ATS Automation has a 91 per cent runway, says Stifel

Stifel GMP analyst Justin Keywood is still actively behind ATS Automation Tooling Systems (ATS Automation Stock Quote, Chart, News, Analysts, Financials TSX:ATA), maintaining a “Buy” rating and $66/share target price for a one-year projected return of 91.1 per cent in an update to clients on Tuesday.

Cambridge, Ont.-based ATS is a custom automation and integration solutions and services company for businesses in a range of markets.

Keywood’s newest update comes ahead of the company’s fourth quarter and year-end financial results for the 2022 fiscal year, which are expected to arrive on May 19.

“Despite the high volatility in ATS’ shares and substantial recent weakness, we see continued strength in the fundamentals and expect good FQ4 results,” Keywood said.

Keywood is forecasting $600 million in revenue for ATS in its final quarter for a 50 per cent year-over-year increase while implying organic expansion of between 10 and 15 per cent, all the while putting the company at a projected $2.18 billion in total revenue to wrap up the fiscal year for a year-over-year increase of 52.4 per cent. 

Keywood’s forecast is slightly more optimistic than that of the consensus, which forecasts $570 million in revenue for the quarter.

Looking ahead to 2023, Keywood maintains a $2.5 billion revenue projection for a potential year-over-year increase of 14.7 per cent. In terms of valuation, Keywood forecasts the EV/Revenue multiple to drop from 2.8x in 2021 to a projected 1.8x in 2022, then to a projected 1.6x in 2023.

Keywood also forecasts 50 per cent growth in the company’s EBITDA, with the $92 million projection with a 15.4 per cent margin being more in line with the consensus expectation of $90 million.

“We consider 50 per cent growth in sales and EBITDA as strong results that are contrary to the recent pressure,” Keywood said. “Our view is predicated on ATS’ recent record backlog, its resilient growth verticals and being able to withstand supply chain headwinds much better than peers with longer duration contracts.”

According to Keywood, the company’s M&A pipeline remains plentifyl, with an aim toward acquisitions in the Life Science and Food/Beverage verticals. ATS also has its eye on technology that could affect multiple verticals, as evidenced by its February acquisition of VASPAC, a Canadian organization focused on software quality assurance and specialized consulting to the nuclear industry.

Keywood also believes ATS is uniquely equipped to handle supply chain disruptions by employing a global supply chain group to manage purchases and to serve as a risk mitigation tool, while on-shoring automation is also in the early stages of having an impact on ATS.

ATS has seen its share price drop off by 29.2 per cent since the start of 2022, taking a downturn after a peak of $52.99/share on February 1, culminating in a 2022 low of $34.54/share on Tuesday.

Overall, Keywood believes the upcoming financial results will clear up any misconceptions investors might have in regards to the company.

“We see the recent share price pressure for ATS as contrary to the fundamentals of the business, where FQ4 results should help provide clarity,” Kewood said. “Although supply chain risk remains dynamic, we see ATS as much better positioned to manage headwinds with longer duration contracts and to outperform peers.”