CA - ATCO: Operational Efficiencies Improving Cash Flow Consistency

2023-05-29 10:52:37 ET

Summary

• ATCO pays out a solid dividend providing shareholders with consistent returns.
• The stock has underperformed the S&P 500 historically demonstrating the need for a change.
• Operational efficiency improvements for ATCO have enabled the company to create consistent cash flows along with improved margins.
• Assuming my DCF figures, ATCO is currently undervalued, resulting in a buy rating.

ATCO Ltd. (ACLLF) has been relatively flat over the years leading to stagnant returns. But, I believe ATCO is currently a buy due to its solid dividend, improvements in operational efficiencies, and undervaluation assuming my DCF figures.

Business Overview

ATCO Ltd. and its subsidiaries offer a wide range of solutions in housing, logistics, transportation, agriculture, water, real estate, and energy. The company provides workforce and residential housing, modular facilities, construction support, facility operations, defense operations, and emergency management services. It is also involved in commercial real estate services, including property sales, leasing, and development.

ATCO engages in the generation of electricity through hydro, solar, wind, and natural gas facilities. It offers electricity distribution, transmission, storage, and related infrastructure services. The company also provides natural gas transmission, distribution, storage, and retail sales, along with natural gas liquids storage services. Furthermore, ATCO delivers integrated water services such as pipeline transportation, storage, treatment, recycling, and disposal to industrial customers.

Operating in Canada, Australia, and internationally, ATCO serves various industries and contributes to infrastructure development and energy supply.

ATCO's current market capitalization stands at $3.53 billion, with its stock price at $31.01. The 52-week high for the stock is $38.85, while the low is $28.75. At a P/E ratio of 11.75 based on GAAP, the stock price appears favorable compared to its peers, indicating a potentially better valuation.

ATCO also pays a healthy dividend of 4.54% representing a safe payout ratio of 51.77%. This gives shareholders a consistent income-based return off of the stock while also enabling ATCO to use the remaining FCF to focus on improving its core business model.

ATCO's Q1 2023 results have surpassed expectations both in earnings per share and revenue. The EPS beat by 7.94%, with a reported figure of $1.21 compared to the expected $1.12. Similarly, revenue exceeded expectations by 4.34%, reaching $1.36 billion instead of the projected $1.30 billion. These results highlight ATCO's ability to outperform in a challenging economic climate, showcasing its operational excellence and strategic positioning. This success reflects the company's proficiency in leveraging long-term trends and delivering value to its shareholders. Based on this strong performance, I anticipate ATCO will continue to generate shareholder value in the future and strengthen its core business to become more reliable.

ATCO Compared to the Broader Market

Over the past 5 years, ATCO has underperformed the broader market. This underperformance indicates the need for ATCO to pivot through a long-term strategy to begin generating consistent shareholder returns.

Improving Operational Excellence to Foster Growth

Operational excellence is prioritized by ATCO Ltd. as a crucial element of its corporate strategy. The business targets operational effectiveness, cost reduction, and continual development for all of its operations. ATCO wants to improve its competitive position, provide value to consumers, and promote sustainable growth by concentrating on operational excellence.

ATCO's investment in modern technologies and digital offerings for improving its energy infrastructure is one illustration of its operational excellence. To increase the dependability, effectiveness, and safety of its operations, the organization makes use of statistical analysis, digitization, and smart grid technology. For instance, ATCO has put in place a cutting-edge outage management system that allows for real-time monitoring of disruptions and quick action to resume service. Through the use of technology, ATCO is able to quickly identify and fix operational shortcomings while also improving customer satisfaction.

I believe that ATCO has had great success because of its operational improvement initiatives. The organization has continually increased customer satisfaction while lowering expenses and improving operational efficiency. In addition to improving ATCO's standing within its sector, these measures have established the company as a pioneer in implementing cutting-edge technologies and environmentally friendly procedures. As a result, ATCO is better positioned to leverage its assets and achieve growth over the long term as opposed to being dependent on erratic cash flows.

Analyst Consensus

In the last three months, 8 analysts have rated ATCO as a "buy," indicating a positive outlook for the company. These analysts foresee promising returns over the next year. The average estimate for ATCO is $37.01, suggesting a potential upside of 19.35%.

Valuation

Prior to formulating my assumptions and conducting a discounted cash flow analysis, it is essential to determine the Cost of Equity for ATCO using the Capital Asset Pricing Model. By considering a risk-free rate of 3.33%, I have determined that the Cost of Equity for ATCO amounts to 6.86%, as illustrated below.

Through the application of an Equity Model DCF analysis utilizing free cash flow to equity, I have determined that ATCO is currently undervalued by approximately 26%, considering a fair value of approximately $41.67. This valuation was derived by employing a discount rate of 6.86% over a 5-year period. Additionally, my analysis suggests that ATCO will continue to enhance its operational efficiencies, resulting in a gradual improvement in profit margins.

Risks

Regulatory Environment: ATCO works in a number of industries, including those that are heavily regulated by the government, such as power, infrastructure, and real estate. The operations as well as the financial health of the company may be impacted by modifications to rules, policies regarding the environment, or pricing regulations.

Project Execution: Large-scale infrastructure and building projects are undertaken by ATCO. The business's bottom line and reputation might be negatively impacted by interruptions, price hikes, or other challenges with project execution.

Conclusion

In conclusion, I consider ATCO to be an attractive investment opportunity based on its strong dividend, track record of operational excellence, and undervaluation according to my DCF analysis.

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