Still more upside to ATS Automation, this investor says

Canadian tech success story ATS Automation Tooling Systems (ATS Automation Stock Quote, Charts, News, Analysts, Financials TSX:ATA) has come a long way over the past 12 months, but don’t think the run is over yet, says David Burrows, who has ATS as a Top Pick for the year ahead.

“ATS has been around forever. They had a lot of business in the transportation area,” says Burrows, president of Barometer Capital Management, who spoke on BNN Bloomberg on Thursday.

“It was always a pretty thin stock, so it was difficult for an institution to own [it]. The stock has become more liquid, but they really have grown into life sciences and food and beverage and consumer products,” he said.

“We all know that companies are looking for ways to automate. In a world where input costs are going up and employment costs are going up, there is going to be no shortage of companies that as they look to start investing in their capital infrastructure are going to look to add to their automation,” Burrows said.

After literally years of going no place special, ATS Automation started to pop last fall as the impact of COVID-19 on businesses caused a surge in demand for its products and services. The stock went from about $20 last September to above $35 by July of this year. Now, with its most recent quarterly earnings report, ATS is now up above $40.

Cambridge, Ontario-based ATS Automation makes custom automation and integration solutions for companies in markets such as life sciences, food and beverage, transportation, consumer products and energy. The company is international in scope with now 28 facilities across 20 countries and over 5,000 employees.

Burrows says the tailwinds for ATS are still strong.

“There’s a great backdrop for automation,” he said. “I recommended a couple of years ago the ROBO [Global Robotics and Automation NYSE: ROBO] and BOTZ [Global X Robotics & Artificial Intelligence NASDAQ:BOTZ] ETFs, which have exposure to robotics and automation.”

“But in our own backyard here, I think ATS is a great business and it could grow for a long time. With their most recent earnings they beat the estimate by 50 per cent. I think their order book was up 74 per cent year-over-year, and they’re going to have opportunity to make acquisitions along the way,” he said.

“So, I think this can be quite an exciting story and one that I hopefully will own for quite some time,” Burrows said.

Stifel GMP analyst Justin Keywood would tend to agree. The analyst said in a July 27 report that the backdrop for ATS Automation’s business features rising costs, supply chain challenges and a tight labour market, all of which point to a strong demand for automation, one which has been clearly evident in the results of ATS’s peers in the industry.

“We forecast 37 per cent year-over-year growth in sales and 44 per cent growth in EBITDA over the next 12 months [for ATS],” said Keywood in his report. “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.”

“We see a strong investment case for higher valuation for ATA, despite the recent outperformance,” Keywood wrote.

For ATS’s fiscal first quarter 2022, delivered on August 11 and for the period ended June 27, the company showed revenue up 57 per cent year-over-year to $510.6 million. Adjusted EBITDA almost doubled from $39.2 million for the Q1 2021 to $77.9 million, while EPS came in at $0.37 per share compared to $0.11 per share a year earlier.

What’s more, the company’s order bookings jumped by 96 per cent from a year ago to $637 million, while the order backlog climbed 37 per cent to $1.248 billion.

“First quarter performance featured strong organic revenue growth, contributions from strategic acquisitions, record Order Bookings and progress toward our margin expansion objective,” said Andrew Hider, CEO, in a press release. 

“These results reflected good execution, and compared to a year ago, a more stable economic environment. We are proud of the ongoing efforts of the ATS team worldwide to address customer needs during the pandemic while maintaining our focus on continuous improvement through the ATS Business Model. Looking ahead, our record Order Backlog provides good revenue visibility, our balance sheet enables us to pursue our M&A strategy and we are positioned well to create long-term shareholder value,” Hider said.

Looking ahead, the company said in the fiscal Q1 report that the funnel (which includes customer requests for proposals and identified customer opportunities) in its life sciences and food and beverage businesses remain robust, while strategic opportunities lie ahead in transportation and funnel activity in consumer products has improved.