Expansion Into Nuclear Energy And Life Sciences Will Strengthen Future Prospects

Key Takeaways

• Expanding recurring revenue streams and recent acquisitions will stabilize revenue and enhance margins through synergies and efficiencies.
  
• Strategic emphasis on high-growth sectors and innovation is poised to significantly boost future operational efficiency and revenue.
  
• Supply chain disruptions, high leverage, and liquidity challenges could hinder short-term growth and financial flexibility for ATS, despite a growing order backlog.

Catalysts

Provides automation solutions worldwide.

• The company has a strong order backlog of approximately $2.1 billion, with a trailing 12-month book-to-bill ratio of 1.18:1, which indicates potential for future revenue growth as these orders are fulfilled.
  
• ATS is expanding its recurring revenue streams by building out standard products and services, which should help stabilize revenue and potentially improve net margins over time.
  
• The integration of recent acquisitions such as Avidity, Paxiom, and Hanwha is expected to contribute positively to future earnings, supporting both revenue growth and margin improvement through synergies and process efficiencies.
  
• Continued focus on innovation, particularly in digital solutions and AI-driven initiatives, is expected to enhance operational efficiency and customer value, positively impacting future earnings.
  
• The strategic focus on high-growth areas like nuclear energy, life sciences, and food and beverage sectors, supported by a strong funnel and record backlogs, could drive significant revenue growth over the medium term.

ATS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ATS's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 7.7% in 3 years time.
• Analysts expect earnings to reach CA$257.9 million (and earnings per share of CA$2.6) by about March 2028, up from CA$89.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.1x on those 2028 earnings, down from 40.3x today. This future PE is lower than the current PE for the CA Machinery industry at 30.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.74%, as per the Simply Wall St company report.

ATS Future Earnings Per Share Growth

Risks

• ATS experienced a 13% decrease in Q3 revenues compared to the previous year, primarily due to lower expected EV revenues, which could impact short-term revenue growth negatively.
  
• The company faces potential complexities from new tariffs between the U.S. and Canada, which could disrupt supply chains and affect operational costs, impacting revenue and margins.
  
• There is a significant amount of non-cash working capital tied up due to a dispute with an EV customer, which keeps working capital above target levels and affects liquidity and cash flow management.
  
• While ATS has increased its order backlog, the delivery of these large orders typically takes 12-18 months, resulting in a lag between bookings and revenue recognition, which might not provide immediate revenue support.
  
• High leverage with a net debt to adjusted EBITDA ratio of 3.7x, outside the target range of 2x to 3x, could limit financial flexibility and increase the risk if earnings do not improve as anticipated.

Valuation

• The analysts have a consensus price target of CA$51.137 for ATS based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$58.0, and the most bearish reporting a price target of just CA$42.96.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$3.3 billion, earnings will come to CA$257.9 million, and it would be trading on a PE ratio of 24.1x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of CA$36.76, the analyst price target of CA$51.14 is 28.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.