ATS has a 38 per cent upside, says Stifel

Industrial automation solutions company ATS Corp (ATS Corp Stock Quote, Charts, News, Analysts, Financials TSX:ATS) has already delivered the goods this year with a year-to-date return of 24 per cent, but investors can expect more upside to come, according to Stifel GMP analyst Justin Keywood, who provided a flash update to clients on Tuesday. Keywood said a newly completed tuck-in acquisition should help boost ATS’ profit margins.

Cambridge, Ontario-based ATS, which has custom automation, repeat automation and automation products and services for manufacturers worldwide, announced on Tuesday the acquisition of US-based Triad Unlimited for an undisclosed amount. Triad has its proprietary Relialytics software which enhances the life cycle performance and maintenance of installed equipment. Founded in 2017, the company has about 30 employees and serves over 50 companies across 23 countries in industries including life sciences and food & beverage.

ATS said the Triad pickup will support the former’s after-sales and service business and thereby enhance its connected asset value chain and predictive maintenance abilities. 

“Adding the Triad team and their differentiated offerings will further our unique value proposition and enable us to support customers throughout their equipment’s lifecycle,” said Simon Roberts, ATS Senior Vice President, After Sales and Services, in a press release. “Triad’s experience and leadership in life sciences, food and beverage, and other key industries offers synergies with both our current and targeted portfolio of customers.”

Triad adds to ATS’ long list of acquisitions in recent years, including automation systems integrator Zi-Argus, announced earlier this month.

Commenting on the Triad deal and beyond, Keywood wrote, “We see Triad as adding to ATS’ after-market services segment, which is recurring in nature and has increased from 12 per cent to ~20 per cent of total sales since 2018, with higher margins. We also see additional deals as positive catalysts for ATS given its strong track record of M&A and an expanding ROIC.”

With the update, Keywood maintained a “Buy” rating on ATS and $75 target price, which at press time represented a projected one-year return of 38.3 per cent.

Keywood said his investment thesis on ATS rests on a number of themes, including a currently strong secular trend for on-shoring; the company’s targeting of high-valued verticals such as healthcare and electric vehicles; a projected margin expansion of over 500 basis points over five years; a new CEO who has reinvigorated ATS’ work culture and over $400 million in M&A capacity to expand its scale and geographic reach.