ATS Automation remains our Top Pick for 2022, says Stifel

Stifel GMP analyst Justin Keywood continues to be bullish on ATS Automation Tooling Systems (ATS Automation Stock Quote, Chart, News, Analysts, Financials TSX:ATA), maintaining a “Buy” rating and Top Pick status as Keywood raised his target price from $61/share to $66/share for an implied return of 29.4 per cent in an update to clients on Wednesday.

The latest target price increase comes after ATS, a Cambridge, Ontario-based custom automation and integration solutions and services company, released its third quarter financial results for the 2022 fiscal year, which Keywood reported to be strong.

“ATS is executing well in an above-average growth industry with the backdrop of supply chain disruptions, rising costs/wages and a tight labour market,” Keywood said. “ATS operates in the higher valued verticals within the industry, like Life Sciences (55 per cent of sales) and leading to even higher growth. The company is also executing on a disciplined M&A program through largely a cultivation strategy at favourable multiples.”

ATS set a company record with $546.8 million in revenue in the quarter, producing a 48 per cent year-over-year increase while soundly beating Keywood’s $520 million estimate, along with the consensus projection of $500 million. The company also produced 21.5 per cent organic growth in the quarter, significantly outpacing Keywood’s forecast of 15 per cent organic growth.

The Life Sciences vertical grew 42 per cent year-over-year, while the Food and Beverage vertical, which accounts for 20 per cent of the company’s revenue mix, went up 757 per cent, driven by the company’s CFT acquisition along with organic growth.

Meanwhile, ATS also produced $83.5 million in adjusted EBITDA for a 15.3 per cent margin in the quarter and a 68 per cent year-over-year increase, slightly beating Keywood’s projection of $78 million in adjusted EBITDA for a 15 per cent margin. Keywood also noted that adjusted EBITDA added back one-time items but did not add back $13 million in stock-based compensation, which could suggest higher margins.

“The third quarter of fiscal 2022 featured record Order Bookings, Order Backlog, and revenues driven by both organic growth and solid contributions from our acquisitions. The deployment of the ABM and effective countermeasures put in place to protect our people and our operations resulted in good results for customers and shareholders despite the resurgence of the COVID-19 pandemic and ongoing supply chain disruptions,” said Andrew Hider, Chief Executive Officer in the company’s February 2 press release. “Our record Order Backlog provides good revenue visibility and our strong balance sheet enables us to continue supporting our growth strategies.”

The new financial results have prompted Keywood to revise his financial projections, as he now expects a revenue climb to $2.18 billion in the 2022 fiscal year (previously $2.12 billion), implying a 52.4 per cent year-over-year increase. Looking to 2023, Keywood projects revenue of $2.5 billion (previously $2.49 billion), good for a 14.7 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 ($337 million, previously $325 million) in 2022 and 17 per cent ($422 million, previously $414 million) in 2023. Meanwhile, Keywood expects the company’s gross margin to expand from the reported 27 per cent in 2021 to 29 per cent and $629 million (previously 28 per cent and $601 million) in 2022, then remaining at 29 per cent with $735 million in EBITDA (previously $711 million) in 2023.

The company’s EPS picture also looks brighter, with Keywood projecting a jump from $0.69/share in 2021 to $1.74/share (previously $1.71/share) in 2022, then increasing to $2.47/share (previously $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 2.5x 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 16.5x in 2022 and 13.1x in 2023, while the P/E multiple is projected to drop from 73.9x in 2021 to 29.3x in 2022, then to 20.7x in 2023.

Keywood has a track record of being positive on ATS, having consistently raised his target going back to December 2018.

“We increased our target price from $61 to $66 based on 16x (15.5x prior) and slightly higher F2023 EBITDA estimates,” Keywood said. “We see justification for higher valuation with the solid organic growth, margin expansion and with M&A looming as catalysts.”

ATS has seen its stock price climb over the last 12 months with a 92.6 per cent return, though it has yielded a minimal loss of 0.8 per cent since 2022 began. ATS achieved a new 52-week high of $52.99/share on Tuesday, more than double its 52-week low of $25.70/share from February 8.