Expansion In Asia Will Strengthen Future Market Position

Key Takeaways

• Strategic acquisitions and expansion in high-margin markets could drive growth and boost revenue, orders, and net margins.
  
• Focus on R&D and innovation in energy-efficient solutions aims to maintain technological leadership and enhance profit margins.
  
• Dependency on acquisitions, lower demand, and uncertain market outlook pose risks to revenue growth and profitability, impacting long-term earnings stability.

Catalysts

Provides compressed air and gas, vacuum, energy, dewatering and industrial pump, industrial power tool, and assembly and machine vision solutions in North America, South America, Europe, Africa, the Middle East, Asia, and Oceania.

• Atlas Copco has completed 33 acquisitions in the year, significantly contributing to orders and revenues, which is likely to drive future revenue growth.
  
• Strategic acquisitions in various business areas, such as vacuum systems and automation tools, support growth in higher-margin and expanding markets, potentially boosting earnings and net margins.
  
• A strong focus on innovation and R&D, particularly in energy-efficient products like nitrogen generators and vacuum pumps, aims to maintain technological leadership, possibly enhancing revenue and profit margins.
  
• The company has increased its footprint in significant growth regions like Asia, which is expected to continue supporting revenue growth despite challenges in markets like China.
  
• Potentially lower effective tax rates compared to previous years could positively impact net earnings, contributing to higher net margins.

Atlas Copco Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Atlas Copco's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.8% today to 17.6% in 3 years time.
• Analysts expect earnings to reach SEK 36.5 billion (and earnings per share of SEK 7.44) by about January 2028, up from SEK 29.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.7x on those 2028 earnings, down from 29.8x today. This future PE is greater than the current PE for the GB Machinery industry at 28.5x.
• Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.45%, as per the Simply Wall St company report.

Atlas Copco Future Earnings Per Share Growth

Risks

• The Industrial Technique orders were down for the year, driven by weaker demand from the automotive industry, which could impact overall revenue growth and future earnings.
  
• There is stagnant organic growth and dependency on acquisitions to drive revenue, potentially impacting long-term net margins as integration costs are often dilutive.
  
• The Vacuum Technique business experienced flat semiconductor equipment orders and weak demand from industrial and scientific sectors, posing risks to revenue and profit margins.
  
• Investments in R&D and expansion of production capacities remain underutilized due to lower current demand, leading to higher fixed costs and potentially affecting profitability.
  
• The overall market outlook remains uncertain, with mixed regional performances and industry-specific challenges, which may pose risks to consistent revenue streams and earnings stability in the near term.

Valuation

• The analysts have a consensus price target of SEK188.62 for Atlas Copco based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK238.0, and the most bearish reporting a price target of just SEK122.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK207.2 billion, earnings will come to SEK36.5 billion, and it would be trading on a PE ratio of 29.7x, assuming you use a discount rate of 5.4%.
  
• Given the current share price of SEK182.05, the analyst's price target of SEK188.62 is 3.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.