Strategic Growth In Services And Innovation Fuels Future Revenue And Margin Expansion

Key Takeaways

• Expansion of the service business and strategic acquisitions could drive revenue and improve net margins through stability and market reach.
  
• Investments in eco-friendly products and organizational improvements may enhance efficiency and capitalize on energy transition opportunities.
  
• Global macroeconomic uncertainty and challenges in key segments may hinder revenue growth, profitability, and margins, exacerbated by currency impacts and industry-specific issues.

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.

• The continued expansion and performance of Atlas Copco's service business could drive increased revenue and improved net margins, benefiting from the stability and recurring nature of service contracts.
  
• The growth in the Vacuum Technique segment, particularly driven by the semiconductor market in Asia, is expected to support future revenue despite short-term fluctuations in order volumes.
  
• Operational improvements and the adaptation of the organizational structure in response to weaker trends, particularly in Vacuum and Industrial Technique, may lead to enhanced efficiency and improved earnings over time.
  
• Recent investments in new product lines, such as eco-friendly compressors and advanced vacuum systems, are likely to drive future revenue through market differentiation and tapping into energy transition needs.
  
• The company's strategic acquisitions across various segments are anticipated to bolster future revenue growth and potentially enhance net margins by integrating complementary businesses and expanding market reach.

Atlas Copco Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Atlas Copco's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.4% today to 17.9% in 3 years time.
• Analysts expect earnings to reach SEK 37.0 billion (and earnings per share of SEK 7.34) by about November 2027, up from SEK 28.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK 31.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.9x on those 2027 earnings, down from 31.0x today. This future PE is greater than the current PE for the GB Machinery industry at 25.3x.
• Analysts expect the number of shares outstanding to grow by 1.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.41%, as per the Simply Wall St company report.

Atlas Copco Future Earnings Per Share Growth

Risks

• Mixed end-market demand with flat or declining orders in key segments such as Industrial Compressors and Gas and Process compressors could impact future revenue growth.
  
• The decline in operating margin from 22.7% to 21.7%, influenced by restructuring costs and currency impacts, may negatively affect net margins and overall profitability.
  
• Currency headwinds leading to a 4% negative impact on orders received could continue affecting earnings and revenue if exchange rates remain unfavorable.
  
• Automotive industry challenges, with slowed EV adoption impacting Industrial Technique, could lead to reduced order volume and affect revenue and net margins.
  
• Hesitation from customers to place orders due to global macroeconomic uncertainty, conflicts, and delays in decision-making, especially in Industrial Compressors, could result in lower revenue growth.

Valuation

• The analysts have a consensus price target of SEK 187.36 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 SEK 238.0, and the most bearish reporting a price target of just SEK 122.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be SEK 207.3 billion, earnings will come to SEK 37.0 billion, and it would be trading on a PE ratio of 29.9x, assuming you use a discount rate of 5.4%.
  
• Given the current share price of SEK 183.0, the analyst's price target of SEK 187.36 is 2.3% 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.