ATS Corp is our best idea, says Stifel

Stifel GMP analyst Justin Keywood maintained a “Buy” rating on ATS Corporation (ATS Corp Stock Quote, Charts, News, Analysts, Financials TSX:ATS) in a Tuesday report to clients, saying that stock continues to trade at a discount to its peers. Keywood said current levels represent a compelling entry point for investors and he kept ATS as both a Top Pick for Stifel as well as their best idea.

Cambridge, Ontario’s ATS Corp went through a name and ticker symbol adjustment last month, going from ATS Automation Tooling Systems and “ATA” on the Toronto Stock Exchange to just ATS and “ATS.” Management said in a November 21 press release that the move gives a nod to the company’s past while also signalling that its capabilities are, “now broader, more diverse and technologically advanced.”

With a $4 billion market cap, ATS saw its share price rise to a double in 2021, while 2022 has been less bountiful, as the stock is currently down about 12 per cent for the year.

But Keywood argues that secular trends support the automation sector, with the $200-billion-plus industry growing at a mid-single digit pace and supported by rising labour costs, on- and near-shoring as well as the demand for higher quality manufacturing and technology improvements.

As for ATS, Keywood pointed to its five-year average organic growth rate of nine per cent while also highlighting the company’s track record on M&A, where it has deployed $1.3 billion on 15 transactions since 2018. 

Commenting on ATS’ recent announcement of a share buyback program, one which gives the company the option to purchase and cancel up to 7.3 million common shares (about ten per cent of its public float), Keywood wrote,

“We do not anticipate that ATS will be utilizing the NCIB at current levels, but it provides a tool to when the stock price is severely disjointed from the fundamental value of the business. We also note that ATS successfully used the NCIB in the past at $16/$18 in 2020. More broadly, ATS continues to trade at a discount valuation of 12x 2023 EBITDA versus peers at 15x. ATS remains our top pick,” Keywood said.

On ATS’ financials, Keywood is projecting full fiscal 2023 (year end March) revenue of $2.58 billion compared to $2.18 billion in fiscal 2022 and 2023 EBITDA of $426.4 million compared to $343.8 million in 2022. With his “Buy” rating, Keywood maintained his target price at $66.00, which at press time represented a projected one-year return of 48.6 per cent.

“The stock is still relatively unknown to a broader investment base, despite the company having global operations and ~50 per cent of sales tied to the U.S. The fundamentals of ATS continue to show strength, despite the tough market backdrop, including record CQ3 order bookings and ~50 per cent organic growth. We maintain our $66 target and highlight ATS as our best idea,” he said.