Share Watch: Atlas, the super trooper of air compressors
There's a Swedish proverb which says 'those who wish to sing will always find a song'. To a great extent, it sums up a Swedish national approach that is often reflected in the businesses that had their origin there.
Companies like Electrolux, Volvo, Ericsson and the enterprise we are looking at today, Atlas Copco, demonstrate a special Swedish-ness that does not imitate or borrow from elsewhere, but relies on the value of its own clear thinking. If these firms played tennis, they'd be Bjorn Borg; if they were pop stars they'd be Abba.
Single-mindedness has not hampered Atlas Copco which is now Sweden's largest industrial group.
It develops, manufactures and sells compressed air equipment, construction and mining equipment and power tools. Starting out in the 1870s as a specialist in railway equipment, it has gone through umpteen transformations.
In the early 20th century, it switched to producing diesel engines and pneumatic products which had a big war-time demand. As a neutral country, Sweden supplied both sides. Atlas prospered. The depression of the 1930s saw financial problems that prompted a rescue but post-war Atlas jettisoned diesel engines, concentrated on the air compressor business, and embarked on international expansion. The bulk of group sales are now outside Sweden.
The company not only expanded internationally, but simultaneously extended its product range by acquisitions. It purchased major industrial brands like Chicago Pneumatic Company, Milwaukee Electric Tool Company and, at the beginning of the millennium, the US company Prime Services.
The latter, renamed Atlas Copco Rental Services, hires products like air compressors, forklifts, power tools and light construction equipment. Two years ago, Atlas purchased the Edwards Group, a UK-based producer of vacuum pumps (ie. machinery to clean air) for the semi-conductor industry.
The growth of the company has been impressive. It now employs 44,000 (13,000 in services and 3,000 in R&D); it generates sales in 180 countries and has production facilities in 30 countries on five continents. Its sales, at €10bn, are particularly strong in Europe (30pc), North America (32pc) and in the Asia-Pacific market (28pc). It manufactures products for its compressor, construction, mining and industrial business. The compressor business is the firm's largest, with almost half of group revenue. Mining has a quarter, the other businesses making up the remainder.
Atlas's compressor business performed well last year with sales of €4.5bn, up one third.
The decline in commodity prices has impacted on Atlas's mining business and is a source of real concern. Along with its neighbour, Sandvik, Atlas accounts for half of the world's market for mining equipment.
The cutting of capital expenditure by large miners such as BHP, Rio, and Glencore, badly hit the bottom line. To add to the company's woes, it also faces a slump in the oil and gas sector. However, Atlas is putting on a brave face, stating that its services business is shielding earnings. Last year, Atlas achieved record revenues of €10bn in spite of the patchy business climate. Sales were up 12pc; surprisingly, operating profits were flat at €1.8bn.
On the positive side, the company's compound growth rate for several years has been a remarkable 8pc, and its success no longer depends on product sales as servicing, generates 40pc of group income. During the year Atlas shares reached a high of €32 but have dropped back to €27, yet it is still ahead of its yearly low of €19. The company is selling on a demanding price/ earnings multiple of 26 and its market value is €32bn.The lack of demand in the mining and oil industry is a problem for Atlas and cannot be reasonably ignored. It is difficult to justify the current share price, and the valuation multiple as the end markets are still a problem. The share price has started its correction but not an entry point yet.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.