This space tech company beat analysts’ earnings estimates by $0.19 per share last quarter. The shares are speculative; the company has a large debt load; but the attraction to the shares is primarily based on a buyout of one of its divisions and a refocus on a higher margin subsidiary.
Maxar Technologies Inc. (MAXR)
From The Wealth Advisory
Back in 1969, two former college buddies founded a small technology company in their Vancouver basement. Their names were John MacDonald and Vern Dettwiler. And their company grew up to become the crown jewel of the Canadian aerospace industry.
MacDonald, Dettwiler, and Associates continued to grow throughout the 1970s and 1980s until it was bought by U.S.-based Orbital Systems in the early 1990s. Orbital eventually spun the company off, and for years it’s traded in Canada as MDA.
MDA has been instrumental in manned space flight since its inception. Most recently, it supplied the Canadarm 1 and Canadarm 2—robotic arms—for NASA’s Space Shuttle and the International Space Station. It’s also been tasked with creating a third Canadarm for the U.S. lunar outpost that’s currently under construction.
But in the expensive and quickly changing world of astronautics, you’ve got to be constantly evolving and growing. So, throughout the 2000s, MDA has gone on a growth spurt. It’s either merged with or acquired the operations of 12 other space-related companies. But it was its most recent (and biggest ever) acquisition that makes us so interested in the company and also makes the stock such a compelling buy right now.
You see, back in 2012, MDA bought Space Systems Loral and became one of the world’s leading communication satellite (comsat) companies. But commercial comsats are a very cyclical industry. Satellites have an active life once you get them up into space. It varies by design, but they typically last for about 10 to 15 years. So, you’ll have a boom time when companies are ordering new ones and sending them up. Then you’ll get a lull in orders until those satellites become inoperable.
And we’ve been heading into one of those lulls for the past year or two. But MDA saw the writing on the wall and decided to make a bold move. It bought satellite operator DigitalGlobe in 2017 in order to shore up its sales figures. And it changed the name of its combined companies to Maxar.
At first, investors couldn’t have been happier. Shares shot up from the mid-$40s to the high-$60s. But then reality struck. The company kept reporting falling sales in its quarterly numbers. And those drops were led by its space systems segment. Considering most of its investors are interested only in its connection to the cosmos, that was really bad news. Shares of Maxar dropped from the high-$60s in late 2017 to the mid-$30s by late last year. But it was when management drastically missed estimates in the middle of 2018 that the slope really got steep.
Maxar shares fell from about $50 in July 2018 to about $5 at the start of 2019. And they’ve been stuck between $5 and $10 ever since.
The falling revenues in comsat helped drag Maxar shares to new all-time lows. But it’s another issue that’s kept shares so far down this long. Maxar took on a lot of debt to fund its purchase of DigitalGlobe. I’m talking about over $3 billion, with a big old capital “B.” That’s a whole lot of debt for a company with falling sales. It makes some investors worry that the company might default on its debts and go into bankruptcy. And there’s not really anything worse for common shareholders than that.
But we see the debt as an opportunity. You see, the debt pile is massive for sure. But the company has a plan to address it and also address the drop in comsat sales. When it first stated negotiations to buy DigitalGlobe, Maxar also started the process of redomiciling itself. As of this year, it’s incorporated as a Delaware company.
That may not sound like a big deal, but it’s huge. That’s because now, Maxar is eligible for U.S. government work. And that means it’s got something to shore up its comsat segment while the commercial satellite market is in a contraction cycle. And the deals are already starting to roll in. So that’s going to help reverse the sales drop in space systems until the next generation of commercial satellites go into orbit.
But that presents a little issue for the Canadian government. Now, its most important astronautics company is technically foreign. And the Canadian government has already blocked the sale of certain MDA assets it deemed critical to its national security. But now, there’s good reason for Canada to push for a sale of MDA. Remember, MDA is now a part of the larger combined companies known as Maxar. And when its assets were up for sale in the late 2010s, they were set to fetch the company more than a billion dollars. Now, there’s talk that Maxar wants to focus its efforts entirely on the high-margin business that came with its DigitalGlobe purchase.
And there’s more talk that the plan to refocus involves putting MDA up on the auction block again. Maxar has already let MDA customers know of the plans. And a couple of them have already expressed interest in buying the assets. And those assets will still fetch Maxar a cool billion dollars. Combine that billion with the increased sales thanks to U.S. government contracts, and you’ve got enough cash to pay down a lot of that debt.
And it’s that debt that’s keeping Maxar shares down. So once management shows they’re addressing it, investors are going to start flocking back to the stock and sending it back up into the $30s, $40s, and perhaps even $60s.
Just taking sales into account, we can do a little figuring on how much the different segments at Maxar are really worth. The company just paid $3.6 billion (including acquired debt) for DigitalGlobe. So, we’ll give it a $3.6 billion value. And MDA makes close to $1 billion a year in revenue. So, we’ll call its value $1 billion. Space Systems Loral is barely breaking even, so it’s
going to get a $0 value (despite the fact that its assets could be sold for something). Then we take out total debt (about $3 billion). That makes the company’s equity (or stock) worth about $1.6 billion overall. Right now, it’s trading for less than $550 million, however. Shares go for less than $10 each. But based on that math, they’re actually worth more than $25.
If the company can sell off its MDA assets and pay down debt with the proceeds, it’s going to be in the perfect spot to go stratospheric once again. And we’re convinced that’s what’s going to happen. So, before this stock goes straight to the moon (or Mars, whatever), let’s get some skin in the game.
Maxar Technologies Inc. (MAXR) common stock is a buy under $10. The 12-month target will start at $15.
Brit Ryle and Jason Williams, The Wealth Advisory, www.angelpub.com, 877-303-4529, September 2019