Morningstar | Atlas Copco Posts Mixed 3Q18; Shares Fairly Valued
Weak demand in the third quarter for Atlas Copco's vacuum business drove the first decline in the firm's order book since the last trough in mid-2016. The main driver for the sluggish demand was waning growth in orders from semiconductor and flat panel screen manufacturers. We have been modeling in slower growth in 2019, and the company flagged weakness in vacuum last quarter. So the slowdown is not new news but the extent of slowdown could still be steeper than our forecasts. However, for now we are not changing our SEK 220 per share fair value estimate or narrow moat rating. We see the shares as fairly valued.Year over year, group organic orders and revenue were minus 1% and plus 6% in the third quarter and the EBIT margin was steady at 22%. While the order growth in vacuum was down 19%, the largest and other core business, the compressor division, posted a more measured slowdown with the organic order book up 4%, down from 12%-13% in the last two quarters. Previous order book growth, boosted third quarter compressor revenue, up 11%, and the EBIT margin up 40 basis points year over year. We expect the vacuum and compressor businesses to slowdown in growth next year as the cycle turns; however, the vacuum business carries greater volume and margin risk in a downturn. By contrast, the compressor business enjoys a strong competitive footing with a longer innovation lead time and a higher service component to its revenue base.
The other two divisions, power and industrial were mixed. Power had good results with organic order and revenue growth at 13% and 5%, respectively, and operating leverage helped boost the EBIT margin up 150 basis points year over year. Demand from Europe and the rental market supported the division.
On the other hand, the industrial division saw some weakness from the automotive end market and orders that were flat year over year. Organic revenue was up 4% supporting a decent EBIT margin, just shy of 24% and close to its historic peak.
Atlas Copco provides industrial productivity products and services. Co.'s operations are divided into four business areas: Compressor Technique (provides compressors, vacuum solutions, gas and process compressors and expanders, air and gas treatment equipment and air management systems), Industrial Technique (provides power tools, assembly systems, quality assurance products, software and service through a global network), Mining and Rock Excavation Technique (provides equipment for drilling and rock excavation), and Construction Technique (provides construction and demolition tools, portable compressors, pumps and generators, lighting towers, and compaction and paving equipment).
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