Semiconductor Demand and Supply Chain Constraints Dominate Atlas Copco's Third Quarter

Supply chain constraints hampered Atlas Copco's ability to deliver orders with demand exceeding 2019 levels in nearly all divisions. Orders and revenue were 19% and 6% higher in the first nine months of 2021 than the comparable period in 2019 (prepandemic). The rebound in demand particularly from semiconductor end markets has continued to boost order growth beyond the company's supply chain capacity. Management estimated that overall revenue could have been SEK 1 billion to SEK 2 billion higher, or as much as 7% more than the SEK 27.8 billion reported in the quarter. Supplier capacity and component constraints are roughly 80% of the problem in getting orders executed. The remaining issue is the company's own capacity, running at full utilization rates. Pricing increases, mix, and volume helped to offset inflation pressures with the third-quarter EBIT margin remaining relatively solid at 21.6%, just 30 basis points below the 2019 level. Management cautioned that while demand remained robust, the fourth quarter is likely to be somewhat slower. We expect to make adjustments to our model but not enough to materially affect our fair value estimate. Our narrow moat rating remains intact.