Atlas Copco - Always Excellent, Almost Always Expensive

Maybe no other company illustrates the challenges with the idea of "you have to pay for quality" better than Atlas Copco (OTCPK:ATLKY). While the Swedish industrial conglomerate doesn't get quite the same "compounder" fanfare as companies like Fortive (FTV) or Roper (ROP), the company nevertheless has an established track record of above-average margins, ROIC, free cash flow growth, and so on … as well as a 10-year total return (annualized) below that of the S&P 500. I believe a long history of an elevated valuation has contributed to keeping a lid on the share price, though a 10%-plus annualized return over a long period is not exactly "bad".

These shares are down about 7% since my last update, and now there are a lot more concerns in the market about industrials - particularly whether these companies (and stocks) are going to get squeezed between slowing demand (as indicators like the PMI slow) and persistent supply chain pressures. I think Atlas will navigate these challenges well, but the valuation is certainly not in straightforward bargain territory. While this is about as attractive as I've seen the valuation in a while, investors should be alert to the risk of further derating.

 

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Atlas Copco - Always Excellent, Almost Always Expensive