ATS Automation is a Buy, says Stifel

Ahead of quarterly earnings from ATS Automation Tooling Systems (ATS Automation Stock Quote, Charts, News, Analysts, Financials TSX:ATA), Stifel GMP analyst Justin Keywood says his bullish thesis on the company and stock is intact, reiterating on Wednesday a “Buy” rating and $66.00 target price. 

Scheduled to report its second quarter fiscal 2023 financials on November 9, custom automation and integration solutions company ATS Automation should hit $611 million in sales in its Q2, according to Keywood, which is higher than the consensus average at $595 million. On EBITDA, Keywood is calling for $95 million for a 15.5 per cent margin compared to the Street’s forecast at $92 million. The analyst also noted that ATS has beaten street estimates for 12 consecutive quarters and 19 out of 22 since the current CEO joined in March, 2017.

“We continue to be bullish on automation and ATS, especially given the low valuation at 11x Forward EBITDA. There are many secular trends at play, including a labor shortage, but we also expect M&A to reignite for ATS with a solid track record and leading to compounding value,” Keywood wrote in a client update.

Keywood commented on ATS’ announcement last month of a new US$167 million contract with an original equipment manufacturer (OEM) who is already an existing customer with ATS to expand their battery assembly systems for the electric vehicle market. ATS said the order will be realized into revenue over the next 15 months, and it follows on a US$70 million contract announced in June with the same OEM.

Keywood said although ATS has been in the EV space for ten years, demand has been rising of late. Keywood noted that for ATS the transportation segment represented 14 per cent of its last 12 months sales, which came almost entirely from EV-related contracts and he estimated ATS to be currently in discussions with over 80 companies on their EV plans.

“We appear to be at an inflection point for EV, where automation lines need to be built prior to the cars. Automation contracts can be 12-24 months in length, suggesting more near-term win opportunities,” Keywood wrote. 

“Our back of the envelope math suggests that the EV opportunity for ATS could be $4 billion to $8 billion, assuming order sizes of $50 million to $100 million with 80 OEMs as the target customer set. As our broad estimated total addressable market indicates, there could be great variability in the size of each order and ATS has now secured at least $310 million from one OEM,” he said.

At the time of publication, Keywood’s $66.00 target represented a projected one-year return of 46 per cent.