Description

ATS was written last year by tim321 at much higher prices. Not much has changed from a LT perspective but the business is now available half off!

ATS and the Adoption of DBS Principles

ATS, a global provider of automation solutions, has drawn inspiration from DBS. ATS’s CEO, Andrew Hider, spent a decade at Danaher and applied many of its principles when he introduced the ATS Business Model (ABM) upon becoming CEO. ABM centers on continuous improvement (Kaizen) and focuses on three key areas: People, Process, and Performance. Like DBS, ABM promotes a customer-first approach and prioritizes performance management, shorter development cycles, and greater production efficiency.

Under Hider’s leadership, ATS stock price increase from US$10 per share in 2018 to a peak of US$48 by 2023, before correcting back to around $26 at present. Despite the drop, ATS remains positioned for long-term growth in an expanding automation industry. The company’s implementation of a DBS-like system within its culture has contributed to its success, driving improvements across several key performance indicators such as revenue growth, EBIT margin, and ROIC.

ATS’s Core Business and Global Footprint

ATS serves as a leading System Integrator and Original Equipment Manufacturer (OEM), offering end-to-end automation solutions across industries like pharmaceuticals, food and beverage, and life sciences. It employs over 7,000 people across more than 65 manufacturing facilities and 85 offices worldwide, giving the company a vast geographic footprint. This scale ensures ATS can respond to client needs in a timely manner, providing a strong competitive advantage.

The company assists clients in three stages of automation: pre-automation (including feasibility analysis, concept development, and cost modeling), automation (equipment manufacturing, system integration, and software development), and post-automation (training, process optimization, and equipment maintenance). This comprehensive approach, along with the company’s ability to support clients with high-quality, after-sales services, helps ATS maintain its leadership in the automation space.

Industrial automation is a secularly growing industry due to labor inflation and nearshoring. The sector is highly fragmented, and ATS competes with several public companies, most of which are based in Europe. Some of its major public competitors include GEA, KION, and Dürr. It is interesting to note that all these competitors have margins in the single digits. ATS has really differentiated itself with its ABM system along with a business mix that focuses on critical industries and higher margin businesses such as after sales supper and spare parts. 

Shifting Market Focus: From Automotive to Life Sciences

ATS’s market composition has evolved over the years. While the automotive industry once accounted for a significant portion of its revenue, ATS has since expanded into other sectors. The acquisition of Sortimat in 2010 increased its presence in life sciences, which became its largest revenue contributor by 2023, representing 44% of total revenue. Notably, ATS now supports medical device manufacturing and pharmaceutical companies, helping to design, build, and maintain their production processes. These sectors are more stable and less price-sensitive, with customers placing a higher priority on performance factors such as speed, precision, and consistency.

In addition to life sciences, ATS has made forays into other markets, including the food and beverage industry through acquisitions like MARCO and CFT. Transportation, once a primary focus, now contributes to 29% of revenue, driven by ATS’s shift toward electric vehicle (EV) projects and aerospace. 

Strategic Growth and Recurring Revenue

Since Hider became CEO, ATS has reduced its dependence on cyclical systems integration work, from 70% of revenue in 2017 to 40% in 2023. In its place, the company has expanded higher-margin, after-sales services and is selling more of its own products and equipment. 

One of ATS’s key strengths is its focus on building long-term customer relationships. Roughly 90% of its clients are repeat customers, some of whom have maintained relationships with ATS for over a decade. Contracts for automation systems typically exceed $1 million, with larger projects surpassing $10 million. Project durations vary from six to 24 months, depending on the complexity.

This customer loyalty contributes to the company’s recurring revenue base, which ranges between 25% and 35% of total revenue. Services such as maintenance, retooling, and equipment retrofits provide recurring streams of revenue and help smooth out the company’s financial performance during market downturns.

Financial Performance, Margins, and M&A Strategy

ATS’s financial performance has benefited from a combination of organic growth, acquisitions, and margin improvements. The company has grown organically at an average rate of 9-10% annually, with additional growth coming from mergers and acquisitions (M&A). 

ATS has a target EBIT margin of 15%, up from its current 13.1%. ATS is actively pursuing several strategies to drive this growth, including expanding its higher-margin after-sales service business, optimizing global supply chain operations, increasing the adoption of standardized platforms and technologies, and continuously improving processes through ABM initiatives.

ATS' software and Internet of Things (IoT) solutions have also played a key role in driving revenue growth independently of workforce expansion. Further, enterprise-level programs - projects that extend beyond basic machine assembly and delivery to include a wider range of services like planning, custom design, manufacturing, and system integration - present a more favorable margin profile.

M&A has been a critical component of ATS’s growth strategy, with approximately $1.8 billion deployed toward 23 acquisitions since 2018. Notable acquisitions include Comecer (radiopharmaceuticals), CFT (food and beverage), BioDot, and SP Industries (life sciences). These acquisitions have strengthened ATS’s capabilities and expanded its presence in attractive end markets. 

There are strong parallels between ATS' M&A approach and that of Danaher. Danaher identifies acquisition targets at the business unit level, and ATS appears to follow a similar strategy, with input from business unit leaders playing a key role in identifying and nurturing potential acquisitions. Both companies focus on fragmented markets with strong long-term growth potential and significant barriers to entry. When evaluating deals, Danaher prioritizes return on invested capital (with a threshold of over 10% by year five for larger acquisitions) and looks for opportunities to apply its DBS framework - a method ATS replicates as well.

ATS has a target leverage range of 2-3x Net Debt/EBITDA and is willing to exceed this in the short term for the right opportunity. The important thing is that ATS has maintained a ROIC in the 13-14% range even with this torrid pace of M&A showing that it is adding value and not overpaying. Having said that, current leverage at 2.7x is at the higher end of the range meaning that ATS will probably not be doing M&A in the near future.

Challenges and Recent Stock Performance

ATS’s recent weakness stems from its automotive division. As their current EV projects near completion ATS announced plans to restructure their EV operations and align the cost structure.

“What's happened in the last little while is consumer demand (in EV) has been weaker. And I think that's given clients an opportunity to pause some of that capacity expansion and focus on technology, making sure they have their products where they want them, getting that design stabilized. And so we expect over the midterm, there's going to be continued investment. Again, those long-term targets are there, whether it's company consumer-driven or regulation-driven. There's still a lot of capacity that has to be built.”

-CFO at Deutsche Bank conference (2024)

ATS reported Q1 Net Bookings of $783.0 million, resulting in a book-to-bill ratio of approximately 1.1x. In Life Sciences, bookings rose, driven by organic growth and $28.6 million in contributions from recent acquisitions, including $24.2 million from Avidity. Bookings in Transportation declined as customers adopted a more cautious approach to Electric Vehicle investments in response to shifting market conditions. Net bookings in Food & Beverage and Energy also saw decreases, while Consumer Products experienced an uptick due to the timing of customer projects.

ATS does have exposure to macro weakness, but overall, the business is in decent shape. ATS dramatic stock decline is more likely a function of its shareholder base than the underlying business. The company listed in the US and attracted a lot of fast money and growth investors. Now, at the first sign of volatility, these growth investors have exited the stock creating an opportunity to buy into ATS at 10x NTM EV/EBITDA and 15x NTM EPS.

This is a very reasonable multiple for a company that,

• Operates in a secularly growing industry with tailwinds such as increased labor costs and nearshoring

• Operates efficiently in a A+ management team that is focused on innovating, increasing margins and bettering the quality of the business

• Runs a M&A strategy that actually works

It is always difficult to ascertain the multiple one pays for an industrial business as all industrial businesses have some inherent cyclicality. In this case, we have seen a few disappointing quarters already and while it is difficult to forecast the short term, it is reasonable to expect a much bigger and better business in the long term that would be demanding of a premium multiple. 

Conclusion

Under the leadership of Andrew Hider, ATS has transformed its business model, moving away from cyclical markets toward more stable, higher-margin industries. The company’s strategic focus on continuous improvement, customer loyalty, and value-enhancing acquisitions has positioned it for continued growth. By adopting a DBS-like system, ATS has embedded a culture of excellence that can drive its long-term success, much like Danaher’s. Despite short-term challenges in the EV market, ATS remains poised for growth as it capitalizes on trends like automation, nearshoring, and labor cost pressures.

Catalyst

-Execution

-YoY comps on automotive