A few weeks back, a previously unknown company purchased a full-page ad in The Wall Street Journal, announcing its arrival on the NYSE stock exchange. Maxar Technologies (MAXR) is its name -- and space is its game.
Buying a full-page WSJ ad is no cheap endeavor. At non-contract rates, these ads go for more than a quarter-million dollars a pop. And yet, while you may not have heard of Maxar before, this is a big company, and one with plenty of cash to throw around. Last year, Maxar -- which was known as MacDonald, Dettwiler and Associates at the time, and already listed in Canada -- bought U.S. satellite imaging company DigitalGlobe in a deal valued at $2.4 billion. This acquisition followed Maxar's 2012 purchase of Loral Space and Communications' satellite-building business, known as Space Systems/Loral (SSL) for $875 million.
With these acquisitions added to its core business, Canada's Maxar has built itself into a $1.5 billion-a-year space operations giant. Size-wise, it's roughly on par with America's own Aerojet Rocketdyne, which did $1.9 billion in business last year. Despite being slightly smaller than Rocketdyne, though, Maxar has a higher market capitalization -- $3.5 billion to Rocketdyne's $2.3 billion.
Is that higher valuation justified? Let's take a look.
Maxar Technologies -- new and improved
Maxar Technologies did $1.5 billion in sales through the 12 months ending in September (before DigitalGlobe was folded into it), and earned an 11.2% operating profit margin on those sales, with a 4.1% net margin, according to data from S&P Global Market Intelligence. DigitalGlobe earned margins of 11.3% (operating) and 0.8% (net) on sales of $810 million. Even without "synergies" from the merger, a combined Maxar/DigitalGlobe should be earning something on the order of $69 million, and generating free cash flow of roughly $182 million.
Maxar carries a debt load of about $740 million net of cash on hand. Added to its market cap, this gives Maxar an enterprise value of just under $4.3 billion. Thus, the company's enterprise value-to-sales ratio appears to be approximately 1.9, and its debt-adjusted P/E ratio is 62. The company's EV-to-free-cash-flow ratio is more attractive at 24.
While not extreme, these are not cheap multiples to pay for Maxar Technologies stock. To deserve them, Maxar is going to need to put up some pretty impressive growth numbers.
Is Maxar Technologies stock a buy?
How likely is that to happen? According to data from S&P Global, analysts expect to see Maxar's earnings take a short-term hit from its acquisition of DigitalGlobe when final 2017 numbers come out. That said, earnings are expected to rebound 55% to $2.61 per share in 2018 as Maxar begins to benefit from its new acquisition, then more than double over the next two years, with Maxar eventually earning as much as $6.06 per share in 2020 (the last year for which estimates are available).
Maxar bulls can point to these forecasts to argue that the stock is even cheaper than it looks right now, because in just two or three years, its per-share earnings will quadruple, giving the stock a valuation of 10.6 times 2020 estimated earnings. Free cash flow should grow strongly as well, with Maxar generating positive free cash flow of perhaps $382 million in 2020 -- and $524 million in 2021, which would be nearly three times the cash profit that Maxar and DigitalGlobe, combined, produced over the past 12 reported months.
If Maxar gets anywhere near these targets, there's a strong argument to be made that the stock is worth what it costs today, and could even rise in value. That said, there are risks to this investment.
On one hand, Maxar is in line to win tens of millions of dollars in contracts building orbital "space tugs" to repair and relocate ailing satellites -- first for NASA and the U.S. Department of Defense, and later for commercial customers as the technology is proven workable. On the other hand, though, Maxar is just one player in a fast-evolving space marketplace. Both soon-to-be Orbital ATK owner Northrop Grumman and Lockheed Martin are angling to win similar contracts for space tug tech. Meanwhile, small rocket producers such as Vector, Rocket Lab, and Virgin Orbit are springing up to service cheap, small, disposable nanosatellites -- the kind that probably won't live long enough to require "tugging," in any case, which could cause Maxar's target market to dissolve before it even materializes.
Given the uncertainties, I hesitate to recommend Maxar Technologies before seeing at least the first few batches of post-merger numbers. If Maxar's share price descends to a lower orbit, however, I reserve the right to change my opinion ahead of schedule.
And if Maxar's profits actually grow as fast as they're projected to grow... I reserve the right to be wrong.