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ATS firing on all cylinders, but are shares getting too pricey?

ATS Automation Tooling Systems assembling the Sphere Formation.

Unspecified/Handout

Investors betting on the increased production of consumer goods in the recovering North American economy are eyeing the steadily rising stock of manufacturing company ATS Automation Tooling Systems Inc.

Shares in the Cambridge, Ont.-based company, whose machines help to make medical devices, car parts and smartphones, are up 40 per cent over the past year and almost 300 per cent since the depths of the last recession.

Sales and profit are increasing, thanks in part to new acquisitions and the shedding of underperforming assets.

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Still, some analysts caution ATS is yet another stock that's starting to look pricey as it trades near highs not seen since before the global economic downturn.

"It's a good story and in a good part of the cycle. It's just a little on the expensive side for my taste," said Canaccord Genuity analyst David Tyerman.

He's one of four analysts with a "hold" rating on the stock, while two say "buy," and one "sell," according to S&P Capital IQ. The consensus target over the next year is $15.18.

That's not far from where the stock is currently trading and slightly below its eight-year high of $15.45 reach in mid-October. The shares dipped below $13 late last year, but have since recovered as the company's outlook brightens.

In early February, ATS reported a 23-per-cent increase in third-quarter revenue, driven by its acquisition last fall of German-based IWK Verpackungstechnik GmbH, which specializes in tube filling and cartoning machinery for the pharmaceutical and personal-care industries. Earnings from continuing operations were $16.7-million, up 23 per cent from the same period last year.

Based on its most-recent quarter, about 40 per cent of the company's revenues were from the life sciences sector, 34 per cent transportation, 20 per cent consumer products and electronics, and the rest in energy.

ATS, which has 23 manufacturing plants around the world, says it's on the hunt for more acquisitions to grow the business as it continues its fix-and-grow strategy. That included selling its underperforming solar business in 2012.

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Robert Sneddon, president and founder of portfolio management firm CastleMoore Inc., believes ATS is taking the right steps to boost its stock price, but isn't ready to buy back in.

"I wouldn't buy here right now. I would wait for confirmation the market thinks it's executing on its new direction and focus," or buy on a pullback, he said.

Cormark Securities analyst MacMurray Whale has a "market perform" (equivalent to "hold") on the stock and $15 price target, saying he's looking for more consistent revenue and margin growth, including when the company reports its latest quarterly earnings on Thursday.

"Should we see the sales and margin to improve with bookings, we would be more positive on the stock given the valuation," Mr. Whale said in a note.

Analysts say the company is expensive when looking at its enterprise value (EV), which is the market value of all its shares plus the company's net debt in comparison to its earnings before interest, taxes, depreciation and amortization (EBITDA). It's currently trading at an EV/EBITDA ratio of about 12.

Others believe ATS is worth the higher valuation given the potential growth from future acquisitions and the improving economy.

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Justin Wu, an analyst at GMP Securities, has a "buy" on ATS and $17.75 price target.

"Rising backlog on cyclical expansion, growth of higher margin service/parts revenue and acquisitions are key elements of our investment thesis," Mr. Wu said in a note.

Scotia Capital analyst Mark Neville rates ATS as a "top pick" with an $18 price target. "We do not believe the shares reflect the appropriate premium from the potential upside," he said in a note, citing expected growth from both acquisitions and existing operations.

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About the Author
Contributor

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More

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