BEST SMIDCAP IDEAS: UNIQUE WAY TO PLAY LONG-TERM DEMAND FOR AUTOMATION
THE TD COWEN INSIGHT
ATS is a leading automation solutions provider. The company leverages its extensive knowledge base/global capabilities to address the sophisticated manufacturing/service needs of multinational customers in attractive markets (life sciences, food & beverage, consumer products, energy, and EVs). We believe that the stock is one of only a few direct plays on the long-term trend toward automation.
Summary Of Our Thesis
ATS has compounded adj. EBITDA at ~25% over the past five years, reflecting high-single-
digit organic revenue growth, margin expansion, and strategic M&A.
A rapid cooling of the EV boom will dampen ATS' near-term earnings growth, but we believe that consensus estimates have been revised down to the point where they leave some room for potential upside, although probably not until H2/F25.
Medium- to long-term, we see ATS as very well-positioned to benefit from supply chain de- risking, labour cost/availability issues, and automation as an enabler of more sustainable manufacturing operations. We are particularly attracted to the company's focus on end markets with high barriers to entry and lower cyclicality (~75% of current backlog).
We also see continued scope for margin expansion and M&A upside.
What Is Underappreciated Or Misunderstood?
Rockwell Automation is often referenced as an ATS comparable, and Rockwell's recent financial results have been affected by excess channel inventory, particularly at machine builders, likely because customers over-ordered in response to prior supply-chain constraints. ATS' primary business is supplying mission-critical manufacturing systems directly to customers; therefore, channel inventory is not an issue for ATS.
Catalysts & Milestones To Watch
1) Large contract wins; 2) accretive acquisitions; and/or 3) reactivation of the ~$150mm of EV work that is currently on hold, which would be incremental to ATS' F2025 outlook.
Price Target & How We Value The Stock
Our $63.00 target price is based on 13.5x EV/F2026E EBITDA (March year-end). A 13.5x multiple is somewhat above the high-end of ATS’ 10-year range of 9.8x-13.0x, but we believe multiple expansion is justified, because the resiliency/growth potential of the business have meaningfully/sustainably improved over the past 5+ years.
What Is The Bear Case & Risks To Our Call?
The consensus calls for F2025 EBITDA to decline ~2% y/y, with lower earnings in H1/F25 partly offset by earnings growth in H2/F25, which is likely to limit near-term share-price upside. There could be risk to the remaining EV backlog of $425mm (~25% of total backlog), of which ~$150mm is on hold.