Sweden's Atlas Copco (OTCPK:ATLKY) is a case in point as to some of the limitations of modeling and model-based valuation. This is an excellent industrial conglomerate by almost any standard and one that is well-respected and generally well-liked. When I last wrote about the company in September of 2016, I liked the company quite a bit but thought that the valuation was already very healthy. Since then, not only have the company's underlying markets come back faster and stronger than expected but so too has investor enthusiasm - pushing these shares up by a third, in line with other strong Swedish plays like SKF (OTCPK:SKFRY) and Sandvik (OTCPK:SDVKY) but well ahead of strong U.S. industrial conglomerates like Fortive (NYSE:FTV) and Illinois Tool Works (NYSE:ITW).
It's hard to connect the dots on the valuation today, unless you think long-term revenue growth will reach the high single-digits, FCF margins will move into the 20%s, and/or you're willing to accept a total return closer to the mid-single digits. I've learned over the years not to bet against Atlas Copco (or at least to do so very carefully), but even the company's announced split and ongoing recoveries in multiple markets can only do so much for a stock that already enjoys quite a bit of esteem.
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Atlas Copco's Excellence Reflected In The Performance