RBC maintains Atlas Copco stock underperform, SEK130 target

RBC Capital maintained its Underperform rating on Atlas Copco with a SEK130 price target, citing significant foreign exchange headwinds expected to negatively impact revenue and margins by 5.8% and 50 bps, respectively; this contrasts with market consensus anticipating a margin recovery by 2026. RBC's analysis points to a 510 bps margin decrease since 2011 when adjusted for the Swedish krona's devaluation and lackluster EBIT growth since 2018, while CFRA downgraded their price target from SEK200 to SEK167 despite upgrading the stock rating from Hold to Buy, reflecting moderated expectations for future performance.

Analysis

Atlas Copco AB is currently facing significant operational challenges, primarily from substantial foreign exchange headwinds, which RBC Capital Markets identifies as the most severe in fourteen years. These currency fluctuations are projected by RBC to cause a 5.8% decline in revenue and a 50 basis point contraction in margins for the current year. While market consensus anticipates a margin recovery to the historical 21-22% range by 2026, RBC's analysis presents a more cautious view, highlighting that when adjusted for the Swedish krona's 30% devaluation since 2011, Atlas Copco's margins have actually decreased by 510 basis points. Furthermore, the company's EBIT growth has been a modest 7.3% CAGR since its 2018 spin-off, lagging the sector average, leading RBC to forecast potential earnings stagnation through 2027 barring a significant market recovery. This underpins RBC's maintained Underperform rating and SEK130.00 price target. InvestingPro data indicates the company trades at a P/E ratio of 23.36x and suggests the stock is overvalued, despite a consistent 46-year dividend payment history and strong financial health metrics. Recent revenue growth has been minimal at 0.54% over the last twelve months, with a gross profit margin of 42.72%. In contrast, CFRA analyst Jeff Wong recently upgraded the stock from Hold to Buy, though reducing the price target to SEK167.00 from SEK200.00, citing moderated expectations due to current uncertainties and softer volumes. Wong remains optimistic about the company's strong order book, high-margin service business growth, strategic acquisitions, and a history of strong returns on capital, anticipating an industrial demand recovery to drive future revenue and margin improvement.

Key Decisions for Investors

• Investors should meticulously evaluate the significant foreign exchange headwinds and their potential impact on Atlas Copco's revenue and margins, as highlighted by RBC Capital's analysis predicting a 5.8% revenue decline and 50bps margin contraction.
• Carefully weigh the conflicting analyst ratings, contrasting RBC's Underperform rating and concerns over adjusted margin erosion and EBIT growth with CFRA's Buy rating based on long-term recovery prospects, strong order book, and service business growth.
• Consider the stock's current valuation, noted as potentially overvalued by InvestingPro with a P/E of 23.36x, against its consistent dividend history and recent modest revenue growth of 0.54%, especially in light of potential earnings stagnation through 2027 if market conditions do not improve.