As 1 of nan best-run industrials retired there, and a business that touches rather a wide scope of business end-markets, grounds of emerging weakness astatine Atlas Copco (OTCPK:ATLKY) isn’t thing I return lightly… moreover if results truthful acold are nary worse than I expected (and amended successful immoderate respects).
Fourth 4th net and guidance for 2023 person mostly been beautiful affirmative crossed nan sector, aliases astatine slightest that’s really nan Street is perceiving it. While galore companies person talked astir precocious end-customer inventory levels, weakening orders, and persistent costs inflation, nan Street seems much aliases little consenting to waive past that and presume that nan economical rhythm will spot a soft bottoming-out successful nan autumn of this year.
I don’t know. There are similarities betwixt nan commencement of this downcycle and past downcycles that ended up being pretty unsmooth (1957, 1974, 1981, and 1990), and while history ne'er repeats, it often rhymes. I’m reluctant to propulsion be aware to nan upwind and bargain into industrials today. Maybe Atlas banal won’t get importantly cheaper than this, but I deliberation nan risk/reward astatine this constituent isn’t bully capable to measurement up and return nan consequence that this downcycle could beryllium worse than expected.
Mixed Results For The Fourth Quarter
Atlas Copco didn’t person a unspeakable 4th quarter, but for a institution that often ticks disconnected beat-and-raise performances for illustration a metronome, location were decidedly immoderate areas of weakness that carnivore watching.
Revenue roseate 16% successful integrated terms, putting it good connected nan precocious extremity of business institution performances this 4th (the mean has been person to 10%) and astir 4% up of sell-side expectations. Gross separator was strong, rising a half-point to 42.4%, but while operating income roseate 24% (with separator down 190bp to 20%), it missed expectations by adjacent to 6%.
A Look Around The Segments…
Looking astatine nan segments, Compressor Technique posted 15% integrated gross growth, beating by 3%. Profits roseate 28%, beating by 1%, pinch separator down 30bp to 23.6%. CT’s champion comp, Ingersoll Rand (IR) hasn’t reported yet, but request for products utilized successful business operations mostly held up good successful nan quarter, including metalworking devices (Kennametal’s (KMT) Metal Cutting business was up 11%) and welding instrumentality (Illinois Tool Works (ITW) reported 15% integrated maturation successful Welding).
Vacuum Technique gross roseate 14% successful integrated terms, missing by 10%, and while profits roseate 6%, that was a 19% miss and margins contracted almost 5 points to 18.2%). Again, location isn’t a surplus of awesome nonstop comps here, but VAT Group (OTCPK:VACNY) did spot a akin 14% integrated gross maturation rate.
Industrial Technique grew 16% (again, organic), beating by 5%, pinch beardown request from car customers for EV launches and patient request crossed aero, electronics, off-highway, and wide business markets. Strength successful instrumentality imagination is absorbing comparative to nan challenges astatine Cognex (CGNX), but Atlas’s instrumentality imagination business is overmuch much industrial-focused, and companies for illustration Lattice Semiconductor (LSCC) person echoed patient trends successful instrumentality imagination contempt immoderate anemic end-markets (like electronics assembly and storage automation). Profits roseate 6%, missing by 13%, pinch separator down 350bp to 18%.
Power Technique posted 24% integrated gross growth, beating by 14%, while profits astir doubled (up 92%), beating by 14%, and separator improved almost 2 points to 18.2%. Given nan wellness of awesome end-markets for illustration oil/gas, mining, petrochem, and utilities, this spot isn’t wholly unusual, but nan magnitude is nevertheless impressive.
Orders Declining Into An Unknown Downcycle
Atlas reported a 7% integrated diminution successful orders, missing expectations by adjacent to 5%. Orders were up 3% successful Compressor Technique (a 6% miss) connected very beardown late-cycle gas/process orders, but underlying measurement was down mid-to-high single-digits (emphasizing really important value is to near-term revenue) and mini compressor orders were down mid-single-digits. At this constituent compressor orders are astir a 3rd higher than pre-pandemic levels, and I person immoderate concerns that its going to return clip to activity done to a much normalized level of orders.
Vacuum Technique orders declined 33%, missing by 10%, but this was broadly accordant pinch nan 43% diminution that VAT announced. Atlas saw a meaningful magnitude of cancellations (SEK 1B compared to SEK 8.5B successful orders), and location has been much talk of bid pushouts for superior equipment. While galore logic markets stay capacity-constrained, I americium concerned astir weakness connected nan representation side, arsenic it looks for illustration a batch of tech customers opportunistically purchased ample quantities of representation chips to put into inventory.
Industrial Technique orders roseate 18%, beating by 16%. A batch of this maturation was tied to car OEMs prepping for EV launches, and I do expect EV accumulation to double successful 2023, but fixed weakening wide car build complaint expectations and weakening business capex investment, I’m concerned this could reverse beautiful sharply.
Power Technique orders fell 6%, beating by 4%. I don’t person peculiarly beardown feelings astir this business, nan smallest of nan four, but fixed its skew toward late-cycle end-markets, I would expect that this conception would enactment stronger for longer.
All told, Atlas’s bid trends weren’t really truthful different than nan broader business space, and honestly, excluding Vacuum, they were beautiful beardown (up 4% organic, ex-VT). I do deliberation immoderate of this tin beryllium tied to Atlas’s vulnerability to an car assemblage still tooling up for important EV accumulation description , arsenic good arsenic late-cycle power and process industries. My concern, though, is that pinch elevated end-user inventories, fading demand, persistent inflation, and nan consequence of moreover much complaint hikes, orders will weaken much than nan 10% to 12% presently expected. To beryllium clear, this isn’t an Atlas-specific concern, but Atlas conscionable typifies it.
The Outlook
I’m a small beneath nan Street for FY’23 revenue, but still expecting adjacent to 7% year-over-year maturation arsenic Atlas rides nan tailwinds of beardown backlogs and request successful areas for illustration aerospace, auto, and late-cycle/process markets. I’m besides a small beneath nan Street successful FY’24, looking for astir 1% maturation arsenic I deliberation that respective markets that are holding up amended successful FY’23 could spot a weaker FY’24 (auto, trucks, mining). Long term, I’m expecting astir 5% halfway gross growth.
Margins should stay patient successful FY’23 and FY’24, and I’m expecting astir 2 points of betterment complete nan adjacent 3 years. At nan free rate travel line, I expect continued advancement toward 20% FCF margins, driving 5%-plus gross maturation to astir 8% semipermanent FCF growth.
Neither discounted rate travel nor margin/return-driven EV/EBITDA propose undervaluation here, and that’s pinch Atlas still enjoying a premium EBITDA multiple.
The Bottom Line
I do deliberation location is simply a existent consequence that galore business stocks person recovered excessively acold connected what could beryllium to beryllium excessive optimism astir a brief, comparatively gentle reset successful nan economical cycle. Given precocious inflation, precocious inventory, extended proviso chains, and beardown maturation going into this downturn, I do still spot downside risk.
In immoderate case, circumstantial to Atlas, this is ever a sanction to watch for pullbacks. I spot thing fundamentally incorrect pinch nan institution and should nan shares waste disconnected by 15% aliases so, I’d decidedly see astatine slightest a starter position.
Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.
This article was written by
Stephen Simpson is simply a freelance financial writer and investor. Spent adjacent to 15 years connected nan Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That past portion isn't wholly true. Probably.
Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.
Editor: Naga