Nesbit and Hans Peters)
($1=6.680 Swedish Crowns)

UPDATE 4-Upbeat SKF sparks hopes for strong engineering Q3