ATS Automation is a top pick for me, this investor says

Cyclicality is all the rage these days as the markets appear to be rolling away from Big Tech and into value stocks expected to do well in the post-pandemic economy. But investors can still find the odd gem in today’s well-picked-over tech sector. Take ATS Automation (ATS Automation Stock Quote, Chart, News, Analysts, Financials TSX:ATA), which was just named a Top Pick by Scotia Wealth advisor Greg Newman.

Cambridge, Ontario-headquartered ATS is an automation solutions provider with 20 manufacturing facilities worldwide and employs about 4,200 people across North America, Europe, Southeast Asia and China. The stock finished in the black last year, up four per cent, but it’s done better so far in 2021. Year-to-date, ATS is up 22 per cent.

But there should be more upside to come, says Newman, who thinks the company is poised for growth.

“ATS Automation builds custom-made, engineered manufacturing and test systems for customers and they do it from the ground up with a new factory or they add in. And they have high growth exposure to many secular names and secular areas like life sciences, electric vehicles and solar,” said Newman, senior wealth advisor at Scotia Wealth Management, who spoke on BNN Bloomberg on Friday.

“You want to own a cyclical name at a time like this,” he said. “They’re also a play to a certain extent on re-shoring some manufacturing activities back into Canada, like Pharma.”

Tech stocks have been doing so-so in recent weeks after what has been called a bonafide correction, with many names like Apple and Alphabet peeling back by as much as 20 per cent over the past from late January into March. The pullback comes after a banner year for tech in 2020 as investors flocked to the FAANG stars whose businesses fared well during the stay-at-home economy brought about by COVID-19.

But the scene appears different today, largely due to the arrival of COVID vaccines and the promise of what by many accounts will be an unprecedented period of economic growth. That expectation has brought cyclical names in sectors such as finance, industrials and even energy stocks back into vogue, as areas of the market that traditionally reflect the cyclical ups and downs of the economy.

“What we’ve seen is a very, very sharp rebound in value,” said James Sullivan, equity researcher at JPMorgan, who spoke on CNBC last Friday. “You’re likely to see a bounce in growth as a result of the extremity of that market move. On a medium-to-long term basis, we still see cyclicals and defensives leading this market higher.”

As for the tech sector, Sullivan said it should take a back seat in 2021.

“Overall tech leadership of markets was taken to an extreme last year. We are seeing valuations that are reasonably high,” Sullivan said. “We don’t necessarily see the large platforms leading these markets higher for the rest of this year.”

For ATS, 2020 saw a slowdown in growth as customers across the spectrum dialed down, especially in transportation, for which revenues dropped by 36 per cent for ATS’ latest quarter, its fiscal third quarter 2021, delivered in early February.

For that Q3 2021, ATS saw overall revenues grow by a slight one per cent year-over-year to $369.7 million while EBITDA nonetheless climbed to $49.7 million from $26.8 million a year earlier.

The bright light came from order bookings, however, which were up 18 per cent compared to a year earlier, while ATS’ order backlog hit $985 million by the end of December, 2020, up five per cent.

“We are encouraged by the strong order bookings activity. As the pandemic evolves globally, we are closely monitoring customer demand signals, and it’s fair to say that some customers remain cautious about approving new capex spend,” said CEO Andrew Hider in the third quarter earnings call. “Our order backlog of $985 million provides us with a solid base of business to offset uncertainty in the short term.”

Newman said ATS Automation looks like a good bet on a comparative basis.

“We expect they’re going to grow their earnings by 39 per cent compound annual growth from 2021 to 2023, yet they’re not appreciated by the market. They’re only trading around 15x 2023 [earnings],” Newman said.

“They have a solid balance sheet, and they’re also a name that can benefit by not just organic growth but by acquisition,” he said. “A couple times in our last few [BNN Bloomberg] shows we’ve been highlighting Magna or we’ve been highlighting Citigroup. Those are great and they still have more to go, but we’re trying to find names that are earlier in their breakout and I think this might be one of them.”

After the third quarter results, National Bank Financial analyst Maxim Sytchev raised his target on ATS from $28.00 to $30.00 with an “Outperform” rating, saying in a client update,

“We continue to like ATA’s Healthcare/Food/Nuclear steady state businesses that should command a higher multiple,” said Mr. Sytchev. “Encouragingly, after the Transport restructuring there appears to be better momentum in the EV space in North America; continued investment in e-commerce is also bringing life to the Consumer vertical.”