Revised TargetsAs always, the market massively overreacts, particularly given that the targets aren't bad and RJ actually raised theirs. GLTA
While its third-quarter results topped his expectations, Scotia Capital analyst Michael Doumet downgraded ATS Corp. to “sector perform” from “sector outperform” previously, believing its shares are fairly valued and preferring to “look for a more attractive entry point.”
“ATS has gone through a transformation in the last few years — becoming an undisputed earnings compounder,” he said. “However, we believe organic growth, which has been accelerated via-outsized growth in Transportation, is at risk of normalizing in the NTM [next 12 months]. And, while the delayed EV order ($200 million) is expected to restart in 1QF25, we expect consolidated organic growth in F25 to be flattish — if not at risk of declining if EV orders continue to be deferred. Additionally, we believe this ‘stop-start’ with large EV orders will lead to variability in labour utilization, and therefore, margin pressure.
“In the last six months, we believe the bull/bear thesis has reflected the push/pull on sentiment between the potential normalization of EV sales and the growth of GLP1/Life Sciences. In the next few quarters, we believe the risks in EV sales are greater and, as such, believe the perception of ATS’s earnings base will need to be reset lower in the near-term.”
On Wednesday before the bell, the Cambridge, Ont.-based industrial automation systems manufacturer reported sales of $752-million, up 16.2 per cent and above Mr. Doumet’s $727-million estimate. Earnings per share of 65 cents fell in line with expectations.
“ATS’s growing EV business has been one of its major recent successes. In the last two years, Transportation sales grew from $280 million to $910 million,” the analyst said. “That organic growth of $630 million has outstripped the company’s consolidated organic growth (on a dollar basis) during the period. To be fair, Life Sciences had grown rapidly prior to the two-year period — and in the last two years, growth had normalized. Now, with GLP1s accelerating, ATS’s Life Science organic growth is likely to get a shot in the arm. However, similar to the last two years, we think EVs will have a greater directional weight on revenue growth — and, as such, believe the risk to organic growth is to the downside.
“Due to lower-than-expected uptake in EVs, OEMs have been reducing or postponing EV-related capex. In the quarter, ATS noted that $200 million of order backlog from one EV customer was delayed — so far, into 1QF25. The delay reduced the revenue expectation for 4QF24. It is also expected to weigh on margins due to the reduced labour utilization (we estimate a 130 basis points headwind to gross margins in 4QF24). ATS expects the delayed program to restart in 1QF25. As highlighted in our previous research, we believe the normalization in EV could represent a more than 6-per-cent headwind to organic growth. Meanwhile, we believe growth from GLP1s will be less than 5 per cent.”
With the expectation, Mr. Doumet lowered his target to $61 from $64. The average on the Street is $66.14.
Elsewhere, others making changes include:
* Stifel’s Justin Keywood to $73 from $75 with a “buy” rating.
“ATS reported mixed FQ3 results with solid sales growth and FCF generation with some margin expansion, " he said. “However, bookings missed our estimate and a range we would consider to be adequate with a significant, (85-per-cent) contraction in EV
“ATS’ shares were slightly elevated, heading into FQ3 on the back of buzz within the GLP-1 space, which continues to be a substantial opportunity. We remain bullish on ATS, especially upon M&A with a track record to support value creation, including ROIC expansion, along with a diversification opportunity from EV and one large customer.”
* National Bank’s Maxim Sytchev to $65 from $69 with an “outperform” rating.
“With a number of investors staying away on concerns of book-to-bill slipping below 1.0 times (we were at 0.9 times in the Q), we don’t believe there was aggressive positioning on the part of investors, especially in light of ROK’s underwhelming results,” said Mr. Sytchev. “Perhaps that better explains the better than feared reaction to [Wednesday’s] outlook, which, objectively, was a negative surprise but at least had a time frame associated with it – restart for the EV order in June 2024 quarter (according to management). Overall, we do believe we are going to see the resumption of EV momentum as OEMs figure out the pace of capacity additions. Healthcare is a strong vertical for the company as are Food and Nuclear. Net net, the EV overhang is not removed but arguably has become more acute in the short term.”
* Raymond James’ Michael Glen to $65 from $61 with an “outperform” rating.