EUR 850.00 For Business Accounts Only

Morningstar | Atlas Copco's 4Q In Line; Vacuum Continues to Show Weakness From Semi Cycle; Margins Resilient

Atlas Copco's fourth-quarter and full-year 2018 results were modestly better than we (and consensus) expected. The key takeaways from the results were 1) most of its industrial markets are showing still healthy order growth, 2) unexpectedly, orders from the semiconductor market continues to be weak, and autos in Europe was slower possibly due to the delay in orders caused by the well-flagged change in European Union emissions testing, 3) margins in the vacuum segment have remained remarkably resilient, despite the drop in orders from exposure to the semiconductor end market. We retain our narrow moat rating and SEK 220 fair value estimate and see the shares as fairly valued.

Across its general industrial base of customers, Atlas Copco's order growth was lower in the second half of the year than in the first half. For products such as compressors and power tools, order growth fell from high-single-digit/double-digit to mid-single-digit growth. This reflects our base case for 2019: a moderation in growth. Growth in vacuum pumps, particularly exposed to the semiconductor industry, declined by 18% in the second half of the year.

Notably, margins remained resilient, with the vacuum division's EBIT margin dropping by just 60 basis points in the second half versus the prior-year period. The rest of the division showed slight improvements from operating leverage with sales for the other divisions up organically by 5%-6%, above midcycle levels. Management's outlook included demand that is somewhat lower than current levels, but we do not expect significant downgrades to growth beyond low single digits on revenue and we expect margins to remain stable at the group level as the more mature and stable margin compressor business still underpins nearly 40% of group profits.