Sell ATS Automation, says Paradigm Capital

In the midst of a industrial and manufacturing recession in which industry multiples have dropped considerably, ATS Automation (ATS Automation Stock Quote, Chart, News: TSX:ATA) still does not trade at enough of a discount to bellwether stocks such as Rockwell Automation and Applied Materials, says Paradigm Capital analyst Daniel Kim.

This morning, ATS announced its Q4 and fiscal 2016 results. In the fourth quarter, the company earned $8.1-million on revenue of $246.8-million, down 15 per cent from the $289.4-million topline the company reported in the same period a year earlier.

“Fourth quarter revenue performance was anticipated and reflected lower order backlog entering the period,” said CEO Anthony Caputo. “During the quarter, ATS set a new quarterly order bookings record on the way to generating over $1-billion in annual order bookings for the first time. Based on year-end order backlog, significant funnel and strong balance sheet, we are well positioned to continue to advance our value-creation plan.”

Kim says order bookings are the only positive when looked at ATS, who thinks things are about to get worse with the company. He expects its earnings will collapse in fiscal 2017 to $0.54, a 25 per cent year-over-year decline. The analyst today reiterated his “Sell” recommendation and one-year price target of $8.00 on ATS Automation, which he notes is trading at a 17 per cent premium on a P/E multiple basis to its peers.

“ATA is clearly feeling the pain of the industry slowdown,” says the analyst. “We had hoped the company could acquire its way out of this market funk; however, even with an acquisition the size of PA this was clearly not enough. Now with a stretched balance sheet (at least relative to historical), CEO disruption and continued market malaise, we believe investors should still avoid this name. Rolling forward our valuation and applying our same 12x multiple to FY18 EPS gives us our same $8.00 target. This target multiple is only a 20% discount to AMAT, which we believe is more than generous.”