Increasing automation is the future of manufacturing (arguably already the present of manufacturing), and Atlas Copco (OTCPK:ATLKY) is making it increasingly clear that they do not intend to be left behind. While the company hasn’t really made that eye-popping acquisition yet, between Isra Vision (OTC:IRAVF) and now Perceptron (NASDAQ:PRCP), Atlas is putting on its water wings and wading out into much bigger seas of opportunity in metrology, machine vision, and automated manufacturing.
I like the Perceptron deal, and I believe the price paid offers relatively few risks for the company. I do also believe, though, that Atlas has bigger long-term ambitions, and we’re seeing only the first moves in a long-term strategy. Given recent updates and management commentaries, I’m not substantially more bullish on the outlook for high-quality industrials like Atlas Copco. Accordingly, while I love the business, I don’t love the valuation.
Perceiving Some Value In Perceptron
On Monday morning, Atlas Copco announced it had reached an agreement to acquire metrology and robot guidance specialist Perceptron for $7/share in cash, or an enterprise value of about $63 million. The $7/share bid is well above the $4.09 close on Friday, and there really wasn’t any action in the share price suggesting that a bid like this was on the way.
I wrote about Perceptron a few years ago. While the company has good technology in metrology (basically measuring cars in real-time as they are produced to ensure product/process quality) and robot guidance, the company has struggled to execute on its plans to apply these technologies outside of the auto sector. With that, revenue and growth and margin improvement have been lackluster at best, and this has continued to strike me as a company with better technology than management. To be fair (or at least fairer) to management, though, porting technologies across industry verticals is a lot harder than it sounds, and the company’s resources aren’t nearly on the level of rivals like Hexagon (OTCPK:HXGBY).
It makes absolute sense to me that Atlas Copco would be interested. I’ve written in the past that I expected Atlas to start acquiring its way into factory automation, with machine vision and metrology being likely targets. With the deals for Isra Vision and now Perceptron, Atlas management is basically following the playbook I expected, though I suppose I’m a little surprised that Atlas has focused more on the “small fish” as opposed to a splashier deal for larger players like Cognex (CGNX) or FARO (FARO).
I think this is a relatively low-risk deal for Atlas, particularly in the context of the price paid. Atlas already has a large presence with auto customers, it’s the main end-market for the company’s Industrial Technique segment (focused largely on assembly tools, assembly systems, and quality assurance products), and so Perceptron should fit neatly into that business. I believe Atlas has the resources to accelerate the product development and SG&A spending needed to make Perceptron a player in other end-markets, but even if they cannot do that, they’ve made a decent acquisition in an end-market they know well already.
As far as the price paid goes, Atlas is paying 10.5x my FY’21 EBITDA estimate – just a hair above what I thought Perceptron could be worth on that basis.
Current Trends Are Still Challenging
Listening to management present at a recent sell-side conference, it sounds like a modest recovery is still on track. Management noted improved performance in the Compressor aftermarket business (a significant business, as about 40% of Compressor Technique revenue comes from service), largely due to much improved access to work/customer sites. Management also commented that, even with the recent turbulence in the semiconductor sector, demand for vacuum products remains healthy. This doesn’t surprise me, given ramping logic programs, and I expect healthy demand for both foundry/logic and memory into 2021.
On a less happy note, Atlas noted that China’s “V-shaped” industrial recovery has been leveling out some recently. Management also expressed some confusion (you could also say “concern” or even “exasperation”) about the discrepancy between financial market performance and financial market perceptions of the recovery and the on-the-ground reality they’re seeing. That’s not far removed from recent commentary from Sandvik (SVDKY) to that effect, including “uneven” performance across various end-markets.
I mention this because it is front and center on my list of worries. While I do expect a strong recovery in many industrial end-markets before the end of 2021 and into 2022, I do worry that the Street is already pricing in too much of a recovery and/or with too much confidence, setting the stage for a potentially meaningful correction around third or fourth quarter earnings as managements look to set expectations for 2021.
The Bottom Line
As a low-risk way to get the company’s feet wet in metrology and robot guidance, I really do like the Perceptron deal, and I think it’s just another early deal in what will be a much more extensive move into the factory automation space. At the same time, I do remain concerned about the valuation and the level of expectations the Street has for industrials in 2021. While I don’t ever expect Atlas Copco to get “cheap”, I would like a better price before getting more bullish on the name.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.