Revised Targets (Up & Down) Despite a “dynamic operational backdrop,” ATS Automation Tooling Systems Inc. delivered a “strong” fourth-quarter performance and outlook given the “less cyclical nature of company’s end-markets,” according to National Bank Financial analyst Maxim Sytchev.
“Similar to our engineering & consulting peers, inflation rates, and by extension, discount rates, have wreaked havoc on trading multiples (all things being equal, a 17 times EV/EBITDA nine months ago is now = 14.5 times given where the 10-year treasuries are),” he said. “However, as investors became concerned re supply chain issues and the ability to convert backlog to revenue (due to Rockwell’s weak results), ATA was caught up in the sentiment downdraft.
“[Thursday’s] results, however, demonstrate that despite a fluid operating backdrop, ATA continues to effectively navigate the climate BECAUSE it has exposure to defensive/secular growth-focused industries such as Healthcare, Food, EVs and Nuclear. The 32-per-cent share price decline year-to-date is much worse than S&P 500 (down 14 per cent), but we would argue ATA has the characteristics of the type of name one wants to own for the foreseeable future, as consumers are pulling back in their horns (limited exposure) while the supply chain re-localization theme is likely to accelerate as OECD countries try to decouple from Asian dependence.”
Before the bell on Thursday, the Cambridge, Ont.-based company reported revenue of $603.2-million, up 51 per cent year over year and well ahead of the projections of Mr. Sytchev ($586.3-million) ad the Street ($562.7-million). Adjusted earnings per share of 64 cents also topped estimates (50 cents for both).
The analysts deemed ATS’ outlook “positive as defensive end-markets deliver,” calling it “conservative” on backlogs “as per usual.”
“Supply chain/inflation disruptions are being effectively managed,” he said. “No one supplier makes up more than 3.5 per cent of spend and the top 10 make up less than 15 per cent, insulating ATA as a result chip shortages/EU macroeconomic climate, etc. The company’s supply chain is also 80-per-cent protected from price increases by being pre-sourced before a quote is given for a program, helping shield against inflation of component pricing. While the company is seeing the situation as ‘dynamic” (some raw material price increases and extended lead times for typically short lead time products are taking place), ATA is managing through these challenges (adjusting for lead times, factoring wage increases in contracts, and by planning ahead allowing for flexibility).”
“Capital allocation – M&A acquisition funnel is healthy (question is at what price?) .... M&A funnel remains healthy, even though we presume the calculation around accretion now has to take into account its own valuation (hence, ATA becoming active on NCIB in April). Capex for the year is expected to be in $90 - $110-million range as ATA is adding capacity to the existing locations and invests in innovation.”
Reiterating an “outperform” rating, Mr. Sytchev cut his target to $52 from $66 with an “outperform” rating after accounting for the rising cost of capital. The average on the Street is $58.50.
Elsewhere, Scotia Capital’s Mark Neville raised his target to $55 from $53 with a “sector outperform” rating.