ATS Automation scored with MARCO acquisition, Stifel says

A new deal for ATS Automation (ATS Automation Stock Quote, Chart, News TSX:ATA) has Stifel Canada analyst Justin Keywood maintaining his bullish stance on the stock.

On Monday, ATS announced it had acquired UK-based food packaging concern MARCO, which generated revenue of approximately 15 million pounds sterling in its most recent fiscal year.

“MARCO is a high-quality company that provides ATS with the means of entering a product-based, niche segment of the food industry that is growing at a mid-single digit rate,” ATS CEO Andrew Hider, said. “The food industry itself is attractive to ATS because it is subject to industry and government regulations driving a need for high precision technologies. In MARCO, we acquire a proven business that is well positioned to meet growing demand for productivity and quality-enhancing solutions. MARCO will serve as a first step in our expansion into an attractive new vertical market for ATS.”

“Joining ATS enables us to take advantage of ATS’s global reach, industry-leading technologies and after-market services platform,” MARCO CEO Murray Hilborne countered. “This exciting combination will benefit MARCO’s customers and employees. The management team and I look forward to working with ATS to enable MARCO to take the next step in realizing its full potential and ambitions.”

Keywood says this is a new vertical for ATS and one they are entering at a reasonable price.

“We see MARCO as a good acquisition with a value multiple paid for entry into a strong segment of the automation industry,” the analyst said. “Similar to ATS’ other highly valued segments, like healthcare, MARCO’s industries are less prone to economic swings and should provide further stability to results. The Food industry is said to be growing at mid-single digits and likely to be recession resistant. The Food industry also has a strong developing trend in pre-made meals and meal delivery kits, supportive of the good organic growth trend. We note the high caliber of customers at MARCO as well, including The Unilever Group (~€130b market cap). The after-market sales and services component at MARCO represents 10% of sales that could suggest an opportunity to expand with ATS Illuminate, leading to even higher margins. Overall, we see MARCO as consistent with ATS’ M&A strategy of diversifying further into high valued segments in the automation industry with a disciplined approach. ATS continues to have plenty of fire power (~$800mm in cash and debt capacity) for further M&A.”

In a research “Flash” update to clients today, Keywood maintained his “Buy” rating and one-year price target of $28.00 on ATS Automation, implyign a return of 31 per cent at the time of publication.

The new pickup for ATS comes on the heels of the September 19 acquisition of German IT and consulting firm iXLOG Unternehmensberatung GmbH (iXLOG), which generated a topline of approximately €4 million in 2018.

Hider said the move would allow ATS to improve its Process Automation Solutions business