CFA IRC Atlas Copco - M¤lardalen University
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Industrial Goods & Service, Stockholm Stock Exchange
KEEP CALM AND BUY ATLAS COPCOATLAS COPCO ATCOA.SS
Date: 20/12/2014 Current Price: 210.70SEK (01/12/2014) Recommendation: BUY (17% Upside)Ticker: ATCOA.SS (Bloomberg) USD 1.00: SEK 7.4572 (Riksbank) Target Price: 246.40SEK
Figure 1: Atlas Copco EPS
Figure 2: Atlas Copco Share Performance
We issue a BUY recommendation on Atlas Copco AB (ATCO) with a one-year target price of SEK 246.40 for ATCO-A and SEK 231.96 for ATCO-B using the Discounted Cash Flow to Firm meth-od. This offers a 17 % upside for both shares from their closing prices of SEK 210.70 (ATCO-A) and SEK 198.10 (ATCO-B) on 1st December, 2014. The companys strengths lie in their robust cash flows, diversified business areas and strong positions in their market regions. This gives the company an ability to grow revenue by means of exercising its positive acquisition strategy and improving its organic growth through development of innovative product solutions and services.
ATCO industry leader in terms of margins and this is continue as the company plans to increase the revenue from the higher margin after sales service. This is to be seen in mining where though capital expenditure drops there is a continued increase in production output which is a key driver to service offering. The increase in mining production will be mainly in Iron ore by 8.6% and Copper 3.8% driving growth in the Australian and South American regions.
ATCO has good exposure to the North American market that is being driven by a strong resur-gence of the United States economy, with the World Bank estimating growth of 3% in 2015. The shale gas revolution has seen a rebirth of American manufacturing as it has lowered both energy costs and increased need for industrial goods for its extraction. This has led to lower unemploye-ment leading to a better demand for housing Freddie Mac forecasting an increase of 14% in home purchases for 2015. ATCO has is increased its exposure by partnering with new distributors and opening new sales offices in the region.
ATCO purchase of Edwards sees the opening of a new opportunities growing industrial sector of semi-conductor industry. The two companies have strong synergies and it makes a good fit into its Compressor Technique business. This is an important market to enter as semi-conductor driven technology continues to play a bigger role in lives of people. It offers greater exposure for ATCO in the North America and Asia where growth rates in those regions are high.
ATCO has a stable and strong financial base shown by its high liquidity (evidenced by high current ratio), high coverage (evidenced by high interest coverage ratio) and low leverage (evi-denced by low debt to equity ratio) company with a solid cash flow generation trend and which funds most of its acquisitions through internally generated funds. This combined with its long term high credit ratings (A2 from Moodys and A from Standard & Poors) enables it to generate additional funds at favourable costs to fund acquisitive and organic growth further providing a solid platform for projected, continued growth.
Valuation date: 01/12/2014
Exchange Rate: 1 USD : 7.4572 SEK
Industry: Industrial Goods & Services
Total Market Cap(A Share only):
52 Week High (SEK) 222.20
52 Week Low (SEK) 169.90
Ave. Daily Vol (M) 773
Exchange: NASDAQ OMX Stockholm
Source: Factset, Bloomberg and Nasdaq
2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E
Total Sales 63 762 69 875 81 203 90 533 83 888 92 110 96 892 99 998 103 282 106 650
EBIT 9 109 13 803 17 461 19 074 16 915 17 514 19 199 19 896 20 480 21 047
EBITDA 11 425 16 248 19 809 21 664 19 602 19 617 21 330 22 055 22 723 23 406
Net Income 6 338 9 974 13 901 13 901 12 072 12 679 13 999 14 492 14 853 15 261
Retrun on Assets 9.3% 13.9% 16.9% 16.7% 13.4% 13.9% 14.8% 14.7% 14.7% 14.6%
Return on Equity 24.7% 34.0% 45.3% 39.6% 30.3% 27.9% 29.3% 31.2% 27.8% 31.7%
Current Ratio 2.28 2.51 1.86 2.44 2.35 2.35 2.35 2.35 2.35 2.35
Total Asset Turnover 0.94 0.98 0.71 0.60 0.64 0.46 0.44 0.60 0.41 0.63
Debt to equity 0.93 0.69 0.71 0.60 0.64 0.46 0.44 0.60 0.41 0.63
Earnings per share 5.21 8.19 10.73 11.44 9.94 10.42 11.50 11.91 12.21 12.54
Dividend per share 3.00 4.00 5.00 5.50 5.50 5.21 5.75 5.95 6.10 6.27Source: Factset and Team Analysis
Atlas Copco AB, established in 1873, is a Sweden based manufacturing company that provides industrial solutions to customers over 180 countries around the world. The Company has over 50 brands and its product portfolio includes compressors, vacuum solutions and air treatments systems, power tools and assembly systems, and construction and mining equipment.
As of 2013, the Company had revenue of BSEK 84 and its largest single markets were the US and China, whereas North America, Europe, Asia and Australia accounted for 80% of the total rev-enues. It is therefore no surprise that there is a high correlation between the companys revenue growth rate and GDP growth rate in these economies means that the companys revenue depends a lot on economic performance in these regions. Going forward the company seeks to bolster revenues by gaining foothold in emerging economies and new business areas via organic growth and acquisition of strong brands.
Atlas Copco operates through four main business areas: The Compressor Technique business area is the largest, generating 40% of revenues and it in-cluding the development and manufacturing of industrial compressor, vacuum solutions, gas and process compressor and expanders, air and gas treatment equipment and air management systems. The companys main customers are in manufacturing, process construction and service industries. The Industrial Technique business area generated 11% of 2013 revenue. It provides industrial power tools, assembly systems, quality assurance products and software and service. Its main customers are in the automotive and aerospace industries, industrial manufacturing and mainte-nance and vehicle servicing. The Mining and Rock Excavation Technique business area provides surface and underground drilling and rock excavation equipment and service. As of 2013 this business area accounted for 34% of the companys total revenue. The Construction Technique business area accounted for 15% of the companys 2013 revenue. This business area provides construction and demolition tools, portable compressors, pumps and generators, lighting towers, and compaction and paving equipment as well as specialty rental and service.
Company Strategies Five strategic pillars guide Atlas Copcos strategic direction: Increase market presence and penetration The company currently is represented in 182 coun-tries and growing its market presence in the emerging markets. Expansion into western China as well as increasing the sales force in the United States of America and high growth markets in Africa (Angola and Mozambique) are noted as drivers for growing market presence. A strong appetite for acquisitive growth can be seen with 11 acquisitions in 2013. Invest in research and development innovation The company has over 3 400 active patents and 900 inventions. Atlas Copco remains committed to using innovate methods and products to maintain and boost its market share. The research and development budget currently accounts of 3% of total expenditure and 7% of the staff complement. Its key focus is the improvement of energy efficiency for their clients with a target of 20% reduction by 2020. Increase the service offer This is the most stable income generator in the business that con-tinues to grow and now accounts for over 40% of the business. The current offering is mainly maintenance and spare parts but the intention is to focus on products that improve customer productivity as well. This was seen in the purchase of Synatec, a company that specializes in prod-ucts and solutions to enhance manufacturers workplace operations, data collection and analysis. Continuously strive for improved operational excellence The focus on internal processes to reduce the turnaround time for equipment products and sharing of best practices between divi-sions. Key to this is to ensure a more flexible and efficient assembly set up and adjusting the suit to fit the weight of the group. Attract, recruit and develop skilled coworkers The aim is to have a diverse and highly mo-tivated staff complement to ensure competitive advantage. Its senior management is currently represented by 52 nationalities with 17% female. Key focuses are knowledge sharing, competence development and health and safety of employees.
Shareholder structureAs of December 31, 2013, Atlas Copco had 72 238 shareholders. The companys largest sharehold-er was Investor AB, which owned 16.8% of its total share capital. The other three major sharehold-ers included Swedbank, which owned 5%, Alecta, which owned 3.4% and AMF, which owned 2.8%. Over 53% of the total share was owned by investors in Sweden.
Corporate managementAtlas Copcos management team is composed of people who have worked their way up the com-panys management structure and hold relevant academic and professional qualifications. Ronnie Leten is the President and CEO since 1 April 2009 while Hans Straberg is the Chairman of the Board since April 29 2014. In addition, the management team also consists of four Senior Exec-utive Vic