Atlas Copco: A High-Quality Industrial Leader

Atlas Copco is a global leader in industrial solutions, specializing in compressed air and gas systems, vacuum technology, industrial tools, and power solutions. With a strong focus on innovation, energy efficiency, and mission-critical applications, the company has built a resilient business model supported by high-margin service revenue and strategic acquisitions. Its disciplined capital allocation and consistent financial performance have made it a standout in the industrial sector. The question remains: Is Atlas Copco a stock worth adding to your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own shares in Atlas Copco. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. If you want to purchase shares (or fractional shares) of Atlas Copco, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $50.

The Business

Atlas Copco is a Swedish multinational industrial company specializing in compressed air and gas solutions, vacuum technology, industrial power tools, and construction equipment. Founded in 1873 and headquartered in Nacka, Sweden. It serves a wide range of industries, including semiconductors, automotive, aerospace, healthcare, and infrastructure. The company operates through four core business areas. Compressor Technique provides air and gas compressors, expanders, air treatment systems, and related services. These are essential for keeping production lines running in industries like manufacturing, healthcare, and food processing, where clean and reliable air supply is needed. Vacuum Technique develops vacuum pumps and exhaust management systems used in semiconductor manufacturing, industrial production, and scientific research. Vacuum technology is critical in producing everyday items like smartphones, medical equipment, and high-tech components that require dust- and particle-free environments. Industrial Technique supplies advanced industrial tools, assembly solutions, and machine vision technologies that help companies improve efficiency and quality control. These solutions are used in the automotive industry, aerospace, and electronics manufacturing to ensure precise assembly and reduce errors in production. Power Technique focuses on mobile compressors, generators, energy storage, and industrial pumps for construction, mining, and temporary power solutions. These products are used on job sites, in remote areas, and in emergency power situations where reliable equipment is needed to keep operations running smoothly. Atlas Copco differentiates itself by focusing on mission-critical applications where performance, reliability, and efficiency are paramount. This enables the company to maintain pricing power and high customer retention, as its clients are unwilling to compromise on quality. One of its key advantages is its ability to quickly fulfill orders with short lead times, ensuring customers get what they need without delays. This combination of pricing power, strong customer relationships, and fast order fulfillment forms the foundation of Atlas Copco’s moat. The company also benefits from a high-value customer base that relies on its equipment for essential operations. Many clients trust only Atlas Copco technicians for maintenance and upgrades, which strengthens its service revenue and recurring income. Additionally, Atlas Copco follows an asset-light model, outsourcing most manufacturing while focusing on R&D and final assembly. This structure helps maintain high free cash flow, which supports reinvestment in growth, acquisitions, and shareholder returns.

Management

Vagner Rego is the CEO of Atlas Copco, appointed to the role on May 1, 2024. With nearly three decades of experience at Atlas Copco, he has played a crucial role in the company’s growth and strategic direction. He began his career at Atlas Copco in 1996 as a trainee engineer in São Paulo State, Brazil. Over the years, he held various leadership positions, most recently serving as Business Area President for Compressor Technique, one of Atlas Copco’s most important divisions. His ability to drive growth, particularly within this segment, has been widely recognized. Vagner Rego holds a degree in mechanical engineering from Mackenzie University and an MBA from Ibmec Business School, both in Brazil. He is known for his deep industry expertise, strong leadership, and focus on innovation. Under his leadership, Atlas Copco is expected to continue expanding in key markets while maintaining its emphasis on energy efficiency, automation, and sustainability. His leadership style is centered on strategic growth, operational excellence, and fostering a culture of continuous improvement. Industry peers and colleagues describe him as a pragmatic and forward-thinking leader who values both innovation and customer-driven solutions. His extensive experience within Atlas Copco ensures continuity in the company’s long-term vision while also positioning it for future opportunities. While he is still relatively new as CEO, his long tenure with the company and track record of success give me confidence in his ability to lead Atlas Copco moving forward.

The Numbers

The first metric to investigate is the return on invested capital (ROIC). Our criterion requires a 10-year history with all figures exceeding 10% annually. Atlas Copco has historically maintained a high ROIC, dipping below 20% only once in the past decade, in 2017, when it reached 18%. In 2024, ROIC declined slightly to 21,8% from 24,7% in 2023. However, this does not concern me, as ROIC remains well above 20%. Atlas Copco places greater emphasis on return on capital employed (ROCE), with one of its key financial goals being the sustained achievement of a high ROCE. I personally prefer when companies set financial targets that include ROIC or ROCE, as it reflects a disciplined approach to capital allocation. Given its track record, I believe Atlas Copco will continue to deliver a high ROIC moving forward.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth.  I don't have the growth rate from 2014 to 2015 as Finbox only provides data for the past ten years. Atlas Copco has increased its equity every year except for one in the past decade, which is very encouraging. Excluding 2020, which was affected by the pandemic, the company has achieved annual equity growth of more than 10% in all other years where equity increased. This consistency is impressive and highlights the company's strong financial discipline. It is also encouraging that equity reached its highest level ever in 2024, reinforcing Atlas Copco’s ability to generate long-term value.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Atlas Copco has achieved positive free cash flow every year for the past decade. It is particularly encouraging that the company reached its highest free cash flow ever in 2024, despite capital expenditures also hitting a record high during the year. As Atlas Copco continues to increase its free cash flow, investors should benefit, as one of the company’s financial targets is to distribute 50% of net profit as dividends. The levered free cash flow margin increased from 2023 to 2024, which is a positive sign. However, it remains well below previous highs, and I would like to see further improvement moving forward. The free cash flow yield is at its highest level since 2020 but still below the ten-year average. While this suggests that the shares are trading at their most attractive valuations in recent years, they are not necessarily cheap. We will revisit valuation later in the analysis.

Debt

Another important aspect to consider is debt. It is crucial to assess whether a business has a manageable level of debt that can be repaid within a three-year period, calculated by dividing total long-term debt by earnings. Upon analyzing Atlas Copco’s financials, the company currently has no debt, making this a non-issue for investors. Nothing suggests that debt will become a concern in the future, so it is not something I would worry about if I were to invest in Atlas Copco.

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Risks

Macroeconomic conditions pose a significant risk for Atlas Copco because its business is closely tied to industrial activity, capital expenditures, and overall economic growth. When the global economy slows down, industrial production and manufacturing investment tend to decline, directly impacting Atlas Copco’s sales. One of the main risks is that large customers may delay or reduce capital expenditures, particularly in periods of uncertainty. As the company noted, demand from major players is currently subdued, meaning customers are hesitant to make large investments in new equipment. If this trend continues, Atlas Copco could face lower order volumes and weaker revenue growth. Additionally, the company’s service and aftermarket business, which provides a more stable source of income, is also sensitive to macroeconomic conditions. When customers scale back production, they may use existing equipment more conservatively, reducing demand for spare parts, maintenance, and consumables. This can put pressure on Atlas Copco’s recurring revenue streams, which typically help offset downturns in equipment sales. A widespread financial crisis or economic downturn would amplify these risks by making it more difficult for customers to finance new investments. If businesses face tighter credit conditions or weaker cash flows, they may delay or cancel planned purchases, further affecting Atlas Copco’s order intake.

A lack of product development poses a significant risk for Atlas Copco, as its long-term growth and profitability depend on continuous innovation. The company operates in highly competitive industries where technological advancements, energy efficiency, and sustainability are critical to maintaining market leadership and pricing power. If Atlas Copco fails to develop new products that are more energy-efficient, sustainable, and compliant with evolving regulations, it risks losing customers to competitors offering more advanced or cost-effective solutions. Many industrial sectors, including manufacturing, construction, and semiconductors, are shifting toward lower-emission, quieter, and more resource-efficient equipment due to stricter national and regional regulations on emissions, noise, and recycling. Falling behind in innovation could limit Atlas Copco’s ability to compete in markets where compliance with these regulations is a priority. Another risk is the growing competition from low-cost manufacturers in emerging markets. In regions where environmental and efficiency regulations are less stringent, local companies can produce cheaper alternatives that do not meet the same sustainability and efficiency standards as Atlas Copco’s products. If customers in price-sensitive markets prioritize cost over efficiency or regulatory compliance, Atlas Copco could lose market share to these lower-cost competitors.

A decline in reputation can have serious financial and operational consequences for Atlas Copco, as its brand is built on quality, reliability, and sustainability. The company operates in industries where customers depend on high-performance, long-lasting equipment, and any damage to its reputation could weaken customer trust, impact sales, and reduce pricing power. If Atlas Copco’s products fail to meet expectations - whether in terms of performance, safety, or environmental impact - customers may switch to competitors, leading to lost market share and lower recurring service revenue. A strong reputation allows Atlas Copco to charge a premium for its products and maintain customer loyalty, so any perceived decline in quality could put pressure on margins and reduce customer retention. Regulatory non-compliance is another major risk. If Atlas Copco fails to meet product labeling standards or is found guilty of false advertising, it could face legal consequences, fines, and negative publicity. In an industry where trust is crucial, such incidents could discourage potential customers and damage long-standing relationships with key clients. A strong reputation is also essential for attracting and retaining talent. Engineers, technicians, and industry professionals prefer to work for companies known for innovation, ethical practices, and sustainability. If Atlas Copco’s reputation declines, it may struggle to recruit top talent, weakening its ability to develop new technologies and maintain its competitive edge.

Reasons to invest

Global trends will benefit Atlas Copco. The expansion of the semiconductor industry presents a major growth opportunity. Rising demand for semiconductors, driven by AI, cloud computing, electric vehicles, and 5G, has led to increased investment in chip manufacturing capacity. Atlas Copco’s vacuum solutions are essential for creating the controlled environments required in semiconductor production. The global push for energy efficiency and sustainability is another key driver. Governments and industries are increasingly focused on reducing carbon emissions and improving energy efficiency, driving demand for Atlas Copco’s energy-efficient compressors, vacuum systems, and industrial tools. In recent years, the company has expanded its investment in technologies that support the transition to a low-carbon society. This includes solutions for renewable energy production, such as solar panels, wind turbines, and hydrogen, as well as the electrification of transport. Its compressors, vacuum solutions, and joining technologies play a critical role in enabling the production of batteries, fuel cells, and energy storage systems, all of which are essential for the future of clean energy. Electric vehicle production and battery manufacturing represent another structural growth trend that aligns with Atlas Copco’s expertise. The shift toward EVs requires highly specialized assembly tools, precision fastening solutions, and vacuum technology for battery and drivetrain production. As automakers continue to scale EV manufacturing and build gigafactories, Atlas Copco will play a crucial role in ensuring efficient and high-quality production. The ongoing global investment in infrastructure and construction, particularly in emerging markets, is expected to further support demand for Atlas Copco’s power solutions, compressors, and industrial pumps.

Atlas Copco’s acquisition strategy is a key reason to invest in the company, as it provides consistent, long-term growth while maintaining a disciplined, risk-aware approach. Rather than relying solely on organic expansion, Atlas Copco strategically acquires small to mid-sized businesses that enhance its core segments, technology portfolio, and service offerings. This acquisition-driven model allows the company to continuously strengthen its competitive position, diversify revenue streams, and expand into new geographic and industrial markets. One of the most attractive aspects of Atlas Copco’s acquisition strategy is its focus on high-margin, mission-critical businesses. By acquiring companies that complement its existing operations in compressed air, vacuum solutions, industrial tools, and power technology, Atlas Copco ensures that each acquisition adds value without straining resources. The company actively seeks businesses with strong market positions, high growth potential, and synergies that support its existing operations. Service growth is another pillar of Atlas Copco’s acquisition strategy. By acquiring service-oriented businesses, the company enhances its recurring revenue streams, improving financial stability and reducing reliance on cyclical equipment sales. This focus on aftermarket services and long-term customer relationships creates a more predictable revenue model, which is particularly valuable during economic downturns. Despite its aggressive acquisition pace - completing 33 acquisitions last year - Atlas Copco remains disciplined, ensuring that all acquired businesses are closely aligned with its core operations and contribute positively to economic value. While acquisitions may be slightly dilutive in the short term due to integration costs, such as IT security and operational adjustments, they ultimately enhance long-term profitability and market positioning.

Atlas Copco’s continued investment in research and development (R&D) and new facilities is a key reason to invest, as it strengthens the company's market position, pricing power, and long-term growth potential. The company dedicates at least 4% of annual revenue to R&D, significantly outspending competitors. This ensures a steady pipeline of new products, technological advancements, and efficiency improvements that drive customer value. In industries where price increases are difficult to implement, innovation is crucial for maintaining pricing power and differentiating from competitors. By continuously developing more energy-efficient, productive, and cost-effective solutions, Atlas Copco secures its position as a market leader while reinforcing long-term customer relationships. Investments in new manufacturing facilities across key global markets, including South Korea, China, and the United States, further support Atlas Copco’s growth strategy. While there are no immediate plans for large-scale capacity expansion, the company has proactively built manufacturing flexibility to adapt to future demand, particularly in automation and digitalization. These facilities also enhance regional supply chain resilience, allowing Atlas Copco to better serve local markets, reduce logistical risks, and mitigate geopolitical uncertainties. By focusing on innovation, global expansion, and supply chain resilience, Atlas Copco is well-positioned to sustain growth, improve profitability, and strengthen its leadership in industrial solutions. These investments not only support current operations but also prepare the company for future market shifts.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 6,10, which is from 2024. I have selected a projected future EPS growth rate of 7%. Finbox expects EPS to grow by 7,1% a year in the next five years. Additionally, I have selected a projected future P/E ratio of 14, which is twice the growth rate. This decision is based on Atlas Copco's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be SEK 41,52. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Atlas Copco at a price of SEK 20,76 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 36.887, and capital expenditures were 4.226. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 2.958 in our calculations. The tax provision was 8.006. We have 4.875 outstanding shares. Hence, the calculation will be as follows: (36.887 – 2.958 + 8.006) / 4.875 x 10 = SEK 86,02 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Atlas Copco's Free Cash Flow Per Share at SEK 6,70 and a growth rate of 7%, if you want to recoup your investment in 8 years, the Payback Time price is SEK 73,55.

Conclusion

I believe Atlas Copco is an intriguing company with strong management. The company has a moat through its pricing power, strong customer relationships, and fast order fulfillment. Atlas Copco has consistently achieved a high ROIC, dipping below 20% only once in the past decade. In 2024, it reached its highest free cash flow ever, though the levered free cash flow margin, while improving year over year, remains below previous highs. Macroeconomic conditions pose a risk for Atlas Copco, as its business depends on industrial activity and capital expenditures. During economic slowdowns, customers may delay investments in new equipment and scale back production. A lack of product development also presents a risk, as continuous innovation is necessary to stay competitive in highly regulated and rapidly evolving industries. Additionally, a decline in reputation could weaken customer trust, reduce sales, and make it harder to attract talent, ultimately impacting the company’s profitability and competitive position. Global trends support Atlas Copco’s growth, with increasing demand for semiconductors, energy efficiency, and electric vehicles driving the need for its vacuum solutions, compressors, and industrial tools. The company’s acquisition strategy fuels long-term growth by expanding its core segments, technology, and service offerings through strategic, high-margin acquisitions. Its continued investment in R&D and new facilities strengthens its market position, pricing power, and long-term growth potential by driving innovation and efficiency. Atlas Copco is a high-quality company that rarely trades at a discount. However, I don’t want to overpay, so I aim for at least a 10% discount based on two of my calculations. This means I would consider opening a position at SEK 132.

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