Stifel GMP analyst Justin Keywood has marked ATS Automation Tooling Systems (ATS Automation Stock Quote, Chart, News, Analysts, Financials TSX:ATA) as an automatic win for investors, maintaining a “Buy” rating and raising his target price from $58.50/share to $61/share in an update to clients on Thursday.
Keywood and Stifel have already given and are reconfirming a Top Pick for 2022 status for ATS, a custom automation and integration solutions and services company for businesses in a range of markets, with Stifel having consistently raised its target price on ATS going back to December 2018.
The latest target price increase comes ahead of ATS releasing its third quarter financial results on February 2, which Keywood expects to be a good one.
“Overall, we expect a strong quarter for ATS, as demonstrated in our street high estimate and raised forecasts,” Keywood said. “Although we are less focused on any particular quarter and view ATS as a multi-year compounder, we see a very constructive backdrop for automation and ATS generally outperforms the industry.”
With the official release just a few days away, Keywood raised his expectations for the ATS quarterly results to predict revenue of $520 million for the period ended December 31, suggesting a 40 per cent year-over-year increase and coming out ahead of the consensus estimate of $500 million, along with representing the top end of a guided backlog conversion range of 35 to 40 per cent.
Organic growth also benefits, with Keywood’s projections implying a growth figure of near 15 per cent.
Keywood noted a positive share price driver to be the company’s bookings forecast, which he increased from $500 million to $550 million for a 27 per cent year-over-year increase and a book to bill ratio above 1.00.
Meanwhile, Keywood projects a more modest EBITDA of $79 million, though the figure would still represent a 58 per cent year-over-year increase and a margin of 15 per cent. Cash flow appears poised to once again be a strong point for ATS, as Keywood projects $49 million in cash from ops in the quarter for a five per cent jump compared to the trailing nine month analysis.
ATS has been busy of late, opening 2022 by announcing the acquisition of HSG Engineering, an Italian industrial automation system integrator primarily serving the pharmaceutical sector, though financial terms were not disclosed.
HSG joins ATS’ Process Automation Solutions (“PA”) business, an independent provider of complete automation solutions for the process and manufacturing industries.
“At PA, we are closing the gap between IT and operational technology in production,” said Dr. Christian Debus, President of PA in a January 7 press release. “Integration is in our DNA. With our combined expertise in automation, digitalization, data analytics and AI, we are the partner of choice for global industrial companies looking to make the best use of their data to drive operational performance.”
The upcoming financial forecasts lend credence to Keywood’s financial projections, as he expects a revenue climb to $2.12 billion in the 2022 fiscal year, implying a 48.2 per cent year-over-year increase. Looking to 2023, Keywood projects revenue of $2.49 billion, good for a 17.7 per cent potential year-over-year jump.
Keywood also projects the company’s margins to expand, with the EBITDA projections forecasting an expansion from 13 per cent in 2021 to 15 per cent ($325 million) in 2022 and 17 per cent ($414 million) in 2023. Meanwhile, Keywood expects the company’s gross margin to expand from the reported 27 per cent in 2021 to 28 per cent ($601 million) in 2022, then growing again to 29 per cent ($711 million) in 2023.
The company’s EPS picture also looks brighter, with Keywood projecting a jump from $0.69/share in 2021 to $1.71/share in 2022, then increasing to $2.44/share in 2023.
Keywood’s valuation metrics also make for a positive showcase for ATS, as Keywood projects the company’s EV/Revenue multiple to drop from 3.9x in 2021 to 2.6x in 2022 and 2.2x in 2023. The EV/EBITDA multiple follows a similar path with a forecasted drop from 29.1x in 2021 to 17.1x in 2022 and 13.4x in 2023, while the P/E multiple is projected to drop from 74.3x in 2021 to 30x in 2022, then to 21x in 2023.
“Our more optimistic outlook is based on analyzing automation peer results, ATS’ customer developments and continued confidence in management’s ability to execute in a strong growth market,” Keywood said. “Automation is not going away and the pandemic has spurred accelerated growth with the backdrop of inflation, rising wages, supply chain disruptions, among other factors. ATS is executing well by serving high valued end markets (Life Sciences, Food & Beverage, EV and Nuclear) as demonstrated with strong organic growth and rising margins.”
ATS has seen its stock price climb over the last 12 months with a 133.3 per cent return and a return of one per cent since 2022 began. ATS got a late Christmas present with a 52-week high of $51.49/share on December 29, more than double its 52-week low of $21.74/share from a year ago today.
At press time, Keywood’s new $61.00 target implied a 12-month return of 19 per cent.