Sector
IndustrialsManufacturing
Background
Stephen Paice is the Head of European equities at Baillie Gifford. We cover the rich corporate history of Atlas Copco, what makes its culture so noteworthy, and provide an overview of its products that are used in industries all around the world.
Cover
Date
August 24, 2022
Episode Number
71
Key Learnings & Lessons for Investors
- Niche Market Domination as a Competitive Advantage: Atlas Copco's success lies in its ability to dominate niche markets. The company has ~30% global market share in compressors, which is ~2x its nearest competitor, Ingersoll Rand.
- Importance of Value-Add Cross-Sell: Despite equipment being a small capital outlay for clients, the significant costs come from the operational side, particularly energy. Atlas Copco's ability to provide energy-efficient solutions is a unique selling proposition that adds value for their customers.
- Long-term Vision: The Wallenberg family's involvement with Atlas Copco showcases the importance of having long-term investors who can provide stability, vision, and resilience. They have been associated with Atlas Copco for over a century, helping steer the company through various challenges and opportunities.
- Diversification and Agility Despite Old History: Atlas Copco's history is a testament to the importance of diversification and the ability to pivot when needed. From railroads to compressors to mining, the company has continually adapted to changing circumstances and market needs. Furthermore, they have been both acquisitive, to expand or diversify, and willing to divest when it aligns with their long-term strategy.
- Service Potential in Equipment Sales: The compressor company's transformation in profitability is primarily attributed to recognizing the potential of service. Beyond just selling a product, the recurring revenue and relationship-building opportunity of services drives profitability, due to the potential for stable and recurring revenue.
- Flexibility and Decentralization: Companies that adopt a decentralized approach, focusing on empowering smaller units and emphasizing organic growth, can achieve greater agility in operations and better understand their customer needs
- Example: Despite the challenges of decentralization, the company has managed through exceptional data collection and reporting. This enables them to rapidly identify outliers and intervene, ensuring the efficiency of their decentralized model.
- Acquisition Discipline: While acquisitions in the business world often carry a reputation for destroying value, Atlas Copco exemplifies how a disciplined and strategic approach can create significant value. They focus on smaller "bolt on" deals and occasionally bigger strategic moves, all while maintaining a clear focus on their core businesses
Key Takeaways & Business Model
- Atlas Copco's Dominance and Historical Performance: Atlas Copco is a leading Swedish industrial conglomerate specializing in air compressors and vacuum pumps, with a market cap of around $50 billion. Over the past two decades, the company has delivered a 4000% return to its shareholders, reflecting a 40x growth.
- Product Diversity and Market Penetration: Atlas Copco provides a broad range of products, with 50% of its revenue coming from compressor technology, around 25% from vacuum pumps, and the remaining 25% from industrial tools and power. These products, particularly compressors, have vast industrial applications, with potential use in nearly every industry globally. It's estimated that nine out of ten factories worldwide use a compressor.
- Atlas Copco's Rich History: Atlas Copco has a storied and rich history that spans over 150 years. It began in the 1850s, initially catering to the emerging railroad networks, and then moved to pneumatics, compressors, and diesel engines. Throughout the decades, the company has faced various challenges, including global recessions and financial crises, but has emerged resilient. Its evolution involved acquiring businesses, such as Arpic in Belgium, and also making divestitures, like Milwaukee Tools and the Epiroc spinoff in 2018.
- The Wallenberg Family's Influence: The Wallenberg family has been intricately linked with Atlas Copco's journey. Their involvement started in the late 19th century, and their influence over the company has been both direct and indirect. Through the Wallenberg family's investment vehicle, Investor, they have provided support during challenging times and played a pivotal role in the company's capital allocation decisions. Today, they own 22% equity and control 46% of the votes.
- Cultural Capital: The company, presumably Atlas Copco, places a significant emphasis on its corporate culture, attracting top talent from Swedish universities and instilling values throughout the organization via tools like the "Atlas Copco blue book." Such a strong, cohesive culture sets it apart from many other companies, particularly in the U.S. where top graduates don't always head into the industrial sector.
- Financial Performance & Strategy: Atlas Copco has seen consistent growth, achieving 6-7% revenue growth over time. Its approach isn't solely reliant on organic growth but also emphasizes a strategic acquisition strategy. Over the past 20 years, the company has seen significant returns, becoming a "40 bagger". Their operating margin has nearly doubled since the early 2000s, from 12% to around 21-22%, with almost all net profit converting into free cash flow. This cash flow is then strategically utilized, with around 30-40% going toward acquisitions, particularly in fragmented markets.
Transcript
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