ATS is a healthcare automation leader, Stifel GMP says

Business may be tough these days but ATS Automation Tooling Systems (ATS Automation Tooling Systems Stock Quote, Chart, News TSX:ATA) is headed in the right direction with its turn towards healthcare automation, according to Stifel GMP analyst Justin Keywood.

In a flash update to clients on Tuesday, Keywood said ATS is expected to reach $1 billion in healthcare segment sales in two years time.

COVID-19 has knocked the wind out of many a company but Cambridge, Ontario’s ATS, which provides automation solutions for manufacturers in a wide range of sectors, is helping companies worldwide to address critical needs during the pandemic.

The company published a news release on Tuesday highlighting the ways in which companies are using ATS’ tech to help pivot their production, such as with a large automaker in the United States which is reconfiguring its manufacturing to produce FFR masks and a company in Italy which is using ATS tech to develop an automated bio-decontamination system for hospitals.

“Around the world, organizations needing to overcome capacity constraints and supply chain shortages are turning to ATS to scale up production of critical medical devices and quickly pivot manufacturing output,” said Andrew Hider, CEO, in the press release.

“We’re enabling customers to manufacture important products such as ventilators and respirators, that are desperately needed to treat patients, protect healthcare workers and contain the coronavirus pandemic. We are proud to play our part and ready to do more,” Hider said.

Keywood said the COVID-19-related work is part of a grander plan on ATS’s part to develop its healthcare segment.

“ATS announced this morning, several healthcare automation areas that it is providing solutions for related to COVID-19, including respirators, ventilator components, bio-decontamination systems, test kits and sanitizer products,” Keywood said. “This is consistent with our own scuttlebutt and highlights a robust healthcare segment for ATS that is expected to reach $1 billion of sales in two years (~$730 million currently).”

“Rough math could suggest that the value of a $1-billion healthcare automation segment is worth more than the entire market cap of the company today and value will continue to compound for many years from an on-shoring trend and elevated organic growth,” Keywood wrote.

The analyst said ATS is also likely to benefit from the longer-term trend of on-shoring manufacturing, saying that COVID-19 has revealed the vulnerabilities in supply chains, particularly in healthcare.

As to ATS’ own operations, Keywood praised the company for being a good capital allocator and having a strong balance sheet with about $120 million in cash, less than 1x net debt ratio and access to about $650 million in credit.

“COVID-19 has presented a dynamic situation with challenges but also opportunity for a business that is primarily in healthcare. We rely on good management to navigate this period, where an increasing on-shoring trend and M&A could ultimately lead to more value,” Keywood wrote.

With the update, Keywood reiterated his “Buy” rating and $28.00 target, which at press time represented a projected 12-month return of 69 per cent.