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ATS Automation starting to turn investors' crank

In the almost four years following a shareholder-driven shakeup inside ATS Automation Tooling Systems Inc., shares of the equipment manufacturer have languished.

The Cambridge, Ont.-based company has been punished by the recession, which saw customers reduce their capital spending. In addition, a unit of ATS that designs and builds solar-power systems has badly underperformed.

But analysts and investors say ATS is about to take off. Bookings have more than doubled in the past year, acquisitions are boosting revenue and management looks like it is finally ready to dump the money-losing solar unit.

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The stock touched a 52-week high this week and has risen almost 19 per cent since June 1, when ATS posted a 43-per-cent jump in year-over-year sales for its fiscal fourth quarter.

"If I had money flooding into my funds, for sure I would buy more. It's our biggest position. We think it's actually pretty timely now, after what seems like a two-year delay," said Peter Puccetti, chairman and chief investment officer of Goodwood Inc., which held nearly 9 per cent of ATS as of last month.

Mr. Puccetti's Toronto-based fund led a brief proxy battle at ATS in 2007, which resulted in a new board of directors and new management team. What would have normally been a three- to four-year holding period for Goodwood has been extended by at least two years due to the "economic earthquake" that struck in 2008 and caused orders from multinationals to almost dry up, he said.

Meanwhile, Mason Capital Management LLC of New York, which also participated in the proxy fight, has been steadily increasing its position in ATS this year, from 14.5 per cent in January, to 17 per cent in early June, according to filings. Mr. Puccetti said the hedge fund recently raised its stake again, to 18.2 per cent as of June 13.

The investment comes as business is picking up for ATS. The company said it received record order bookings in the three months ended March 31 of $206-million. That compares with $133-million in the previous quarter and $105-million in the year-earlier period. Furthermore, the robust pace of bookings remained on track through the spring, with $100-million worth recorded in the first eight weeks of the quarter, the company said.

Price Targets

Some analysts have raised their targets for the stock recently. Neil Linsdell, of Versant Partners Inc., raised his one-year target to $9.50, up from $7.75, citing several factors that included higher bookings and the fact that ATS "has significantly improved its cost structure and competitiveness." He is one of five analysts who rate ATS shares a buy.

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Mr. Linsdell values the business at 15 times estimated earnings for fiscal 2012. "We are now seeing the recovery of the business although we could still be looking at several quarters of margin pressure until recent acquisitions are completely integrated," he wrote in a research report last month.

ATS closed two acquisitions in the last 13 months that have powered growth but dampened margins. It spent about $62-million for Sortimat Group, a German company that makes equipment for the health care industry; and about $18.6-million for Assembly & Test Worldwide Inc., which sells testing equipment for the automotive, life sciences and energy sectors.

ATS says further acquisitions are possible, while Mr. Puccetti points to software used in manufacturing systems as an area of likely interest, given its higher margins.

ATS chief executive officer Anthony Caputo has affirmed plans to separate the money-losing solar unit, called Photowatt, by the end of the year. At the same time the company is looking for a buyer for the portion of the business based in France, where accounting charges related to layoffs and labour disruptions dragged ATS into the red for the year.

The company plans to begin accounting for Photowatt as discontinued operations shortly, which would enable analysts and investors to value the core business more accurately. Most analysts don't attach a material value to the Photowatt assets.

David Tyerman, of Canaccord Genuity, ascribes Photowatt a value of only 13 cents a share, due to "highly uncertain prospects." But he likes the prospects of the company's core automation systems group, projecting that share profit will double over the next three years. He rates the shares "buy" and gives them a price target of $9.75 based in part on a price-to-earnings multiple of 16.7.

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Steve Arthur, of RBC Dominion Securities Inc., is one of three analysts to rate ATS shares a hold. He notes that although order patterns have been improving, continued gains could prove "lumpy" as they have in the past. Shares appear reasonably valued based on 1.2 times book value, or 9.2 times enterprise value divided by earnings before interest, taxes, depreciation and amortization (EBITDA) for fiscal 2012, he said.

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