Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Investors have not been kind to Maxar Technologies (NYSE:MAXR) lately.
Since reporting its first earnings as an NYSE-listed company last month, Maxar Technologies stock has lost 15% of its value. The company has lost its CFO, too, with William McCombe announcing he was stepping down after the earnings miss. (Maxar's 2017 earnings declined 5%, despite sales rising 5%. Worse, Maxar warned that its sales will decline this year by between 2% and 4% in comparison to 2017 levels.)
Wall Street didn't waste much time in punishing the stock. TD Securities cut its price target on Maxar stock earlier this month, and Swiss megabanker Credit Suisse downgraded the stock to neutral last week, citing a lack of clarity in the company's "execution & end-market growth," says StreetInsider.com (subscription required).
Given all the negative headlines Maxar has suffered these past few weeks, today's news probably comes as a relief to investors in the Canadian space tech company: At long last, someone is finally optimistic about Maxar again.
Upgrading Maxar Technologies
Investment banker Raymond James announced this morning that it is upgrading shares of Maxar Technologies to outperform, reports TheFly.com, and assigning the stock an $80 price target implying more than 80% upside for the stock. According to the analyst, investors' sell-off of Maxar stock has gotten a "little overdone," and there are enough positive developments in Maxar's future to justify buying the stock at today's discounted price.
Maxar says its sales will decline this year, and Raymond James accepts that. However, the analyst also accepts management's promise that 2018 will be the "trough" year for Maxar's sales. RJ thinks that cash flow will grow substantially over the next two years, as Maxar "sees material upside from large contract opportunities."
And with capital spending "peaking," capex should siphon off less of Maxar's cash -- with the result that free cash flow will grow.
What opportunities, specifically?
TheFly's note does not go into great detail on what specific "contract opportunities" Raymond James believes will benefit Maxar over the next couple of years. Fortunately, Maxar was kind enough to tell us this itself.
In multiple presentations at last week's SATELLITE 2018 conference in Washington, D.C., Maxar executives touted the company's "diversified commercial capabilities, including LEO and GEO satellite systems for high-resolution Earth observation and communications; next-generation, high-throughput technology; on-orbit servicing and assembly; and advanced signal and imagery processing."
In particular, the company highlighted its expanding ability to provide "Earth imagery" services, such as will be offered when the company begins launching its new WorldView Legion imaging constellation of satellites into space aboard SpaceX rockets in 2021. Maxar notes that Legion satellites -- built by its SSL space systems subsidiary and operated by its DigitalGlobe imaging subsidiary -- will "double DigitalGlobe's ability to collect the world's highest resolution 30 cm satellite imagery and triple the capacity available over the highest-demand regions." At the same time, Maxar predicts that the new generation of satellites will cut its capital spending "by half relative to the GeoEye-1, WorldView-1 and WorldView-2 satellites it will replace."
Tow trucks in space
Maxar also sees opportunities in "robotics and on-orbit servicing." Last year, SSL (also known as Space Systems Loral) won a contract from the U.S. Defense Advanced Research Projects Agency (DARPA) to develop satellites capable of inspecting, refueling, and repairing other companies' satellites while they are on station in geosynchronous orbit (GEO), more than 20,000 miles above the Earth. This contract followed the award of a similar NASA commission that would have SSL develop satellites to perform similar services on NASA satellites in low Earth orbit (LEO) -- perhaps as soon as 2020.
Other companies are working on similar projects -- Orbital ATK, due to be merged into Northrop Grumman any day now, and Lockheed Martin as well. But so far, SSL appears to occupy the pole position in this race, and is winning the government contracts that will lay the foundation for (and subsidize the creation of) this commercial service.
The upshot for investors
How big could these opportunities become for Maxar? Opinions differ.
On average, analysts surveyed by S&P Global Market Intelligence predict that Maxar's GAAP profits will eke out only a 3% annualized growth rate over the next five years -- arguably too slow to justify the stock's current price-to-earnings ratio of 18. At the same time, however, analysts see Maxar's free cash flow growing from less than $55 million last year to more than $355 million by 2020, and far outstripping reported GAAP income.
If your focus is on cash profits -- as Raymond James' appears to be -- then sevenfold growth in FCF over the next three years just might make for a compelling buy argument.