Keystone FinancialFor those unfamiliar with Keystone (Ryan Irvine), this a solid recommendation given lthat they analyze over 4000 stocks per year and only select from 5 to 10 for their subscribers. Here are the extracts from their comments related to ATS. GLTA
KeyStone’s Stock Talk Show, Episode 228.
I will answer a listener question on ATS Corporation (ATS:TSX), an industry-leading automation solutions provider servicing the life sciences, chemicals, consumer products, electronics, food, beverages, transportation, energy industries. The company has a solid track record of long-term growth, in an exciting segment and just completed an acquisition last week. I will let you know its current and forward valuations and whether or not it meets our criteria for investment.
ATS Corporation (ATS:TSX)
Price: $44.33
Market Cap: $4.38 Billion
Company Description: ATS is an industry-leading automation solutions provider with global capabilities in custom automation, repeat automation, automation products and value-added services, including pre-automation and after-sales services. ATS services multinational customers in markets such as life sciences, chemicals, consumer products, electronics, food, beverages, transportation, energy and oil and gas.
Event:
On Friday morning, ATS announced it had entered into a definitive agreement to acquire
Avidity Science LLC for US$195 MM (~C$265 MM).
Commentary:
Avidity Science is a growing designer and manufacturer of automated critical water purification systems, components and consumables used in biomedical and life sciences applications.
In fiscal 2022, Avidity generated revenues of US$81.9 MM (CY20 – CY22 CAGR of 10.4%)
and posted a 20.4% adj. EBITDA margin (vs. ATS’ adj. margin profile in the mid-teens) – so it should help margins. Price tag: price of US$195 MM represents 11.2x Avidity’s projected calendar 2023 adjusted EBITDA of US$17.4 million.
Let’s look at the business.
Q1 FY 2024 highlights:
- Revenues increased 23.4% year over year to $753.6 million.
- Net Income was $47.7 million compared to $39.4 million a year ago.
- Basic earnings per share were 50 cents, compared to 43 cents a year ago.
- Adjusted basic earnings per share1 were 69 cents compared to 57 cents a year ago.
Backlog
At July 2, 2023, Order Backlog was $2,023 million, 30.1% higher than at July 3, 2022. Order Backlog growth was primarily driven by higher Order Bookings in fiscal 2023 within the transportation market, primarily from EV projects.
Order Bookings were $690 million, 6.3% lower compared to $736 million a year ago.
Valuations – trailing valuations:
P/E 41.92
Forward P/E 21.39
Our Take:
ATS is a good business with a strong longer-term growth profile:
Revenues have grown from 683.4 million in 2014 to $2.7 billion over the past 12-months. Gross profit has also increased smartly over that period.
Given this growth, the company deserves a premium multiple. It trailing PE is in the range of 40 which is high, but forward looking it is closer to 22, which is better given the growth. There is the threat that growth slows significantly organically in a recession or downturn, and we do note that while the backlog was up 30% year over year, bookings were down 6% which may be indicative of a slowdown.
Following the acquisition, pro forma leverage is approx. 2.5x expected adjusted EBITDA (up from 2.0x in Q1/F24). Management targets leverage of 2.0-3.0x (with flexibility to take leverage up to 3.5x) – we do think that the company is starting to push closer to its upper limit, and while the acquisition environment may become more attractive, there is less flexibility without an equity raise near-term to add growth. Good long-term business and we may look even closer at it on pullbacks.