Investment Analysis: Burckhardt Compression Holding AG

Executive Summary

Investment Thesis (3 Sentences)

Burckhardt Compression is the world's only full-range reciprocating compressor manufacturer with a 180-year operating history, deep technical moat, and strong recurring services revenue (25% EBIT margins). The company benefits from structural tailwinds in LNG transport, energy transition, and chemical production while maintaining conservative Swiss management with aligned incentives. At CHF 543, the stock trades at a reasonable 17x trailing earnings with 3.3% dividend yield, but lacks sufficient margin of safety for a value investor entry.

Key Metrics Dashboard

Decision

WAIT - Quality business at fair price. Requires 20-30% pullback for adequate margin of safety.

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Phase 0: Opportunity Identification (Klarman)

Why Does This Opportunity Exist?

Primary Reason: Limited visibility among global investors due to:

1. Swiss Exchange Listing: Small, less liquid exchange vs NYSE/LSE
2. Niche Industrial Sector: Reciprocating compressors aren't "sexy" like tech
3. Low Analyst Coverage: ~5 analysts cover vs 30+ for US industrials
4. Language Barrier: German-speaking management, Swiss corporate culture

Secondary Factors:

• Recent stock pullback from CHF 738 high (July 2025) to CHF 543 (-26%)
• Hydrogen sector disappointment (expected boom didn't materialize as fast)
• Tariff uncertainty affecting global industrial capex

Is This Cheap? No. At 17x trailing earnings, this is fairly valued for a quality industrial. The opportunity is in understanding the quality, not finding a bargain. Value investors should WAIT for a better entry.

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Phase 1: Risk Analysis (Inversion Thinking)

"How Could This Investment Lose 50%+ Permanently?"

1. Technological Disruption Risk: LOW (10% probability, 40% impact)

Reasoning Chain:

1. Reciprocating compressors are 150+ year old technology (mature S-curve)
2. No viable alternative technology for high-pressure, variable-flow gas compression
3. Centrifugal compressors cannot achieve same pressure ratios
4. Electric compressors need same mechanical principles
5. Conclusion: Technology risk is minimal; compressors are like pumps—essential and stable

Expected Loss: 10% × 40% = 4% risk-adjusted impact

2. Competitive Dynamics Risk: MEDIUM (25% probability, 30% impact)

Competitors:

• Ariel Corporation (US) - Private, largest API compressor manufacturer
• Howden (UK) - Acquired by Chart Industries (2022)
• Neuman & Esser (Germany) - Private, strong in process gas
• Chinese manufacturers - Growing capability in standard units

Risks:

• Chinese competition in low-end marine and industrial segments
• Pricing pressure if market slows
• Loss of share in hydrogen (nascent market)

Mitigating Factors:

• Burckhardt dominates Hyper compressors (LDPE/EVA) with ~70% share
• Only company covering full technology range
• Service contracts lock in customers for 30+ years
• 95% iron/steel construction creates long asset life (recycling advantage)

Expected Loss: 25% × 30% = 7.5% risk-adjusted impact

3. End-Market Concentration Risk: MEDIUM (30% probability, 25% impact)

Revenue by End Market (FY2024 estimate):

• Chemical/Petrochemical (incl. solar EVA): ~35%
• Gas Transport & Storage (LNG/LPG): ~30%
• Industrial Gas: ~15%
• Hydrogen & New Energy: ~10%
• Refinery/Other: ~10%

Risks:

• Solar panel industry (EVA film) could slow if China solar subsidies cut
• LNG capex is cyclical (linked to oil prices and trade flows)
• Hydrogen timeline stretched vs expectations

Mitigating Factors:

• No single customer >5% of revenue
• Geographic diversification (Europe 35%, Asia 40%, Americas 20%, Other 5%)
• Services Division provides stability (25% EBIT margin, recurring)

Expected Loss: 30% × 25% = 7.5% risk-adjusted impact

4. Geopolitical/Trade Risk: MEDIUM-HIGH (35% probability, 25% impact)

Exposure:

• China revenue: ~20-25% (Shenyang factory)
• US revenue: ~15-20%
• Cross-border supply chains for components

Risks:

• US-China trade war could fragment supply chains
• Tariffs on Swiss industrial equipment
• Sanctions affecting Russian/Iranian customers

Mitigating Factors:

• Local production in key markets (Switzerland, China, Korea, US)
• Not defense-related, generally exempt from sanctions
• Swiss neutrality provides some diplomatic cover

Expected Loss: 35% × 25% = 8.75% risk-adjusted impact

5. Management/Succession Risk: LOW (15% probability, 20% impact)

Current Leadership:

• CEO Fabrice Billard (since April 2022): Former BCG consultant, Sulzer exec
• CFO Rolf Brändli (since 2008): 17-year tenure, stability
• Chair Ton Büchner: Experienced Swiss board chair (Novartis, Swiss Prime Site)

Risks:

• Key person dependency on specialized engineering knowledge
• CEO relatively new (3.5 years)

Mitigating Factors:

• Deep bench of divisional presidents with long tenure
• Family-free, professionally managed (no founder drama)
• Conservative Swiss corporate culture
• Shareholding requirements for executives

Expected Loss: 15% × 20% = 3% risk-adjusted impact

Total Risk-Adjusted Expected Loss: ~31%

This suggests a fair margin of safety requirement of 25-30%.

Bear Case (If I Were Short)

3-Sentence Bear Thesis:

1. "Burckhardt trades at 17x earnings for a cyclical industrial company with 70%+ exposure to volatile capex markets (LNG, chemicals, solar); when the cycle turns, earnings could drop 40%+, making it a 25x+ P/E stock overnight."
2. "The hydrogen hype that drove the 2022-2024 rally has fizzled—orders for hydrogen compressors are a fraction of expectations, and the 'energy transition' order intake is still only 32% vs the 40% target."
3. "Chinese competitors are rapidly climbing the technology curve in standard compressors, and the CHF strength (Swiss franc) makes Burckhardt less competitive on price globally."

Can I State the Bear Case Better Than the Bears? Yes, I believe I can. The cyclicality risk is real but manageable given the services backlog and conservative balance sheet.

Pre-Defined Sell Triggers (Non-Price)

1. Thesis Break: Services Division EBIT margin falls below 20% for 2+ quarters
2. Moat Erosion: Loss of market share in Hyper compressors (EVA) below 50%
3. Management Failure: CFO departure without clear succession plan
4. Capital Allocation: Dilutive acquisition >CHF 300M (>15% of market cap)
5. Balance Sheet: Net debt exceeds 2x EBITDA
6. Customer Concentration: Single customer exceeds 10% of revenue

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Phase 2: Financial Analysis

Historical Financial Performance (5-Year Summary)

ROE Decomposition (DuPont Analysis, FY2024)

ROE = Net Margin × Asset Turnover × Financial Leverage
ROE = (105.6/1,096) × (1,096/1,115) × (1,115/318)
ROE = 9.6% × 0.98 × 3.51
ROE = 33.0%

Analysis: High ROE driven primarily by strong margins and moderate leverage. Quality source of returns.

Owner Earnings Calculation (FY2024)

Owner Earnings = Net Income + D&A - Maintenance CapEx - Δ Working Capital

Net Income:                  CHF 105.6M
+ Depreciation & Amort:      CHF  25.0M (est.)
- Maintenance CapEx:         CHF (15.0M) (est. 60% of total capex)
- Δ Working Capital:         CHF  (5.0M) (growing business needs WC)
= Owner Earnings:            CHF 110.6M

Owner Earnings per Share: CHF 110.6M / 3.39M shares = CHF 32.6

Valuation Trinity

1. Liquidation Value (Floor)

NCAV per Share: CHF 16 (not relevant for going concern valuation)

2. Tangible Book Value

Price/Tangible Book: 543 / 97 = 5.6x (not cheap, but justified by high ROE)

3. DCF Valuation (Conservative)

Assumptions:

• Owner Earnings (Year 0): CHF 110.6M
• Growth Years 1-5: 6% (below historical 13% revenue CAGR)
• Growth Years 6-10: 3% (GDP-like)
• Terminal Growth: 2%
• Discount Rate: 9% (Swiss risk-free 1% + 8% equity risk premium)

DCF Calculation:

DCF Intrinsic Value: CHF 602 per share

4. Owner Earnings Multiple Valuation

5. Relative Valuation (Peer Check)

Assessment: Burckhardt trades at a discount to diversified peers, consistent with smaller size and Swiss listing discount.

Margin of Safety Calculation

Weighted Intrinsic Value: CHF 575 (avg of DCF and 18x multiple)

Current Margin of Safety: (575 - 543) / 575 = 5.6% (insufficient)

Required Entry Price (30% MOS): CHF 575 × 0.70 = CHF 403 Required Entry Price (20% MOS): CHF 575 × 0.80 = CHF 460

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Phase 3: Moat Analysis

Moat Sources

1. Intangible Assets (Brand & Know-How)

Evidence:

• 180 years of operating history (since 1844)
• Only company covering full reciprocating compressor technology range
• Proprietary materials: Persisto® (wear-resistant), Redura® (sealing systems)
• PROGNOST (predictive maintenance brand)
• ~75,000 installed compressors globally

Durability Assessment:

• Patent protection on key components
• Engineering know-how accumulated over generations
• Customer relationships span 30-50 year asset lives

Moat Width: WIDE (8/10)

2. Switching Costs

Evidence:

• Average compressor lifetime: 30-50 years
• Oldest operating Burckhardt compressor: 95 years old
• Proprietary spare parts and service tools
• Site-specific engineering (can't easily swap manufacturers)
• Regulatory certifications for specific applications (API, ASME)

Calculation:

Switching Cost = Cost to Replace + Downtime Cost + Recertification Cost
Switching Cost = $500K-5M (compressor) + $100K/day downtime + $50-200K certification
Total Switching Cost = Often >2x original purchase price

Moat Width: WIDE (9/10)

3. Network Effects

Evidence:

• Limited direct network effects (not platform business)
• Some learning curve effects from installed base data
• Digital services (UP! Insight, UP! Detect) create data advantages

Moat Width: NARROW (4/10)

4. Cost Advantages

Evidence:

• Swiss labor is expensive (disadvantage)
• But: Chinese factory (Shenyang) for lower-cost production
• Korean assembly facility for marine market proximity
• Scale advantages in specialized components (valves, seals)

Moat Width: MODERATE (5/10)

5. Efficient Scale

Evidence:

• Global market for reciprocating compressors: ~$10-15B annually
• Top 5 players control ~60% of market
• Room for only 4-5 profitable players at scale
• Niche segments (Hyper compressors) have even fewer players

Moat Width: MODERATE (6/10)

Moat Durability Assessment

Key Question: "Will This Moat Be Wider or Narrower in 10 Years?"

Answer: STABLE TO WIDER

Reasoning:

1. Energy transition increases gas infrastructure needs (LNG, hydrogen, ammonia)
2. Digital services (predictive maintenance) create new stickiness
3. Services backlog grows with installed base (30+ year asset life)
4. No technology disruption on horizon
5. Chinese competition nibbling at low end, but Burckhardt focuses on high-end

Moat Durability Score: 7/10 (Standard position eligible)

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Phase 4: Management & Incentive Analysis

Compensation Structure (CEO, FY2024)

Bonus Metrics Assessment

Short-Term Incentive (STI):

• Based on % of Group net income (0.28% for CEO)
• Threshold: 4% net income margin (prevents bonus in bad years)
• Cap: 80% of base salary
• Assessment: Directly aligned with profitability; no revenue gaming

Long-Term Incentive (LTI):

• Performance Share Units (PSUs) with 3-year vesting
• Metrics:
  • Cumulative EPS (50% weight)
  • Cumulative Revenue (25% weight)
  • ESG/Sustainability (25% weight) - GHG emission intensity reduction
• Cap: 130% of target
• Assessment: Balanced between growth, profitability, and sustainability

Shareholding Requirements

Capital Allocation Track Record (Last 5 Years)

Assessment: Conservative, shareholder-friendly allocation. No value-destructive empire building.

Insider Activity (Last 24 Months)

Munger's Question: "If I were management with these incentives, what would I do?"

Answer: I would focus on profitable growth (EPS-weighted STI/LTI), maintain the dividend (shareholder expectations), invest conservatively in new markets (energy transition for ESG bonus), and avoid dilutive M&A (stock-based LTI punishes dilution). Management incentives are well-aligned.

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Phase 5: Catalyst Analysis

Potential Catalysts

No Immediate Hard Catalyst

Assessment: No immediate catalyst requiring urgent entry. The business compounds steadily but lacks a specific trigger to close valuation gap quickly.

Implication: Require larger margin of safety (30%+) given lack of near-term catalyst.

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Phase 6: Decision Synthesis

Graham's 7 Criteria Check

Graham Criteria Score: 3/7 - Does not pass defensive investor screen (too expensive)

Buffett Quality Criteria Check

Buffett Quality Score: 5/5 - High-quality business

Megatrend Resilience Score

Total Score: +3 | Tier 2 "Resilient" - Normal position sizing eligible

Expected Return Scenarios

Annualized Expected Return: ~2% (insufficient vs 9% required return)

Position Sizing Formula

Position Size = Base × (MOS/30%) × (Quality/100) × (1-Risk) × Catalyst
Position Size = 3% × (5.6%/30%) × (75/100) × (1-0.31) × 0.7
Position Size = 3% × 0.19 × 0.75 × 0.69 × 0.7
Position Size = 0.2%

Recommended Position: 0% (Wait for better entry)

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Final Recommendation

┌─────────────────────────────────────────────────────────────────┐
│                     INVESTMENT RECOMMENDATION                    │
├─────────────────────────────────────────────────────────────────┤
│ Company: Burckhardt Compression      Ticker: BCHN.SW            │
│ Current Price: CHF 543    Date: December 25, 2025               │
├─────────────────────────────────────────────────────────────────┤
│ VALUATION SUMMARY                                                │
│ ┌─────────────────────────┬─────────────┬─────────────────────┐ │
│ │ Method                  │ Value/Share │ vs Current Price    │ │
│ ├─────────────────────────┼─────────────┼─────────────────────┤ │
│ │ Graham Number           │ N/A         │ ROE too high        │ │
│ │ Net Current Asset Value │ CHF 16      │ Not relevant        │ │
│ │ Tangible Book           │ CHF 97      │ 5.6x (high ROE OK)  │ │
│ │ DCF (Conservative)      │ CHF 602     │ -10% overvalued     │ │
│ │ Owner Earnings (15x)    │ CHF 489     │ +11% overvalued     │ │
│ │ Owner Earnings (18x)    │ CHF 587     │ -8% slight discount │ │
│ └─────────────────────────┴─────────────┴─────────────────────┘ │
│                                                                  │
│ INTRINSIC VALUE ESTIMATE: CHF 575 (weighted average)            │
│ MARGIN OF SAFETY: 5.6% (insufficient)                           │
├─────────────────────────────────────────────────────────────────┤
│ RECOMMENDATION:  [ ] BUY  [ ] HOLD  [ ] SELL  [X] WAIT          │
├─────────────────────────────────────────────────────────────────┤
│ STRONG BUY PRICE:         CHF 400 (30% below IV)                │
│ ACCUMULATE PRICE:         CHF 460 (20% below IV)                │
│ FAIR VALUE:               CHF 575 (Intrinsic Value)             │
│ TAKE PROFITS PRICE:       CHF 690 (20% above IV)                │
│ SELL PRICE:               CHF 860 (50% above IV)                │
├─────────────────────────────────────────────────────────────────┤
│ POSITION SIZE: 0% (wait for entry)                               │
│ CATALYST: None immediate; hydrogen subsidies 2026-27            │
│ PRIMARY RISK: Cyclical earnings decline if capex slows          │
│ SELL TRIGGER: Services EBIT margin <20% for 2 quarters          │
└─────────────────────────────────────────────────────────────────┘

Summary

Burckhardt Compression is a high-quality, well-managed Swiss industrial with a durable moat in reciprocating compressor technology. The 180-year operating history, 25%+ EBIT margin services division, and alignment with energy transition trends make it an attractive long-term hold.

However, at CHF 543, the stock is fairly valued (17x P/E) without sufficient margin of safety for a value investor. The lack of an immediate catalyst and exposure to cyclical end markets (chemicals, LNG, solar) means patient investors should wait for a better entry point.

Action: Add to watchlist. Set alerts for CHF 460 (Accumulate) and CHF 400 (Strong Buy). A 20-30% market correction or sector-specific selloff would create an excellent entry opportunity for this quality compounder.

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Appendix: Sources

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Analysis prepared following the Investment Analysis Framework (Buffett/Munger/Klarman methodology) All conclusions based on primary source documents