SuperTrak HORIZON3 And Recent Acquisitions To Drive Growth And Expand Margins

Key Takeaways

• Strategic acquisitions and innovation in Life Sciences and Food & Beverage are set to enhance revenues and expand margins.
  
• Focus on margin expansion and supply chain management aims to boost profitability and operational efficiencies.
  
• ATS's profitability and strategic growth may be hindered by lower transportation revenues, high leverage, and unresolved cash flow issues with an EV customer.

Catalysts

Provides automation solutions worldwide.

• Despite challenges in the Transportation sector, ATS expects future growth driven by strong order backlog, particularly in Life Sciences, which will positively impact future revenues.
  
• Recent acquisitions of Paxiom and Heidolph are anticipated to enhance ATS’s offerings, contributing to increased revenues and expanded margins in Food and Beverage and Life Sciences.
  
• The strategic focus on margin expansion through realignment, cost reductions, and improved supply chain management is expected to boost net margins and profitability over time.
  
• The development of innovative solutions like the SuperTrak HORIZON3 and digital offerings in energy management and process automation is poised to drive increased revenues and improve operating efficiencies.
  
• The focus on M&A integration and leveraging ABM tools aligns with ATS's goal to grow earnings through organic growth and improving operational efficiencies.

ATS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ATS's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.6% today to 6.1% in 3 years time.
• Analysts expect earnings to reach CA$187.6 million (and earnings per share of CA$1.63) by about January 2028, up from CA$129.9 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 38.0x on those 2028 earnings, up from 33.0x today. This future PE is greater than the current PE for the CA Machinery industry at 22.4x.
• Analysts expect the number of shares outstanding to grow by 5.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.2%, as per the Simply Wall St company report.

ATS Future Earnings Per Share Growth

Risks

• ATS faced lower revenues in Transportation due to decreased EV bookings, which impacted overall revenues and could continue to affect net margins as restructuring efforts conclude.
  
• The company engaged in ongoing discussions with an EV customer over delayed payments, which may impact cash flow and working capital if not resolved promptly.
  
• Adjusted earnings from operations fell by 43% year-over-year due to lower revenue volumes, particularly from the Transportation segment, affecting overall company profitability.
  
• With leverage at 3.4x, above their target range of 2-3x, ATS might face limitations on further strategic investments or acquisitions crucial for future growth in revenue and earnings.
  
• Restructuring in Transportation resulted in a $17.1 million cost, which, while necessary, reflects additional one-time expenses that may constrain short-term net margins.

Valuation

• The analysts have a consensus price target of CA$50.29 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$57.0, and the most bearish reporting a price target of just CA$41.01.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$3.1 billion, earnings will come to CA$187.6 million, and it would be trading on a PE ratio of 38.0x, assuming you use a discount rate of 7.2%.
• Given the current share price of CA$43.84, the analyst's price target of CA$50.29 is 12.8% 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.