Atlas Copco: A High-Quality Industrial Leader

Atlas Copco is a global leader in industrial technology, with a diversified portfolio spanning compressors, vacuum solutions, industrial tools, and power equipment. From mission critical vacuum systems used in semiconductor manufacturing to energy efficient compressors and advanced automation solutions for industrial production, the company combines technological leadership with recurring service revenues and a highly scalable operating model. With growing exposure to structural trends such as semiconductors, electrification, energy efficiency, and the transition to a low carbon economy, Atlas Copco is positioning itself for long term relevance across multiple industries. The question remains: Does this industrial powerhouse deserve a spot in 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 mention that I do not own any shares in Atlas Copco at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so 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 on investing with as little as $50.

The Business

Atlas Copco is a Swedish industrial company founded in 1873 and headquartered in Nacka, Sweden, that has built its business around providing mission-critical equipment, services, and solutions to a wide range of industries including semiconductors, automotive, aerospace, healthcare, energy, and infrastructure. The company operates through four core business areas that together form a highly diversified yet focused industrial platform. Compressor Technique provides air and gas compressors, expanders, and air treatment systems that are essential for keeping production lines running efficiently in industries where clean, reliable, and energy-efficient air supply is critical. Vacuum Technique develops advanced vacuum pumps and exhaust management systems that are indispensable in semiconductor manufacturing and other high-tech applications where even microscopic contamination can disrupt production. Industrial Technique supplies precision tools, automated assembly systems, and machine vision solutions that improve productivity, ensure quality control, and enable data-driven manufacturing across industries such as automotive and electronics. Power Technique offers mobile compressors, generators, pumps, and energy storage solutions that are used in construction, mining, and temporary power applications where reliability and flexibility are essential. Across these business areas, Atlas Copco focuses on niche markets where it can achieve leading positions through differentiated technology, and it supports its equipment offering with a strong and growing service business that includes maintenance, spare parts, consumables, and rentals, which today accounts for a significant share of total revenue and provides a more stable and recurring income stream. The company operates with an asset-light model, where it outsources a large portion of component manufacturing while retaining control over critical components, design, and final assembly, allowing it to remain flexible, maintain high margins, and generate strong free cash flow. This model is supported by a decentralized organizational structure with hundreds of local units that have full responsibility for their own profit and loss, enabling fast decision-making, strong customer proximity, and the ability to tailor solutions to specific applications and local market needs. Atlas Copco’s competitive moat is grounded in its positioning in mission-critical applications, its technological leadership, its extensive installed base, and its highly effective operating model. Because its products are often essential to customers’ operations and downtime can be extremely costly, customers prioritize reliability, performance, and efficiency over price, which gives Atlas Copco meaningful pricing power and high customer retention. This is particularly evident in areas like vacuum technology for semiconductors, where the technical complexity and precision required create high barriers to entry and limit viable competitors. The company’s large installed base of equipment further strengthens its moat by driving recurring service revenue, as customers frequently rely on Atlas Copco’s own technicians, spare parts, and digital monitoring solutions to maintain performance and avoid disruptions. This creates a self-reinforcing cycle where equipment sales lead to long-term service relationships, increasing customer lifetime value and deepening switching costs. Its decentralized structure enhances this advantage by keeping the organization close to customers, enabling faster response times, better understanding of specific applications, and stronger relationships that are difficult for more centralized competitors to replicate. In addition, the company’s strategy of focusing on profitable niche markets where it can achieve leadership positions allows it to avoid commoditized segments and maintain higher margins. Continuous investment in research and development, typically around 3–4% of revenue, ensures that Atlas Copco remains at the forefront of innovation, particularly in areas such as energy efficiency, automation, and data-driven solutions, which further differentiates its offerings. The asset-light model combined with disciplined acquisitions in adjacent niches supports high returns on capital and allows the company to scale efficiently over time. Altogether, these factors create a durable competitive advantage characterized by pricing power, recurring revenue, high customer loyalty, and strong financial performance, making Atlas Copco one of the most resilient and consistently compounding industrial businesses globally.

Management

Vagner Rego serves as the CEO of Atlas Copco, a role he assumed on May 1, 2024, after nearly three decades with the company. His appointment reflects Atlas Copco’s long-standing tradition of promoting deeply experienced internal leaders who understand both the company’s decentralized culture and its highly specialized industrial markets. Having spent almost his entire professional career within Atlas Copco, Vagner Rego brings extensive operational, technical, and leadership experience across multiple geographies and business units, which provides strong continuity in the company’s long-term strategic direction. Vagner Rego began his career at Atlas Copco in 1996 as a trainee engineer in São Paulo State, Brazil. From the beginning, he developed a deep understanding of the company’s engineering-led and customer-focused culture. Over the years, he progressed through a wide range of commercial and leadership roles across different regions and product categories, building hands-on experience in sales, operations, and business management. This long internal journey is particularly important at Atlas Copco, where leadership effectiveness is closely tied to understanding the company’s decentralized model, local accountability, and niche-market focus. Before becoming CEO, Vagner Rego most recently served as Business Area President for Compressor Technique, one of Atlas Copco’s most important and profitable divisions. This business area is central to the group’s overall performance and includes compressors, gas treatment solutions, and related service operations that serve a highly diversified industrial customer base. Under Vagner Rego’s leadership, this segment continued to strengthen its market position through product innovation, operational excellence, and service growth. His experience leading Compressor Technique is especially valuable because it gave him direct responsibility for one of the company’s most mission-critical businesses and one of its largest installed bases, which is a major driver of recurring service revenue. Vagner Rego holds a degree in mechanical engineering from Mackenzie University and an MBA from Ibmec Business School, both in Brazil. His academic background complements his deep industrial experience and reinforces his reputation as a technically strong and commercially pragmatic leader. Throughout his career, he has built a reputation for combining operational discipline with a strong customer orientation, which fits well with Atlas Copco’s culture of local responsiveness and application-specific problem solving. One important point to add is that Vagner Rego’s leadership comes at a particularly interesting time for Atlas Copco. The company is increasingly exposed to structural growth areas such as semiconductors, automation, energy efficiency, industrial digitization, and sustainability-driven capital spending. His background within Compressor Technique and his long experience across the broader organization position him well to continue expanding Atlas Copco’s presence in these attractive niches while preserving the company’s high-return, asset-light business model. Another strength is his likely commitment to Atlas Copco’s decentralized culture. The company’s success has long been built on delegated authority, accountability, and local decision-making, and internal leaders such as Vagner Rego tend to preserve and strengthen this culture rather than disrupt it. This is important because the decentralized structure is one of the key drivers behind Atlas Copco’s agility, customer intimacy, and ability to scale through acquisitions and adjacent niches. While Vagner Rego is still relatively new in the CEO role, his long tenure, proven track record within one of the group’s most important business areas, and deep understanding of the company’s culture and strategy give strong confidence in his ability to lead Atlas Copco through its next phase of growth. His combination of technical expertise, operational discipline, and continuity with the company’s long-term vision makes him appear particularly well suited to guide Atlas Copco as it continues to compound value through innovation, service expansion, and disciplined capital allocation.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10 year history with all numbers exceeding 10% in each year. The company has historically generated exceptionally high ROIC, consistently ranging between roughly 18% and 25% over the past decade, which is outstanding for an industrial company. This level of return is not accidental but rather a direct reflection of the structural strengths in Atlas Copco’s business model. First, the company operates in mission critical niche markets where reliability, precision, and efficiency matter far more than price. Whether it is compressors in food production, vacuum systems in semiconductor fabs, or assembly tools in automotive manufacturing, the cost of downtime for customers is often far greater than the cost of the equipment itself. This gives Atlas Copco meaningful pricing power and supports structurally high operating margins, which is one of the most important drivers of ROIC. Second, Atlas Copco benefits from an asset light operating model. The company outsources a large share of component manufacturing and keeps most capital intensive activities outside its balance sheet, while focusing internally on core components, research and development, and final assembly. This means it can generate high operating profits without requiring a large amount of capital tied up in factories and equipment. Management itself points to this as one of the key reasons why ROCE has remained sustainably above 20% for so long, and the same logic applies to ROIC. Third, the company has a highly attractive service business that now accounts for about 38% of revenue. Service revenues from maintenance, spare parts, consumables, and specialty rentals are typically more stable and carry attractive margins. Just as importantly, they require relatively limited additional capital compared with selling new equipment. Once Atlas Copco has equipment installed at a customer site, that installed base can generate recurring high margin service revenue for many years, which materially lifts ROIC. Fourth, the decentralized model contributes significantly to capital efficiency. Because local divisions and business units have full profit and loss responsibility and remain close to customers, capital is generally allocated with discipline and speed. This helps Atlas Copco avoid bloated central structures and supports faster decision making, better inventory management, and efficient use of resources. The decline to 18,7% in 2025, which appears to be the lowest level in more than ten years, should be viewed in context rather than as a sign that anything is wrong with the business. First, even 18,7% is still a very strong ROIC for an industrial company and remains well above what most peers typically generate. Second, management’s comments on ROCE suggest that the decline is more likely related to short term conditions and recent investments rather than any weakening of Atlas Copco’s competitive advantages. ROCE declined from 28% to 24%, which indicates that earnings growth has not fully kept pace with the money the company has recently put into the business. This can happen when a company invests in future growth areas, makes acquisitions, or faces a softer year in some of its end markets. Atlas Copco has been investing more over the last several years, especially in attractive areas such as semiconductors, automation, and technologies linked to the energy transition. These investments often take time before they contribute meaningfully to profits, so it is normal for ROIC to come down temporarily. In addition, 2025 may reflect weaker demand in areas such as industrial production or semiconductors, which can weigh on earnings in the short term while the company continues to invest for long term growth. Looking ahead, I would expect ROIC to improve from the 2025 level, although perhaps not immediately back to the 24% to 25% peak range. The key reason is that the structural drivers of high returns remain fully intact. Atlas Copco still has strong pricing power, a growing service mix, an asset light model, and leading positions in attractive niche markets. As recently invested capital and acquisitions begin contributing more meaningfully to earnings, the ratio should naturally improve. Management’s focus on sustained high ROCE above 20% strongly supports this view, as it indicates that maintaining high returns on capital remains a core internal performance target even if they do not explicitly discuss ROIC as often. My base case would be that ROIC gradually moves back above 20% over the coming years, assuming end markets normalize and growth investments begin yielding higher profits.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Atlas Copco’s equity has increased in most years, and that is exactly what you would expect from a business of this quality. The main reason is that the company has consistently generated strong earnings and very high returns on capital over a long period. When a company earns more than it needs to run and grow the business, the remaining profits add to the value that belongs to shareholders. Atlas Copco’s strong competitive moat, pricing power, and recurring service revenues have supported stable profitability across different economic environments, which has allowed equity to compound steadily over time. Another important reason is the nature of Atlas Copco’s business model. The company operates with an asset light structure, where a large share of manufacturing is outsourced and capital needs are relatively modest compared with the earnings it generates. Because the business does not need massive ongoing investments in factories and heavy equipment, a larger share of profits can remain within the company and build equity over time. This is one of the reasons why companies with high ROIC often also show strong long term growth in equity. The strong increases in years such as 2019, 2021, 2022, and 2024 were likely driven by a combination of solid profit growth and successful acquisitions in adjacent niches. Atlas Copco has a long history of acquiring smaller high quality industrial businesses that fit well into its existing divisions. These acquisitions can add both earnings power and balance sheet value over time, which helps support equity growth. The decline in 2025 of around 3% should not be seen as a major concern. After several years of very strong growth, it is natural for equity to occasionally decline slightly. This likely reflects that earnings growth was softer in 2025, which fits with the lower ROIC and ROCE figures we discussed earlier. Some of Atlas Copco’s end markets, such as industrial production and semiconductors, may have experienced weaker demand, which can temporarily reduce profits and therefore slow or slightly reverse equity growth. In addition, acquisitions and investments made in recent years may not yet be fully contributing to earnings, which can also weigh on the year over year development. Importantly, a small decline after several years of strong compounding does not change the long term picture. Equity has more than doubled from 53.177 in 2016 to 110.400 in 2025, which is a very strong result over a decade. This reflects the strength of Atlas Copco’s business model, its disciplined capital allocation, and its ability to generate consistently high returns over time. Looking ahead, I would expect equity to continue growing over the long term, although not necessarily in a straight line every single year. Given the company’s high profitability, asset light model, and strong positions in attractive niche markets, temporary fluctuations are normal, but the long term direction should still be upward.

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. Atlas Copco has historically generated very strong free cash flow and high free cash flow margins, and this is one of the clearest signs of the quality of its business model. One of the main reasons Atlas Copco consistently generates strong free cash flow is its high profitability. The company operates in mission critical niche markets where reliability, efficiency, and uptime are essential for customers. Because downtime can be extremely costly, customers are often willing to pay for high quality equipment and services, which supports strong margins. This means a large share of revenue is converted into cash. Another important reason is the company’s asset light business model. Atlas Copco outsources a large share of component manufacturing and focuses its own resources on research and development, core components, and final assembly. This means it does not need to spend heavily on factories, machinery, and production facilities compared with many traditional industrial companies. Management has repeatedly highlighted that the company requires relatively limited ongoing investments in its operations, which allows a larger share of earnings to turn into free cash flow. The service business is also a major driver of cash generation. Service now accounts for a significant share of revenue and includes maintenance, spare parts, consumables, and specialty rentals. This part of the business tends to be more stable than equipment sales and often comes with attractive margins. Since servicing the installed base usually requires less capital than manufacturing and selling new equipment, it supports strong and recurring free cash flow. The slight decline in 2025 should be viewed in context. Even though free cash flow decreased from the record level in 2024, 2025 still represents the second highest free cash flow in the company’s history, which is a very strong result. The decline is likely mainly explained by somewhat softer demand in parts of the industrial cycle, especially in areas such as semiconductors and general industrial production, combined with continued investments for future growth. Atlas Copco has been investing in research and development, acquisitions, and expansion into adjacent niches, which can temporarily reduce free cash flow in a given year. This does not indicate weakness in the business. Rather, it reflects that management continues to reinvest in attractive long term growth opportunities. Looking ahead, I expect Atlas Copco to remain a strong generator of free cash flow. The structural drivers are still fully in place. The company continues to benefit from strong margins, a large recurring service business, and an asset light model with relatively modest investment needs. Free cash flow may fluctuate from year to year depending on demand conditions and the timing of acquisitions, but over the long term it should continue to trend upward as the business grows. Atlas Copco mainly uses its free cash flow in three ways. First, the company reinvests in the future of the business through research and development, product innovation, and strategic acquisitions in adjacent niche markets. Acquisitions have been an important part of Atlas Copco’s long term growth strategy, and management has explicitly stated that internally generated cash flow has been sufficient to fund most of these deals. Second, the company returns a meaningful portion of cash to shareholders through dividends. Management aims to distribute around 50% of earnings as dividends, and this has been a consistent part of the capital allocation strategy. Third, the strong cash generation supports financial resilience, allowing Atlas Copco to remain flexible during weaker parts of the cycle and continue investing when opportunities arise. This combination of reinvestment, shareholder returns, and balance sheet strength is one of the reasons Atlas Copco has been such a strong compounder over time. The free cash flow suggests that the shares are currently trading at a premium valuation. However, we will revisit the 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 only 0,86 years of earnings in debt, making this a non issue for investors. In fact, debt appears to be one of the company’s strengths rather than a concern. Atlas Copco generates strong and consistent cash flows, which means it has limited need for external financing. Management has also highlighted that the company remains highly cash generative and therefore does not see debt as an issue. This conservative balance sheet gives Atlas Copco significant flexibility to act when opportunities arise, particularly when it comes to acquisitions. The company has completed many acquisitions over the years, most of them small to medium sized, and its strong financial position allows it to fund these without putting pressure on the balance sheet. In addition, Atlas Copco maintains strong credit ratings, which further underlines the financial strength of the business. Overall, debt is clearly well under control and should not be a concern for long term investors.

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Risks

Macroeconomic factors is a risk for Atlas Copco because the company’s business is closely tied to industrial activity, manufacturing investment, and overall economic growth. Unlike consumer businesses, Atlas Copco depends heavily on companies continuing to invest in factories, equipment, automation, and infrastructure. When the global economy slows down, businesses often become more cautious and postpone large investments in new machinery and production capacity. This directly affects Atlas Copco because a meaningful part of its revenue comes from customers purchasing new compressors, vacuum systems, industrial tools, and power equipment. Management has already noted weaker demand in areas such as industrial assembly, vision solutions, and power and flow equipment, which highlights how sensitive parts of the business are to the economic cycle. Economic uncertainty also affects customer behavior. When companies face weaker demand, rising costs, or uncertainty around future growth, they often delay capital spending decisions. Atlas Copco itself has commented that customers remain hesitant and that the environment is still challenging and full of uncertainties. This is particularly relevant for large industrial customers, as many of Atlas Copco’s products represent significant investments. If customers choose to postpone these purchases, order intake and revenue growth can weaken for several quarters. Another important risk is that softer production activity can also affect the service business. While Atlas Copco’s service revenues are generally more stable than equipment sales, they are not completely immune to macroeconomic weakness. If customers reduce production levels or run their factories below normal capacity, they may require fewer spare parts, less maintenance, and fewer consumables. Management has explicitly highlighted that changes in customers’ production levels influence sales of service, spare parts, and consumables. This means that even the more recurring part of the business can come under pressure during an economic slowdown. Regional economic weakness add another layer of risk. China is an important market for Atlas Copco, and management has noted that demand there remains challenging. If industrial activity in China remains weak or slows further, this could weigh on several divisions, particularly Compressor Technique and Industrial Technique.

Competition is a risk for Atlas Copco because even though the company operates in highly specialized niche markets, it still faces strong global and local competitors across all of its business areas. In Compressor Technique, key competitors include Ingersoll Rand, Hitachi, and Kaeser, alongside numerous regional players, particularly in China. In Vacuum Technique, competitors such as Ebara, Busch Group, and Shimadzu compete in areas that are critical to semiconductor and industrial customers. In Industrial Technique and Power Technique, the company faces competition from large industrial players such as Bosch, Stanley Black & Decker, Generac, and others. This means that Atlas Copco, despite its strong market position, cannot take market share or pricing power for granted. One of the main risks is pricing pressure, especially during periods of weaker demand. Management has explicitly acknowledged that when demand is not as strong, all players in the market fight harder for orders. This can make it more difficult for Atlas Copco to pass on higher costs through price increases. A recent example is tariffs, where management noted that the company has not yet been fully able to offset the cost increases because of the competitive environment. This is important because it shows that even a company with a strong moat can face margin pressure when competitors are willing to compete aggressively on price to win business. Competition can be particularly intense in compressors, where local competitors may have cost advantages. Management specifically referenced the U.S. market, where imported compressors can face competition from domestic players such as Ingersoll Rand. If local competitors are able to offer similar products at lower prices, Atlas Copco may need to either accept lower margins or risk losing orders. This becomes especially relevant when tariffs increase the cost of imported products. Another risk comes from regional and local competitors, particularly in China and other price-sensitive markets. While Atlas Copco competes primarily on quality, reliability, and service, local companies may compete more aggressively on price. In a weaker economic environment, some customers may prioritize lower upfront cost over premium quality, which could put pressure on Atlas Copco’s order growth in certain markets. Competition is also a risk from an innovation perspective. Atlas Copco’s moat is heavily built on technological leadership, especially in areas such as vacuum systems for semiconductors and precision industrial tools. If competitors develop comparable or superior technology, Atlas Copco could face pressure on both market share and pricing power. This is particularly important in fast-moving areas such as semiconductor equipment, automation, and machine vision, where technological advantages can shift over time.

Reliance on third party suppliers is a risk for Atlas Copco because a large part of its business model depends on external partners for the production and delivery of components. Atlas Copco operates an asset light structure and outsources a significant share of its manufacturing, while focusing internally on product design, core components, and final assembly. This model is one of the reasons the company generates high margins and strong cash flow, but it also creates dependency on the reliability and capacity of its supplier network. One of the main risks is supply chain disruption. If suppliers face production issues, shortages of raw materials, transportation delays, or lack the capacity to meet demand, Atlas Copco may not receive the components it needs on time. Since many of its products are mission critical for customers, delays in delivery can affect customer relationships and potentially lead to lost orders. This risk becomes even more important during periods of high demand, when suppliers may struggle to scale production quickly enough. Another important risk is concentration at single source suppliers. Some specialized components may come from only one supplier, particularly in advanced industrial and semiconductor related equipment. If such a supplier experiences operational problems, geopolitical disruption, or financial difficulties, Atlas Copco could face delays in production and service deliveries. Management itself has highlighted that large disruptions at a single source supplier could negatively affect the delivery of components or spare parts to customers. The risk also extends to the service business. Atlas Copco’s installed base is a key part of its moat, and customers rely on the company for spare parts and maintenance. If suppliers cannot provide replacement parts on time, this could affect Atlas Copco’s ability to support customers and weaken one of its most important competitive advantages. A further risk relates to limited visibility deeper in the supply chain. Atlas Copco may have strong relationships with its direct suppliers, but the company has acknowledged that it does not always have full visibility beyond the first layer of suppliers. This means that disruptions further down the chain, for example at raw material producers or electronics manufacturers, can still affect Atlas Copco even if the direct supplier appears stable. There is also a sustainability and regulatory risk. With a large supplier base across many regions, there is a risk that some components are not produced in line with the company’s standards for environmental impact, hazardous substances, conflict minerals, or labor practices. If issues arise in these areas, it could lead to reputational damage, regulatory penalties, or the need to change suppliers, which may disrupt operations.

Reasons to invest

Secular trends is a reason to invest in Atlas Copco because the company is directly exposed to several long term structural growth drivers that are likely to support demand for its products and services for many years. Unlike short term economic cycles, these trends are driven by lasting changes in technology, industrial processes, energy systems, and infrastructure investment. Atlas Copco’s broad portfolio across compressors, vacuum systems, industrial tools, and power solutions positions the company to benefit from multiple growth areas at the same time. One of the most important secular trends is the continued expansion of the semiconductor industry. Rising demand for chips driven by artificial intelligence, cloud computing, electric vehicles, 5G, and advanced electronics is leading to significant investment in new wafer production capacity around the world. Atlas Copco’s vacuum solutions are essential in semiconductor manufacturing because advanced chip production requires extremely clean and highly controlled environments. Management has highlighted that the capital spending relevant to wafer production is a key driver for the company and that AI is creating significant opportunities within semiconductors. As chip manufacturers continue building new fabs and upgrading existing facilities, this should remain an important long term growth driver, particularly for the high margin Vacuum Technique division. Another major structural trend is the global push toward energy efficiency and the transition to a low carbon society. Governments and industries are increasingly focused on reducing emissions, lowering energy consumption, and improving energy security. This directly benefits Atlas Copco because many of its products help customers reduce energy use and lower total life cycle costs. For example, more energy efficient compressors can significantly reduce electricity consumption, which is important because energy costs often represent the majority of the total cost of owning such equipment. Management has specifically highlighted that energy transition and energy security are creating significant opportunities for the company. The electrification of transport and the rise of electric vehicles is another long term trend that supports Atlas Copco’s growth. The production of electric vehicles and battery systems requires advanced assembly tools, fastening solutions, and vacuum technology. As automakers continue to build gigafactories and expand EV production lines, Atlas Copco’s Industrial Technique and Vacuum Technique divisions are well positioned to benefit. This includes specialized joining technologies used in battery packs and lightweight materials, which are becoming increasingly important in modern vehicle manufacturing. Finally, the company is also positioned to benefit from newer long term trends such as hydrogen, carbon capture, and even quantum computing. Atlas Copco has highlighted opportunities in gas processing, hydrogen handling, and CO2 capture solutions. In addition, ultra high vacuum and cryogenic systems may become increasingly important in future technologies such as quantum computing, which could create another long term growth avenue.

Acquisitions is a reason to invest in Atlas Copco because it has been one of the company’s most important and most successful growth engines over time. Rather than relying only on organic growth, Atlas Copco has built a highly disciplined acquisition model centered around small to mid sized bolt on acquisitions that strengthen its technology portfolio, expand its market presence, and deepen its service offering. This approach has allowed the company to compound growth steadily while keeping risk relatively well controlled. One of the most attractive aspects of Atlas Copco’s acquisition strategy is that it is highly focused. Management has made it clear that acquisitions are primarily made within, or very close to, existing core businesses. This means the company is not chasing unrelated growth but instead buying businesses that fit naturally into its four business areas: compressors, vacuum solutions, industrial tools, and power solutions. By staying close to what it already understands well, Atlas Copco increases the probability that each acquisition adds value and supports long term profitability. Another key strength is the company’s focus on acquiring technology and niche market leadership. Management repeatedly emphasizes that Atlas Copco is a technology company and that acquisitions are often used to strengthen its capabilities in adjacent technologies. This is particularly attractive because it helps the company stay at the forefront of industrial innovation. Whether it is vision technology, vacuum solutions, service capabilities, or specialized components, acquisitions allow Atlas Copco to enter new niches faster than building everything internally. The pace of acquisitions itself highlights how important this strategy is. Between 2021 and 2025, the company completed 126 acquisitions, including 29 in 2025 alone. This consistent activity shows that Atlas Copco has built a repeatable and scalable process for sourcing, evaluating, and integrating businesses. It also means growth is diversified across many smaller deals rather than depending on one large and risky transaction. Another reason this is attractive for investors is the focus on service and recurring revenue. Many of the acquired businesses strengthen Atlas Copco’s service capabilities and installed base. This is important because service revenues tend to be more stable than equipment sales and often come with attractive margins. Over time, acquisitions that expand the service offering help make the business more resilient during weaker economic periods.

Innovation is a reason to invest in Atlas Copco because it sits at the core of the company’s business model and is one of the main reasons it has been able to maintain its leadership positions across multiple industrial niches for decades. In markets where customers depend on reliability, uptime, and lower operating costs, continuous innovation is essential for maintaining pricing power, strengthening customer relationships, and expanding into new applications. Atlas Copco clearly understands this and consistently invests around 4% of revenue into research and development, even during more challenging periods. I find that particularly attractive because it shows that management prioritizes long term competitiveness over short term margin optimization. One of the strongest aspects of Atlas Copco’s innovation strategy is that it is focused on tangible customer value. Management repeatedly emphasizes that innovation must help customers improve productivity, reduce energy use, lower total life cycle costs, or solve more complex operational problems. This customer focused approach strengthens the moat because it makes Atlas Copco’s products harder to replace. For example, its Variable Speed Drive compressors can reduce energy consumption by as much as 60% compared with older generations, which creates a very clear economic incentive for customers to upgrade. Another reason innovation is attractive is that it supports pricing power. In industries where price increases alone can be difficult, introducing products with better performance, higher efficiency, and new capabilities allows Atlas Copco to justify premium pricing. Management has explicitly highlighted that new features and better solutions can support higher prices while also improving customer economics. This is especially important in mission critical applications such as semiconductors, automotive assembly, and industrial air systems, where customers care more about total cost of ownership than initial purchase price. Innovation also helps Atlas Copco expand its addressable market. This is one of the most attractive points in the investment case. Management specifically notes that innovation does not only improve existing products but can transform the size of the market itself. A good example is moving from selling a single industrial tool to selling a complete automated production cell. This significantly increases the value of each customer relationship and opens up new growth opportunities across industries such as electrification, automation, and machine vision. Finally, innovation strengthens customer loyalty. When a company continuously helps customers lower costs, improve uptime, and modernize production, it becomes a more trusted long term partner rather than just a supplier. This reinforces the service business and recurring revenues over time.

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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 for free.

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 5,42, which is from 2025. I have selected a projected future EPS growth rate of 12%. Finbox expects EPS to grow by 11,6% a year in the next five years. Additionally, I have selected a projected future P/E ratio of 24, 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 99,86. 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 49,93 (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 32.566, and capital expenditures were 4.284. 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 2.999 in our calculations. The tax provision was 7.246. We have 4.869 outstanding shares. Hence, the calculation will be as follows: (32.566 – 2.999 + 7.246) / 4.869 x 10 = SEK 75,61 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 5,81 and a growth rate of 12%, if you want to recoup your investment in 8 years, the Payback Time price is SEK 80,04.

Conclusion

I believe Atlas Copco is an intriguing company with strong management. The company has built a moat through its positioning in mission critical applications, technological leadership, extensive installed base, and highly effective operating model. Atlas Copco has consistently achieved a high ROIC, and while it did decrease in 2025, it is expected to improve in the future. Free cash flow also declined slightly in 2025 but still reached its second highest level ever and is expected to continue growing over time. Macroeconomic factors are a risk for Atlas Copco because demand for its products and services is closely linked to industrial activity, manufacturing investment, and overall economic growth. When the economy slows, customers often delay spending on new equipment and may also reduce production, which can weaken both equipment sales and demand for service, spare parts, and maintenance. Competition is also a risk because, despite its strong positions in niche markets, Atlas Copco still faces intense global and local competition across all business areas, which can pressure both market share and pricing power. This becomes especially challenging during weaker demand periods, when competitors may compete more aggressively on price, making it harder for the company to pass on higher costs and maintain margins. Reliance on third party suppliers is another risk because its asset light model depends heavily on external partners for components and spare parts, making the company vulnerable to supply chain disruptions, delays, and capacity constraints. If key suppliers face operational issues or shortages, it can affect both product deliveries and the service business, potentially harming customer relationships and growth. On the positive side, secular trends are a strong reason to invest because Atlas Copco is well positioned to benefit from long term growth drivers such as semiconductors, energy efficiency, electrification, and the transition to a low carbon economy. Its broad portfolio across vacuum systems, compressors, industrial tools, and power solutions gives it exposure to several structural growth areas that should support demand for many years. Acquisitions are also a reason to invest because they have been a key long term growth engine, helping the company steadily expand its technology portfolio, market presence, and service revenues. Its disciplined focus on small to mid sized bolt on deals within core business areas reduces risk while strengthening the moat and supporting more resilient long term growth. Innovation is another compelling reason to invest because it helps the company maintain its leadership in mission critical industrial niches through better performance, higher energy efficiency, and lower customer operating costs. By consistently investing around 4% of revenue in research and development, Atlas Copco strengthens pricing power, deepens customer relationships, and expands into new growth areas such as automation, semiconductors, and energy transition solutions. Overall, I believe Atlas Copco is a great company, and buying shares at SEK 100, which is the intrinsic value based on the Margin of Safety price, would be a good long term investment.

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