Semiconductor Vacuum Upswing And Expanding Service Base Will Support Stronger Long Term Prospects

Catalysts

About Atlas Copco

Atlas Copco supplies compressors, vacuum solutions, industrial tools and related services to industrial, semiconductor and energy customers globally.

What are the underlying business or industry changes driving this perspective?

• Semiconductor related vacuum equipment orders are picking up from a low comparison base, supported by more frequent customer discussions about future capacity and new EUV and Ganymede platforms. This can support higher Vacuum Technique revenue and operating profit over time.
• Global investments in wafer production and gas processing, including LNG, fuel gas boosters and air separation units, are feeding into larger compressor and Gas and Process orders. This can support Compressor Technique revenue and order backlog.
• Growing service activity across all business areas, with service divisions consistently described as delivering good profit and growth, points to a larger, higher margin installed base. This can support group net margins and cash flow.
• Active footprint adjustments and restructuring in Vacuum Technique and Industrial Technique are already visible in stable or improving margins despite softer volumes. This can improve operating leverage and earnings as activity recovers.
• Ongoing acquisitions, including NTE and 29 deals over the year, are expanding the rental and product offering in compressors, pumps and flow. This can broaden the revenue mix and support earnings once integration costs ease.

Assumptions

This narrative explores a more optimistic perspective on Atlas Copco compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Atlas Copco's revenue will grow by 11.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 15.7% today to 17.3% in 3 years time.
• The bullish analysts expect earnings to reach SEK 40.7 billion (and earnings per share of SEK 8.33) by about February 2029, up from SEK 26.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK32.0 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 31.7x on those 2029 earnings, down from 33.9x today. This future PE is greater than the current PE for the GB Machinery industry at 25.0x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.38%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Prolonged weakness in automotive and general industrial demand, which is already weighing on Industrial Technique orders and has triggered repeated restructuring, could limit growth in tools and assembly solutions and keep revenue and earnings below the more optimistic expectations.
• Sustained currency headwinds and tariff related cost pressure, which management linked to lower operating profit and margins in several business areas, may continue to dilute net margins and earnings if pricing and cost actions do not fully offset these external factors.
• Acquisitions that currently dilute margins due to integration costs and lower profitability than the group average may take longer than expected to reach group levels, which could hold back any improvement in group operating margin and earnings.
• Underutilization and weaker activity in the rental fleet, especially in Power Technique and some regions, together with decisions to cancel older orders at less attractive prices, could cap revenue growth and keep operating margins below recent levels.
• If semiconductor related vacuum demand does not translate from customer discussions into firm orders in line with the bullish expectations, the recovery in Vacuum Technique could be slower, which would limit revenue growth and the margin leverage that restructuring is intended to provide, keeping earnings closer to current levels.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Atlas Copco is SEK220.0, which represents up to two standard deviations above the consensus price target of SEK193.35. This valuation is based on what can be assumed as the expectations of Atlas Copco's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK220.0, and the most bearish reporting a price target of just SEK125.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be SEK234.8 billion, earnings will come to SEK40.7 billion, and it would be trading on a PE ratio of 31.7x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of SEK183.75, the analyst price target of SEK220.0 is 16.5% 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.