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Atlas Copco's Premium Valuation Comes With High Expectations

May 08, 2018 8:11 AM ETAtlas Copco AB (ATLKY)
Stephen Simpson profile picture
Stephen Simpson


  • Atlas Copco continues to post excellent results on a comparable/relative basis, but here too margin leverage is coming in weaker than hoped and order growth is slowing down.
  • Strong order growth in the Compressor business should be a good sign for the overall industrial market, but uncertainty seems to be reigning right now.
  • A company with Atlas Copco's excellent track record deserves a premium, but even this 20% pullback isn't enough to bring it back to a truly exciting entry price.

I don’t know that there’s any real doubt or debate that Sweden’s Atlas Copco (OTCPK:ATLKY) is an exceptional company and worthy of premium valuation. Just how much of a premium is reasonable, though, is very much up for debate as the shares' nearly 20% pullback off its 52-week high raises the question of whether there’s been enough of a dip in valuation to wade in.

For now I’m inclined to hold off. Between growing worries of a short-cycle slowdown, significant uncertainty about capital spending in the semiconductor space, and possible turbulence related to Atlas Copco’s spin-off of Epiroc, I’d rather wait until the dust settles a bit more and there’s a real gap to what I think the underlying fair value of this excellent conglomerate is.

A Familiar Pattern – A Good, But Not Good Enough, Quarter

Like many other industrials, Atlas Copco's shares took a beating in the market when it reported earnings in late April, as the company missed at the operating/segment profit level and didn’t really offer that “above and beyond” needed to sustain a very high valuation.

Revenue rose 9%, which was a very strong result given the company’s end-market exposures. Compressor Technique saw 7% revenue growth, while Vacuum Technique grew 13% on top of a steep comp. Industrial Technique grew 7% and Power Technique grew 10%. While reported as a discontinued operation pending the spin-off, Epiroc’s revenue rose 9%.

Adjusted operating income rose 8%, with 40 bps of margin expansion, but missed expectations by a few percentage points. Compressor Technique saw only 10 bps of margin expansion, while Vacuum Technique saw 10 bps of margin compression – neither business offering the sort of incremental margins that investors wanted to see. Both Industrial and Power Technique did notably better, with margin expansion of 80 bps and 390 bps, respectively. Epiroc margins declined 70 bps in the

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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