ATS Automation is a Buy, says Stifel

It’s a new day for ATS Automation (ATS Automation Stock Quote, Charts, News, Analysts, Financials TSX:ATS) after the Canadian automation tech company recently joined the NYSE with an IPO which generated US$282.9 million in gross proceeds. And the stock has a bright future, too, according to Stifel GMP analyst Justin Keywood, who in a Monday note to clients resumed coverage with a “Buy” rating and reiterated a 12-month target price of $75.00, saying a record backlog, M&A potential and skin in the electric vehicle game are all positives for ATS.

Headquartered in Cambridge, ON, ATS is a custom automation solutions company to manufacturing businesses worldwide. ATS closed on May 30 its initial public offering of 6.9 million shares including 900K shares in over-allotment at US$41 per share.

The company said it will use the net proceeds for strategic opportunities including acquisitions and for working capital and general corporate purposes.

“Consistent with ATS’ value creation strategy, ATS may execute on strategic opportunities, including disciplined acquisitions, if and when such opportunities arise, that drive the creation of long-term sustainable shareholder value,” ATS said in a statement.

Keywood said investors can expect ATS to reignite its M&A engines after the IPO. The analyst pointed to the $1.5 billion in capital deployed over the past five years ono 16 deals, with a ROE more than doubling from five to 13 per cent. Keywood believes ATS is analyzing dozens of deals at the moment as the company looks to boost its product offerings and broaden its geographic reach.

“If ATS can transact at reasonable multiples, M&A should serve as a positive catalyst with a track record to support. ATS’ bolstered balance sheet and the potential use of NYSE shares to facilitate transactions also highlights a re-rating scenario,” Keywood wrote.

Keywood pointed to ATS’ record backlog which last stood at $2.1 billion, up 50 per cent year-over-year, with the company typically converting its backlog over nine to 12 months.

As well, Keywood noted that EV demand is now inflecting as original equipment manufacturers (OEMs) ramp up their capital investments to partake in the boom. He said ATS’ Transportation/EV segment doubled over the fiscal 2023 year to represent 22 per cent of total sales and the company is working with eight other OEMs on EV plans.

“We see a solid case for ATS to win additional EV awards to diversify its revenue stream within the segment,” he wrote.

“Our thesis remains largely unchanged, where we see a path to $75.00 as secular strength in automation continues, good baked-in near-term results contribute with potential new EV contracts and M&A serving as catalysts. ATS’ valuation gap has narrowed, towards peers at now 13.5x F2024 EBITDA vs. comps at 15x but can still close further, upon EV wins/M&A to de-risk further momentum,” Keywood said.

At the time of publication, Keywood’s $75 target represented a projected one-year return of 29 per cent.