ATS Automation is heading north of $60, says Stifel

ATS Automation Tooling Systems (ATS Automation Stock Quote, Chart, News, Analysts, Financials TSX:ATA) has fallen a long way this year but Stifel GMP analyst Justin Keywood remains an ardent supporter by maintaining a “Buy” rating and $66/share target price for a one-year projected return of 90.3 per cent in an update to clients on Thursday.

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 after the company released its fourth quarter and year-end financial results for the 2022 fiscal year, which Keywood noted to have outperformed peers.

“Automation demand clearly remains robust and ATS operates in the valuable segments of Life Sciences, Food & Beverage and EV, leading to outperformance,” Keywood said. “ATS’ business model also positions the company well for supply chain headwinds with longer duration contracts, where greater lead times can be better managed vs. peers.”

The fiscal fourth quarter for ATS was headlined by revenue that beat even the strongest expectations, with its $603.2 million report coming in ahead of Keywood’s $600 million estimate while significantly outdoing the consensus projection of approximately $558 million. The figure also represents a sequential increase of 10 per cent and year-over-year growth of 51 per cent.

Life Sciences was again the strongest vertical for ATS as it accounted for 53 per cent of the company’s sales, good for a 40 per cent year-over-year increase. Meanwhile, Food and Beverage had the steepest growth to 16 per cent of overall sales, an 870 per cent year-over-year increase bolstered by its acquisition and integration of CFT Group. The transportation vertical was also up 17 per cent year-over-year to account for 13 per cent sales, while Nuclear accounted for the rest with a 23 per cent year-over-year decrease.

On the margins, ATS reported $99.1 million in adjusted EBITDA for a 16.4 per cent margin, up 69 per cent year-over-year to beat the Stifel projection of $92.1 million (15.4 per cent margin) and the consensus estimate of $90.5 million (16.2 per cent margin).

Looking ahead, bookings came in at $638 million in the quarter for a 38 per cent year-over-year increase while beating the Stifel projection of $620 million. The company’s order backlog was also a strong indicator at $1.4 billion for a 24 per cent year-over-year increase.

All told, ATS ended the fourth quarter with $135.1 million in cash and equivalents available, along with an estimated $400 million for mergers and acquisitions, against net debt of $966.1 million.

“Fourth quarter performance featured record revenues, strong Order Bookings and continued adjusted EBIT margin expansion as core operations and new acquisitions combined to deliver value in a complex and volatile global environment,” said Andrew Hider, Chief Executive Officer of ATS Automation in the company’s May 19 press release. “Our emphasis on serving regulated industries, the size and diversification of our Order Backlog, and the rigorous application of the ATS Business Model by our dedicated teams position us well for the start of our new fiscal year.”

With the fourth quarter results now in, ATS wrapped up its 2022 fiscal year with revenue of $2.18 billion for a year-over-year increase of 52.4 per cent. Looking ahead to 2023, Keywood expects that number to again climb, with his $2.56 billion estimate representing a potential year-over-year increase of 17.4 per cent.

In terms of valuation, Keywood forecasts the company’s EV/Revenue multiple to drop from the reported 2.9x in 2021 to a 1.9x figure for 2022, followed by a further drop to a projected 1.6x in 2023.

The company’s EBITDA increased significantly in 2022, with the $337 million report representing a year-over-year increase of 76.8 per cent, along with an implied margin of 15.5 per cent. For 2023, Keywood forecasts EBITDA to be $420.8 million for an implied margin of 16.4 per cent.

From a valuation perspective, Keywood forecasts the company’s EV/EBITDA multiple to drop from the reported 21.5x in 2021 to a 12.2x figure in 2022, then dropping to a projected 9.7x in 2023.

Overall, Keywood continues to believe in ATS’ ability to execute on its objectives despite supply chain disruptions, rising costs/wages and a tight labour market.

“ATS’ shares have seen substantial pressure heading into FQ4 results, but the speculated weakness does not conform to the strength of the business and we see no reason to change our views or target price,” Keywood said. “The stock continues to trade at a steep discount at ~9.5x forward EBITDA vs. comps at 16x, setting up for a re-rating on continued solid execution.”

ATS Automation has seen its stock price tumble by 30.1 per cent since the start of 2022, hitting an early peak of $52.99/share on February 1 before beginning its descent, which went as low as $30.99/share on Wednesday.