There’s still upside to ATS Automation, says Stifel GMP

ATS Automation (ATS Automation Stock Quote, Chart, News, Analysts, Financials TSX:ATA) has been on an amazing run over the past few months, but investors can still profit from buying the stock, according to Stifel GMP analyst Justin Keywood. In a company update to clients on Wednesday, Keywood reasserted his “Buy” rating and raised his target price from $35.00 to $38.00, saying ATS Automation is still trading at a discount to its peers.

Stifel hosted ATS Automation at the Stifel Canada CSI conference on Tuesday with Keywood commenting on the above average organic growth coming from ATS, which is a leading provider of custom automation solutions to a wide range of manufacturing industries worldwide. The company has 20 manufacturing facilities worldwide, employing about 4,200 people across North America, Europe, Southeast Asia and China.

“We were pleased to host ATS Automation at the Stifel Canada CSI conference today and continue to have high conviction for greater returns with a combination of solid growth (+28 per cent in the next 12 months), at a discounted valuation of 12x C2021e EBITDA versus peers at 20x,” Keywood wrote.

“We also reviewed our forecasts, factored in the recently announced BioDot acquisition ($106 million) and rolled out our F2023 estimates, leading to our new $38 target,” he said.

Keywood expects ATS to have fiscal 2021 (year end March 31) revenue and EBITDA of $1.43 billion and $186.2 million, respectively, fiscal 2022 revenue and EBITDA of $!.89 billion and $265.6 million, respectively, and fiscal 2023 revenue and EBITDA of $2.05 billion and $296.4 million, respectively.

Keywood said the automation industry has been growing at a three-to-five-per-cent clip annually while ATS has achieved nine-per-cent growth in the three years prior to the pandemic. The analyst thinks that trend should continue, in part due to on-shoring movements by industries. The COVID-19 pandemic has revealed vulnerabilities in supply chains, pushing companies towards on-shoring. That’s to the benefit of ATS, Keywood argued, especially in the healthcare industry where ATS has exposure ($820 million in pro-forma sales) with Tier 1 customers.

At the same time, Keywood noted management’s stated goal of improving operating profit margins by 500 bps over five years, with about half of that goal already achieved.

Along with its organic growth profile, Keywood highlighted ATS’ M&A activity, which he says is ramping up. The company currently has over $650 million in capacity to expand its scale and geographic reach, with Keywood projecting two to three deals in the $100-million range per year. ATS’s most recent announcement was a definitive agreement to acquire automated fluid dispensing systems manufacturer BioDot for about $106 million, announced on April 14.

“ATS has deployed ~$600 million into solid transactions with the current management team, and we still see a wide pipeline for M&A in a fragmented automation industry. ATS is seeking scale but also new products, technology, and geographies to overall better serve customers and improve margins. We believe that ATS’s current pipeline for targets is well over 30 assets,” Keywood wrote.

Keywood said ATS has a legacy investor view surrounding it but he argued that perception is now fading as the company continues to execute. Keywood pointed out that about 75 per cent of ATS’s sales are now in resilient verticals like healthcare and food automation whereas only 40 per cent were positioned such in 2013.

Yet despite the changes in the company — a transformed business in high valued verticals, good management team, and solid growth outlook, including M&A — Keywood said ATS is still trading at a depressed valuation at 12x 2021 EBITDA compared to its automation and robotics peers at about 20x.

“We see ATS as in the early innings of a multiyear value creation plan and expect valuation to re-rate higher, towards peers on much greater scale,” Keywood wrote.

At the time of publication, Keywood’s $38.00 target represented a projected 12-month return of 26.5 per cent. ATS’s share price finished 2020 up four per cent, while so far in 2021 the stock is up 34 per cent.

ATS Automation last delivered its financial results in early February where its third quarter fiscal 2021 featured revenue up one per cent year-over-year to $369.7 million and EBITDA of $49.7 million compared to $26.8 million a year earlier. For the nine months ending December 27, 2020, ATS’s revenue was $1.030 billion compared to $1.048 billion at the same point in fiscal 2020.

The company reported order bookings at $435 million, representing an 18 per cent year-over-year increase, and an order backlog up five per cent to $985 million.

“Operationally, our teams drove meaningful margin expansion in line with our long-term plan despite the challenges brought on by the Covid-19 environment. Our record Order Backlog and strong balance sheet position us well to execute our value creation strategy, build, grow and expand,” said CEO Andrew Hider in a press release.