A report by wfc on ValueInvestorsClub provides an investment thesis for ATS Corp. (NYSE:ATS) a stock that has fallen by almost 40% from its peak. We will summarize the bullish stance of the author in this article. ATS shares were trading at $26.10 when the valuation was done by wfc, vs. the closing price of $30.13 on Jan 03.
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ATS provides automation solutions worldwide. The company is also involved in planning, designing, building, commissioning, and servicing automated manufacturing and assembly systems, including automation products and test solutions. It mainly caters to industries like pharmaceuticals, food and beverage, and life sciences.
ATS has transitioned its business to a more favorable mix, shifting from the automotive industry to life sciences. It also focuses on selling its own products rather than taking on integration projects whose contribution to revenue has decreased from 70% in 2017 to 40% in 2023. The foray into life science and strategic shift to sell its own products has reduced the cyclicity of its business and enabled ATS to enjoy double-digit margins that are higher than its peers.
The customer-centric approach has yielded results, with 90% of its clients being repeat customers. Many of these customers have long-standing relationships with ATS that exceed a decade. Established customers contribute 25-35% of the revenue through allied services like maintenance, retooling and equipment retrofits.
Another reason for its success has been its M&A strategy which has allowed ATS to venture into sectors like food and beverage and life sciences. The ability to generate an ROIC of 13-14% even after 23 acquisitions since 2018 means that the strategy has paid off. M&A will have to be put on hold as of now since the Net Debt/EBITDA for the company is 2.7x against a target of 2-3x.
ATS has fallen from its peak of $48 in 2023, primarily on account of investor activity. The stock is available at 10x NTM EV/EBITDA and 15x NTM EPS, providing a good reason to enter at this level.
While we acknowledge the potential of ATS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than ATS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.