Despite its “strong” share price performance, Scotia Capital analyst Michael Doumet thinks there’s “meaningful potential upside” in ATS Corp., leading him to initiate coverage with a “sector outperform” recommendation.
“From the outside looking in, it is often hard to fully appreciate how a change in a company’s strategy and operating framework will impact its performance – that is, until it demonstrates sustainable financial improvements,” he said. “A few years after Andrew Hider joined as CEO, ATS’s ability to achieve sustainable growth has become apparent. At the beginning, management’s focus was on strengthening the company’s operating backbone and refocusing ATS on the right market opportunities – i.e., decentralizing operations, implementing the ABM, increasing the focus on regulated end-markets, and expanding its standardized product and service offerings. Having achieved a baseline of operating success a few years ago, ATS accelerated its pace of M&A, adding capabilities and scale to its product (approximately 30 per cent of revenues) and services (30 per cent) offerings – areas of the business that are more repeatable, predictable, and higher-margin (and less-reliant on customer capex budgets). Today, ATS is faster growing, higher-margin, and more durable (i.e., less cyclical) – all factors that have positive implications for valuation.”
Mr. Doumet said ATS has become a “quality compounder” through that earlier decision to " focus the company on end-markets with favorable long-term growth prospects, execution that continues to improve, and a healthy recycling of FCF into accretive M&A.”
“Four years after setting the goal, ATS achieved its 15-per-cent EBIT margin target in F2022 (ex. acquisitions),” he added. “Since then, margins compressed due to supply chain challenges. Success is often easier the second time around – and there is increasing evidence that supply chains are easing. As we expect Transportation revenues to accelerate and margins to expand/recover, we believe ATS’s EBITDA will track above Street estimates starting in the 2HF24 (and potentially above ours). For 4QF22, we are below consensus due to higher stock comp (given the recent share price appreciation).”
Touting its “strong” organic growth, Mr. Doumet set a target of $67 per share. The average on the Street is $62.57.
“Despite the strong share price performance, we see several reasons to remain bullish, including continued momentum in backlog (i.e., book-to-bill more than 1 times in next several quarters), revenue (in F2024/F25) and margin (F2025) upside versus our/consensus estimates, and outsized product and service growth, all of which should lead to multiple expansion,” he said.