After an impressive year-long run up that almost doubled the share price of ATS Automation Tooling Systems Inc. to more than $15, the company's stock has hit a slump that has knocked about 15 per cent off its value in the past six weeks.
The drop has puzzled analysts, who don't see a simple reason for the pullback, aside from the fact that the gains had put the stock into premium-price territory.
"It is a bit mysterious," said David Tyerman, an analyst at Canaccord Genuity in Toronto. "My suspicion is that expectations just got a little ahead of themselves."
Indeed, there are big hopes for ATS, a Canadian leader in creating the technology that keeps factories functioning. Its automation equipment helps build everything from medical devices to car parts to ink cartridges.
After an investor-led proxy battle that forced a change in management half a dozen years ago, the company has refocused on its core business and set out to expand, partly by making acquisitions. It has also finally sold off most of its struggling solar power business.
Based in Cambridge, Ont., about 80 km west of Toronto, ATS has 23 manufacturing plants in North America, Europe and Asia, and 2,600 employees. It generated close to $600-million in revenue in its last full fiscal year, and about $41-million in profits from its ongoing operations.
The end of solar business has converted the company into "the pure automation play management has long aimed to create," said Cormark Securities Inc. analyst MacMurray Whale. "They've turned it around and finally management is in a position to really make this into a world leader in automation."
Mr. Whale, too, is puzzled at the recent price drop, which occurred after a flurry of stock purchases following the company's inclusion in the S&P/TSX Composite Index in mid-September.
The stock also got a strong lift in early September when it was announced that ATS was buying German-based IWK Verpackungstechnik GmbH, a company that specializes in making equipment for automated tube filling and packaging. IWK's customers are mainly in the pharmaceutical and personal care industries, new and valuable segments for ATS.
ATS chief executive officer Anthony Caputo told analysts on a conference call in November that ATS is definitely not done with acquisitions. "We are talking [to] a number of companies," he said. "Now we have a pretty strong M&A team in place [and] we know what we want."
One crucial strategic move at ATS is to sell customers on "enterprise" solutions, where it helps the clients develop their entire automation processes, instead of just selling them equipment. Mr. Caputo says this means "we are not only the plumbing company and drywaller and general contractor, but also the architect." It also means there is the opportunity to boost margins, he said.
While a resurgent U.S. economy should help expand business in that key market, Mr. Caputo remains cautious. The atmosphere in the United States is "encouraging." he said, but "we haven't seen a U.S. manufacturing renaissance." At the same time, "some of our worst fears in Europe have subsided," he added. "We feel more optimism than we do pessimism."
Six out of the eight analysts who follow the company rate it a "hold," according to Bloomberg, while two call it a "buy." One-year target prices range widely, from about $11 to $18.
Mark Neville of Scotiabank is among the most enthusiastic about ATS, with an $18 target. He said in a recent report that he thinks the company "is at the beginning of a multi-year organic/strategic growth phase." Indeed, the recent decline in the share price makes this "an attractive entry point" for investors to get in, he said.
While the IWK acquisition adds new expertise in tube-filling machines, Mr. Neville noted, it is even more important because of the firm's expertise in servicing equipment. ATS plans to roll that model throughout all of its businesses, adding an important new source of revenue.
Justin Wu, an analyst at GMP Securities, says his positive outlook on the company stems from the fact that ATS is growing both organically and through acquisitions, and there are "positive cyclical tailwinds" because its customers are just beginning to ramp up capital spending after years of sluggish expansion. He has a $17.25 one-year target on the stock.
Not everyone is adding to their holdings. Brandon Snow, portfolio manager of the Cambridge Canadian Equity Corporate Class fund, said he sold off his ATS shares this year, but not because he dislikes the company's prospects. He has shifted to larger cap stocks as his fund's holdings have grown, he said, and thus ATS got cut. Mr. Snow added, "ATS is a company I have known for a long time and I have a lot of respect for management."
His reading on the recent stock drop: "Above $15 it was a little over-valued for what they were delivering at the time, and now maybe it is back to a reasonable valuation. People got excited about [the acquisition] and then when it was done they moved on."
Headquarters: Cambridge, Ont.
Founded: In 1978 by German immigrant Klaus Woerner, who died in 2005
Went public: December, 1993
CEO: Anthony Caputo
Plants and offices: Canada, United States, Germany, Switzerland, China, Malaysia, Singapore, India, Thailand
Fiscal 2013 revenue (continuing operations): $595.4-million