The trading outlook for manufacturers of heavy-duty industrial kit has improved over the past few months. We may well be witnessing a nascent recovery in demand from miners, and if election pledges are anything to go by, we have an incoming US president dedicated to rebuilding Uncle Sam's creaking infrastructure - whatever the cost.
- Commodity price recovery
- Trump stimulus plans
- Diversified geographic spread
- China shows signs of stabilising
- Western sovereign debt levels
- Macro uncertainties persist
- [Enter BEAR Points 3 here]
Macro uncertainties persist, but if the positive factors play out, even partially, they will certainly bolster the investment case for Atlas Copco (SW:ATCOA), a constituent of the OMX Stockholm exchange's benchmark OMXS30 index. Its most recent outlook statement suggested that overall near-term demand for the group is expected to remain at current levels, but according to forecasts from JPMorgan Cazenove, the group's EPS is expected show healthy increases (see table), helped by the rebuilding of the operating margins from 18.9 per cent in the current year (depressed by recent acquisitions) to over 20 per cent in 2018.
Atlas Copco manufactures and hires industrial tools, along with construction and mining equipment, and is the world's leading producer of air compressors. The group recently expanded that part of the business through a deal to acquire Hb Kompressoren Druckluft-und Industrietechnik GmbH, a German distributor and service provider of industrial air compressors and related systems. The deal underlines the engineer's diversified geographic spread, producing equipment in more than 20 countries, although the US remains the group's largest single market, followed by China.
Some of the group's business strands (compressors, mining and rock excavation, construction, and industrial) have struggled in recent years due to the fall-away in Chinese industrial demand and a concurrent slump in metals prices. But it now looks well placed to benefit from a revival in the fortunes of these end markets.
| ATLAS COPCO (S:ATCOA) | ||||
|---|---|---|---|---|
| ORD PRICE (SEK): | 284.70 | MARKET VALUE:▽ | SEK 339bn | |
| TOUCH: | SEK 284.60-284.70 | 12M HIGH / LOW (SEK): | 290 | 171 |
| FORWARD DIVIDEND YIELD: | 2.4% | FORWARD PE RATIO: | 22 | |
| NET ASSET VALUE: | SEK 37.47* | NET DEBT: | 34% | |
| Year to 31 Dec | Turnover (SEKbn) | Pre-tax profit (SEKbn) | Earnings per share (SEK) | Dividend per share (SEK)** |
|---|---|---|---|---|
| 2013 | 84 | 16.3 | 10.0 | 5.50 |
| 2014 | 94 | 16.1 | 10.0 | 6.00 |
| 2015 | 102 | 18.8 | 9.70 | 6.30 |
| 2016** | 104 | 18.4 | 11.0 | 6.50 |
| 2017** | 116 | 22.0 | 13.1 | 6.75 |
| % change | +12 | +20 | +20 | +4 |
Matched bargain trading Beta: 1.36 *Includes intangible assets of SEK34.45bn, or SEK28.02 a share **JPMorgan Cazenove forecasts, DPS excludes SEK6.00 distribution in 2014 | ||||
China's official manufacturing Purchasing Managers' Index (PMI), which measures large state-owned factories, came in at 51.7 in November, matching the previous high in July 2014 and the highest since the 53.3 reading in April 2012. The country's MNI business sentiment indicator was also heading in the right direction, suggesting, at the very least, that economic activity has stabilised - a positive in itself, given that the group's sales in the People's Republic have declined significantly since 2012.
Likewise, the mining and rock segment has probably seen the bottom of the cycle and is well poised to benefit from the apparent modest recovery now under way. Construction-related businesses generate around 15 per cent of sales, a fifth of which is related to the US, so there should be direct benefits from the anticipated rise in infrastructure receipts once the Trump administration gets rolling. About 5 per cent of sales in total are connected to US infrastructure and the multiplier effect of the fiscal boost on other parts of the economy could further bolster the impact on demand.
