Atlas Copco: Still Excellent, Still Expensive, And Maybe A Bit Vulnerable

There may be better industrial companies out there than Atlas Copco (OTCPK:ATLKY), but the number of entries above them on that list is going to be relatively few. Few companies have matched Atlas when it comes to a margin-rich, asset-light model predicated on driving share growth through both strong engineering and distribution and expansion into adjacent markets, and the valuation typically reflects tat.

Since my last update, Atlas shares have modestly outperformed the broader industrial space (by a couple of percentage points), but have outperformed the S&P 500 by a wider margin. By comparison, other industrials I hold in similar regard like Eaton (ETN) and Honeywell (HON) have done a little better, while Parker-Hannifin (PH) has done a little worse, and Ingersoll Rand (IR), a direct competitor in compressors, has outperformed Atlas more meaningfully (by around 400bp).

I have no issues with Atlas Copco from a long-term perspective, but I do see some challenges in the coming quarters as short-cycle industrial markets slow down and the entire industrial group deals with an uncommon combination of elevated backlogs, high inventories, high costs, and weakening demand. Likewise, the nature of Atlas’s business could lead to relative financial outperformance in FY’23, but underperformance in FY’24. Should the shares sell off during this turbulence, strongly consider adding them.

 

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Atlas Copco: Still Excellent, Still Expensive, And Maybe A Bit Vulnerable

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

The Market's Love Affair With Atlas Copco Risks Lower Long-Term Returns

I’m often asked what I think is the best company or stock in a given industry or sector – Atlas Copco (OTCPK:ATLKY) is definitely one of the best companies I follow, irrespective of sector or industry. Double-digit trailing FCF growth, mid-teens FCF margins, strong share in multiple markets, and a disciplined management team all play into that, and the double-digit long-term total return has likewise been quite good.

Still, for all of the positives I see at Atlas, including good leverage to the global industrial recovery and ongoing investment in semiconductor capex, the valuation is just too high. I see Atlas as among the lowest long-term return prospects among the industrials I cover, and lest you think I’m overly conservative on modeling, I’d note that my 2023 revenue number is more than 10% above the sell-side average (likewise for FCF).

I’ve learned to not underestimate how far the market can run with a name it likes, but it’s tough for me to envision the combination of growth and further re-rating it will take for Atlas to keep generating double-digit returns for investors.

 

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The Market's Love Affair With Atlas Copco Risks Lower Long-Term Returns

Atlas Copco Shows Once Again That It's Serious About Automation

Increasing automation is the future of manufacturing (arguably already the present of manufacturing), and Atlas Copco (OTCPK:ATLKY) is making it increasingly clear that they do not intend to be left behind. While the company hasn’t really made that eye-popping acquisition yet, between Isra Vision (OTC:IRAVF) and now Perceptron (NASDAQ:PRCP), Atlas is putting on its water wings and wading out into much bigger seas of opportunity in metrology, machine vision, and automated manufacturing.

I like the Perceptron deal, and I believe the price paid offers relatively few risks for the company. I do also believe, though, that Atlas has bigger long-term ambitions, and we’re seeing only the first moves in a long-term strategy. Given recent updates and management commentaries, I’m not substantially more bullish on the outlook for high-quality industrials like Atlas Copco. Accordingly, while I love the business, I don’t love the valuation.

 

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Atlas Copco Shows Once Again That It's Serious About Automation

Atlas Copco's Long-Term Excellence Continues To Drive The Shares Higher

It's probably true that we've passed through the worst of the pandemic-driven economic downturn, but seeing Atlas Copco (OTCPK:ATLKY) near an all-time high still strikes me as overly optimistic. Don't get me wrong - I think Atlas is one of the best industrials I know, but I struggle to see how any company could live up to the expectations being built into this "safe haven" industrial. With that, I just can't see buying here unless you're the sort of investor who can successively trade momentum stories.

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Atlas Copco's Long-Term Excellence Continues To Drive The Shares Higher

Atlas Copco Offers Premium Performance At A Premium Price

Results are certain to get worse from here, but Atlas Copco’s (OTCPK:ATLKY) relatively strong performance in the first quarter underlines part of the reason why I love this company and why investors continue to bid it up to such a generous premium over typical industrial companies. While Atlas is by no means immune to the coming recession, the company has out-executed its competition over the years and continues to find new avenues of profitable growth in which to reinvest.

Of course Atlas isn’t cheap now. Even during the period of peak panic in March it was barely cheap by normal valuation metrics. If you’re waiting to buy Atlas when it’s inarguably cheap, you’re likely in for a long wait. I’m not suddenly turning into a “ignore valuation” type of investor, but there’s a point where you have to bow to reality, and the reality is that Atlas Copco is going to get a benefit of the doubt (lower implied discount rate/higher valuation) so long as it continues to execute at peer-leading levels.

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Atlas Copco Offers Premium Performance At A Premium Price

Atlas Flinches

Investors waiting for that rare opportunity to buy Atlas Copco (OTCPK:ATLKY), one of the best-run multi-industrial companies out there, on a pullback … need to keep waiting. While the shares have already pulled back more than 10% from their high established in mid-January, the prospective return from here still isn’t all that good and I will be holding off in the hope that further derating brings the shares back to a more reasonable entry point.

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Atlas Flinches

Atlas Copco Riding High On Renewed Enthusiasm For Recovery Stories

I’ve long liked Atlas Copco (OTCPK:ATLKY), but there haven’t been all that many opportunities to buy in at what would normally be reasonable multiples. Between low rates leading investors to accept lower prospective returns and Atlas Copco’s ongoing well-deserved status as a reliable growth leader, though, it hasn’t hurt the share price performance – Atlas shares have significantly outperformed industrial peers over the last 5-year, 3-year, 1-year, and 1-quarter time periods.

Atlas Copco’s recent capital markets day didn’t offer up a lot that was new, but for a company like Atlas Copco, “more of the same” when it comes to new product development, end-market/addressable market expansion, and margin leverage, more of the same is just fine. I can’t see any way that Atlas Copco shares are cheap now, though, and the prospective mid-single-digit return is among the worst of the quality industrials I follow (if not the worst). I don’t expect Atlas to sell off just because the shares look expensive to me, but it’s not a stock I intend to chase at these prices.

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Atlas Copco Riding High On Renewed Enthusiasm For Recovery Stories

Share Gains And Advantageous Market Exposures Drive A Strong Result From Atlas Copco

I’ve said many times before that good companies really show their quality in downturns, and I’ve likewise said many times before that I believe Atlas Copco (OTCPK:ATLKY) is one of the best multi-industrials out there. Although I thought the shares weren’t undervalued when I last wrote about the company, the stock is up almost another 15% since then as Atlas Copco’s strong third-quarter results further polish its reputation and add some “safe haven” momentum for good measure.

I can’t really make the valuation numbers work now for Atlas, though I freely admit that stocks don’t go down just because they’re expensive (likewise, they don’t go up just because they’re cheap). The company’s full-cycle outperformance potential seems fully priced into the shares now, and this is only a name I’d be comfortable considering for my own portfolio on a pullback.

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Share Gains And Advantageous Market Exposures Drive A Strong Result From Atlas Copco

Atlas Copco Keeping Its Best-In-Class Position, But Markets Are Weakening

Given the long-term performance of Atlas Copco (OTCPK:ATLKY), I can understand why sell-side analysts look for excuses to get more positive on the name, and despite multiple data points of spreading weakness in multiple industrial end-markets, consensus EBITDA has risen about 7% in just the past three months. Even so, the shares have actually lost a little ground since my last update, dropping about 3% and lagging the industrial sector by about 6%, as some investors remain concerned about the high multiple in the face of likely peaking margins in the near term.

Atlas Copco acknowledged weakening trends in its industrial markets, and I'm comfortable with the general notion that, if the best companies are seeing weakness, it's worth listening to those warnings. I remain very positive on the long-term outlook for the business, but with the shares seemingly priced for only mid-single-digit long-term annualized returns, I don't see enough return to compensate for the risk.

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Atlas Copco Keeping Its Best-In-Class Position, But Markets Are Weakening

Low Expectations And Portfolio Transformation At SPX Flow

When I last wrote about SPX Flow (FLOW), I wasn’t too enamored with the stock, as the company’s orders seemed underwhelming relative to the cycle and I didn’t like the near-term prospects for growth and margin improvement. Since then, the shares are down about 10% (including a strong post-earnings move), lagging the broader industrial sector by close to 20%, not to mention peers/rivals like Alfa Laval (OTCPK:ALFVY) and Flowserve (FLS) – in fact, until this post-earnings spike, the shares had been lagging troubled GEA Group (OTCPK:GEAGY), and that’s really not a good thing.

I don’t believe SPX Flow is a vastly better business today than a year ago, but I have seen progress on margin and portfolio improvement efforts, the most obvious example being the decision to look to divest the lower-margin Power & Energy business, but also including subtler moves like deprioritizing larger dairy orders. What’s more, the expectations embedded in the business seem quite low. I do have some concerns that this could be a value-trap, but the value proposition is interesting.

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Low Expectations And Portfolio Transformation At SPX Flow

Stanley Black & Decker Comes Back With A Stronger Report

A weak, and poorly-received, fourth quarter put Stanley Black & Decker (SWK) in a hole, and while the shares have lagged industrial peers over the last year, the performance since my last update has been noticeably better. With a strong first quarter driven in very large part by the tool business, Stanley’s guidance for 2019 certainly looks more attainable than just three months ago. While I still see risks in the second half of the year from weaker than expected “general industrial” markets, Stanley should be poised to benefit from gradual improvement in auto demand later this year and some self-directed gross margin improvement efforts.

I’m not as interested in the valuation/share price opportunity as I was in January, as the stock has risen more than 20% since then (roughly doubling its peer group). I’m concerned that the market and industrials in particular are ahead of themselves now and I’d prefer to wait for a better entry price before starting a position here.

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Stanley Black & Decker Comes Back With A Stronger Report

Startlingly Good Results From Atlas Copco Support The Quality Premium Argument

Atlas Copco (OTCPK:ATLKY) won’t have the best quarter among multi-industrials this quarter, Honeywell (HON) and Dover (DOV) already surpassed them in organic growth, but the level of outperformance was startingly high all the same and further supports the argument for Atlas Copco as a best-of-breed multi-industrial. Although there are signs of deterioration if you look for them, management seemed relatively unconcerned about the health of the business.

Atlas Copco ADRs have shot up about 20% since my last update (the local shares have done better), when I said that the shares looked about as promising as they get on valuation. It’s a lot harder to reiterate that argument now, and I’d rather wait for a pullback than chase these shares in what I still believe will prove to be a decelerating macro backdrop.

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Startlingly Good Results From Atlas Copco Support The Quality Premium Argument

Atlas Copco's Better Fourth Quarter Offset By Ample 2019 Uncertainties

The past year (2018) was a relatively rare year where Atlas Copco (OTCPK:ATLKY

) underperformed its industrial peers, as worries mounted throughout the year about the company's semiconductor-exposed Vacuum Technique business. Performance has improved on a relative basis over the last few months, though, as investors start considering whether semiconductor orders may recover in 2019 and whether other industrial markets may not slow as much as feared.

I'm still in the camp that thinks economic growth will slow more noticeably in North America, Europe, and China as 2019 goes on. Atlas Copco may well outperform in that environment (it certainly did in the fourth quarter), but investors considering the shares have to accept the risk of conditions getting worse before they get better. Atlas Copco isn't a clear-cut bargain today, but it's close enough (and seldom gets truly cheap) that I'm tempted to take the risk.

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Atlas Copco's Better Fourth Quarter Offset By Ample 2019 Uncertainties

Worries About China And Energy Have Pushed Emerson To A More Interesting Level

It hasn’t been a good couple of months for Emerson (EMR). Between worries about weakening conditions in China, weaker oil prices, and relatively conservative guidance with fiscal fourth-quarter results in early November, Emerson's shares have fallen almost 20% since early October – tracking fellow process automation player Yokogawa (OTCPK:YOKEY) and lagging other comps like Rockwell (ROK), Honeywell (HON), and industrials in general. It’s worth noting, though, that Emerson has done comparatively better on a full-year basis and remains one of the better-positioned multi-industrials for a late-cycle 2019.

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Worries About China And Energy Have Pushed Emerson To A More Interesting Level

Atlas Copco's CMD - Not All Bad, But Not Exactly Cheerful

In contrast to the ever-sunny, “what, me worry?” attitude of some corporate management teams that would have you imagining them smiling broadly even as the car rockets over the edge of the cliff, Atlas Copco (OTCPK:ATLKY) has a reputation for playing things pretty straight. That doesn’t mean that they’re always right, but it does mean that investors can generally trust them to give as accurate an assessment of the situation as possible.

To that end, Atlas Copco’s Thursday Capital Markets Day wasn’t exactly the sort of event that’s going to get investors feeling a lot better about this stock anytime soon. While management seems to believe the downside risk in Vacuum Technique is less worrisome than some of the more bearish sell-side analysts, and Power Technique could be a bigger contributor to growth than previously expected, all in all I’d say the tone was pretty conservative for the near term.

Atlas Copco shares have fallen roughly 50% from the start of the year and I have to admit getting more and more tempted to take a position, even given the risks around key markets like semiconductors and autos. While there is definitely a risk of things getting worse before they get better, and valuation still isn’t what I’d call cheap, buying these shares on sharp pullbacks has worked out pretty well in the past and I believe that will be the case again here.

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Atlas Copco's CMD - Not All Bad, But Not Exactly Cheerful

Atlas Copco Hits An Air Pocket On Weaker Vacuum Results

I was worried about the possibility of weaker semiconductor orders and slowing industrial activity when I last wrote about Atlas Copco (OTCPK:ATLKY) in July, and those worries are looming even larger now. There’s no longer any real debate about weakness in the semiconductor equipment space; the argument is now about how bad it will get and how long it will last. Likewise, I think it’s becoming increasingly apparent that there are more than a few industrial end-markets that are seeing meaningful decelerations.

None of this is good news for Atlas Copco in the short-term, and there are risks of further negative revisions into 2019 if the semiconductor down-cycle turns uglier and if industrial end-markets slow further. Counterbalancing that is the reality that Atlas Copco is one of the best companies out there, and a company that I believe can do well by shareholders over the long term. The shares are still above my revised DCF-based fair value, and I don’t dismiss the risk of industrial stocks derating further, but this looks like a pretty classic watchlist opportunity to me.

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Atlas Copco Hits An Air Pocket On Weaker Vacuum Results

Healthy Markets And Price Leverage Bode Well For Ingersoll-Rand

Ingersoll-Rand (IR) has had a so-so run of late. Although the company has been reporting some good core revenue and order growth numbers and a general upward trend in margins, the shares have lagged peers/comps like Lennox (LII), Gardner Denver (GDI), and only just matched the industrials sector as whole (and Atlas Copco (OTCPK:ATLKY) had also been outperforming Ingersoll-Rand until a recent dip tied to its semiconductor-exposed vacuum business).

I find that performance interesting given that the company continues to benefit from healthy cycles in the non-residential and residential building markets, has little meaningful exposure to sectors of concern like autos or electronics, and still has leverage to price/cost improvement and growing aftermarket/service sales. Although Ingersoll-Rand isn't cheap enough to call it a clear bargain (those are few and far between in the industrial sector), I wouldn't ignore the significant boost to guidance and the potential for IR to be one of the relatively few beat-and-raise stories in the second half.

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Healthy Markets And Price Leverage Bode Well For Ingersoll-Rand

A Window Of Opportunity At Atlas Copco, But Is It Wide Enough To Climb Through?

Atlas Copco (OTCPK:ATLKY) (ATCOa.ST) is one of those top-notch companies that has historically validated the concept of a watchlist – bide your time, wait for your opportunity, and then take advantage when it arrives. Of course, those opportunities always come with caveats – Atlas Copco doesn’t sell off “just because”, and that is the case today. While the slowdown in semiconductor capex orders that rattled investors may well be a temporary blip, nobody knows how big of a blip it will be and it seems less likely that strength in the remaining businesses will produce meaningful additional boosts to estimates during this up-cycle.

Atlas Copco shares do look undervalued on the basis of forward EV/EBITDA, but not yet on the basis of discounted free cash flow and that is my preferred “buy” signal (though “preferred” is by no means the same as “perfect”). I do see some downside risk as the industrial up-cycle ages, and with the possibility of a longer pause in semiconductor order growth, but I wouldn’t try to get too cute with timing this opportunity unless you expect a sharper correction to industrial equipment is on the way.

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A Window Of Opportunity At Atlas Copco, But Is It Wide Enough To Climb Through?

Atlas Copco's Premium Valuation Comes With High Expectations

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.

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Atlas Copco's Premium Valuation Comes With High Expectations