Vacuum Technique And Compressor Technique Divisions Will Drive Operational Efficiency

Key Takeaways

• Streamlined vacuum operations and compressor innovations are set to enhance profitability and drive future revenue growth and margins.
  
• Strategic market expansions and focused R&D investments promise robust long-term revenue increases and competitive advantages.
  
• Weakness in key markets and operational cost increases could hinder Atlas Copco's revenue growth and profitability, particularly in Europe and North America.

Catalysts

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

• Atlas Copco is reorganizing and rightsizing its Vacuum Technique division, which is expected to improve profitability in semi-vacuum and general vacuum operations, potentially leading to better net margins in future quarters.
  
• The Compressor Technique segment is focused on innovation and efficiency, particularly with oil-free compressors and new division creation, which is poised to positively impact future revenue growth and operating margins.
  
• Strategic geographic developments, with South America and Africa/Middle East showing robust growth, could provide a strong foundation for future revenue increases as these markets expand further.
  
• The company is adjusting its inventory levels for more efficient operations, which could enhance cash flow and overall earnings stability in fluctuating demand environments.
  
• Atlas Copco's continued investment in R&D and innovation across all business segments, including its focus on digital services, is expected to drive long-term revenue growth and sustainable competitive advantage.

Atlas Copco Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Atlas Copco's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.5% today to 17.4% in 3 years time.
• Analysts expect earnings to reach SEK 34.8 billion (and earnings per share of SEK 7.08) by about May 2028, up from SEK 29.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as SEK39.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.6x on those 2028 earnings, up from 25.0x today. This future PE is greater than the current PE for the GB Machinery industry at 21.5x.
• Analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.7%, as per the Simply Wall St company report.

Atlas Copco Future Earnings Per Share Growth

Risks

• The negative development in equipment orders and revenue volumes could limit revenue growth in various business segments, including Compressor Technique and Power Technique.
  
• The continued weakness in specific markets, such as automotive and industrial vacuum, particularly in Europe and North America, poses risks to maintaining high order levels and revenue.
  
• The challenges in the semi-vacuum market and broader vacuum business, along with a lack of recovery, create uncertainty for future revenue and earnings stability.
  
• Increased operational costs, including R&D and the costs associated with restructuring and new division establishment, could adversely affect net margins if not offset by sufficient revenue growth.
  
• Currency fluctuations and potential tariff impacts on key markets, such as the U.S., could negatively affect profitability and net margins due to increased costs and price competition.

Valuation

• The analysts have a consensus price target of SEK173.684 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 SEK210.0, and the most bearish reporting a price target of just SEK130.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK200.1 billion, earnings will come to SEK34.8 billion, and it would be trading on a PE ratio of 28.6x, assuming you use a discount rate of 5.7%.
  
• Given the current share price of SEK149.85, the analyst price target of SEK173.68 is 13.7% higher.
  
• 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.