Atlas Copco Earnings: Weak PC and Server Market Conditions Weigh on Orders

Sales continued to ascend strongly in the second quarter of 2023, rising 31% year on year to SEK 43.4 billion as Atlas Copco ATCO A works through its considerable backlog of orders from 2022 and early 2023. However, the near-term sales outlook is waning, with chilly demand conditions in semiconductor end markets causing new orders to decline 5% organically in the second quarter, reversing course abruptly from the prior quarter where orders grew 5% organically. Our 2023 financial estimates remain largely unchanged as do our long-term expectations for the narrow-moat stock. Investors sent Atlas Copco shares 5% lower on confirmation that the order book for its important vacuum pump division is weakening cyclically. Nonetheless, Atlas Copco still screens as overvalued, trading at a 22% premium to our unchanged SEK 120 fair value estimate.

Demand for Atlas Copco’s compressor business—its largest, accounting for approximately 46% of orders over the 12 months to June 2023—remains robust, with second-quarter orders growing 4% organically. Gas and process compressor orders grew robustly, while industrial compressor order volumes were essentially flat relative to 12 months ago.

By contrast, organic vacuum pump orders continued their decline in the second quarter, falling by a sizable 28% year on year in the second quarter. Demand from the semiconductor industry—the primary end market for Atlas Copco’s vacuum pump division—is down significantly, as weak demand conditions for PCs and servers lead some semiconductor manufacturers to curtail capital expenditure for the time being.

We view the presently weak demand for vacuum pumps as cyclical rather than structural, particularly in light of the ever-expanding use case for semiconductors across a broad range of economic sectors. Consequently, our medium-term expectations for about 6% average annual revenue growth and EBIT growth over the 2023–27 period are unchanged.