Hot stock ATS Automation still has room to grow, says Stifel GMP

ATS Automation (ATS Automation Stock Quote, Chart, News, Analysts, Financials TSX:ATA) has been on an upward trajectory for the better part of a year, and Stifel GMP analyst Justin Keywood believes that trend will continue. Keywood maintained his “Buy” rating and target price of $45.00/share with a few adjustments in his latest report on Tuesday.

Cambridge, Ontario-headquartered ATS Automation is a custom automation and integration solutions and services company for businesses in a range of markets including life sciences, food and beverage, transportation, consumer products and energy. ATS has over 5,000 employees worldwide with 28 facilities across 20 countries and a current market cap of 3.1 billion.

Keywood firmly believes ATS is in a strong market position, particularly with automation playing an increasingly prominent role in business operations on account of rising costs and a tight labour market.

“Our higher estimate reflects strength exhibited by automation peers with a backdrop of rising costs, supply chain challenges and a tight labour market, leading to robust automation demand,” he said. “ATS also operates in verticals that are seeing above average demand, including life sciences and food and beverage.”

Keywood expects ATS to continue its positive momentum from a financial perspective, as he has projected $1.96 billion in revenue for the 2022 fiscal year with an EBITDA of $275.3 million, jumping to a projected $2.13 billion topline in 2023 with a forecasted $316.4 million in EBITDA.

Valuation ratios are projected to come down slightly over the next few years, with Keywood projecting the company’s EV/Revenue multiple to drop from 2.7x in the 2021 fiscal year to a projected 2.0x in 2022, then dipping to an estimated 1.8x in 2023.

Shifting the focus to EV/EBITDA, Keywood projects this multiple to drop from the 2021 report of 20.3x to a forecasted 14.1x for 2022, then again to 12.2x in 2023. The price-earnings ratio is also set to drop, with Keywood projecting a move from 53.4x in 2021 to 22.9x in 2022, then to 19.3x in 2023.

ATS will release its fiscal first quarter 2022 results on August 11. Since reporting its fiscal Q4 2021 results, ATS has stayed busy through an array of mergers and acquisitions, starting with the $84 million purchase of Irving, California-based BioDot Inc., which manufactures premium, non-contact and quantitative fluid dispensing systems serving customers in point-of-care and clinical diagnostics and other segments of the life sciences market.

In June, ATS announced its intent to acquire Dublin, Ireland-based Control and Information Management, a system integrator with a focus on industrial automation, offering a full spectrum of automation related services including system development, upgrades, technical support, project management and validation consultancy.

Keywood said ATS still has a wide pipeline of  over 30 assets in its sights, including some larger deals.

“ATS’ dry powder for M&A with the current balance sheet is estimated at $400-$600 million with a target net debt/EBITDA ratio of 2.5x-3.0x (~1.7x currently),” Keywood said. “Deleveraging can happen relatively quickly with a 1x turn in net debt/EBITDA per year. We see further M&A as catalysts, given the track record of success with $600 million recently deployed and supporting high growth forecasts.”

The company also recently reached a $120 million booking extension with a pre-existing confidential customer to manufacture, build, deliver, and install several fully automated manufacturing systems that will enable the customer to expand its operational footprint globally.

“This is an important award for ATS that fully leverages the differentiated capabilities, innovations and services of our proven life sciences business,” said Andrew Hider, CEO of ATS in the company’s June 2 press release. “We look forward to delivering to plan. This is a strategic program for our customer, and we are proud to play an important role in its efforts to scale operations globally.”

Finally, Keywood addressed ATS’ Environmental, Social and Governance (ESG) credentials, saying the company ranks well by Stifel’s ESG framework and analysis. Keywood noted that ESG is becoming an increasing focus for investors and can make up a broad set of criteria that can direct fund flows into investment.

ATS does come with some risks, the analyst said, primarily from cyclical, competitive and acquisition standpoints, but with 2021’s first quarter results coming on August 11, Keywood’s enhanced optimism regarding ATS stems from the expectation of high-growth quarters in the near future.

“We forecast 37 per cent year-over-year growth in sales and 44 per cent growth in EBITDA over the next 12 months,” he said. “Our sales forecast includes ten per cent organic growth, which we see as conservative, with the remaining attributable to recent M&A. Our 37 per cent growth forecast, combined with 14 per cent EBITDA margins, sums to 51 per cent and exceeds the Rule of 40, which we see as leading to a premium valuation.”

At the time of publication, Keywood’s $45.00 target represented a projected one-year return of 22.1 per cent. ATS’ share price has doubled since this past November. The stock has been up around its all-time high of about $37 over the past two weeks.