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...
Expected to report more than $1 a share in net profit for its fiscal third quarter, Canada's leading space company instead reported a massive $7.31-per-share loss -- most, but not all of which, came in the form of non-cash charges to earnings. Sales for the quarter also fell about 9% short of expectations, and investors punished the stock severely, selling it off by about 45%.
And that's the good news.
The bad news is that yesterday's sell-off looks set to continue today as Wall Street analysts weigh in on exactly how bad Maxar's numbers were. At last count, ratings watcher TheFly.com had clocked no fewer than three separate downgrades of Maxar stock this morning, as well as two price-target cuts.
Despite Maxar now costing barely half what it cost as recently as Tuesday, Canaccord Genuity downgraded Maxar to only "speculative buy." Analysts at TD Ameritrade removed the stock from their "action buy list." At CIBC, Maxar dropped from "outperformer" to "neutral."
Analysts at RBC Capital Markets and BMO Capital both cut their price targets on the Canadian space stock drastically, with RBC saying Maxar is now worth only $40 a share, and BMO guesstimating $35.
But here's the thing: Right now, after yesterday's sell-off, Maxar stock costs less than $15 a share. As a result, most of these analysts who soured on Maxar's prospects today...still think the stock is a buy. Why?
The obvious answer to this is that with Maxar stock now selling for close to a 50% discount off of Tuesday's closing price, these analysts believe investors have overreacted to Maxar's news, and created a great, yawning gap between price and value. If Maxar simply returns to the prices its shares fetched earlier in the week, that should equal a 100% profit for new investors today.
Of course, in order for Maxar to deserve such a valuation, it's got a lot of work to do. Let's take a quick look at what went wrong for the company yesterday, and see if it looks fixable.
Crunching the numbers at Maxar Technologies
Maxar Technologies divides its business into three broad categories: space systems (satellites and the ground stations that control them, as well as in-the-works projects to provide "space tow truck" services for the U.S. government), imagery (pictures of Earth, taken from those satellites and sold to customers down here), and the catch-all category of services.
Most of the problems Maxar suffered this past quarter had to do with its flagship space systems division, and in particular, its business building "GEO Comsats" -- large communications satellites that circle Earth in geosynchronous orbit. As Maxar CFO Biggs Porter explained: "We recognized impairment losses of $345.9 million and an inventory obsolescence charge of $37.7 million related to the GEO Comsat business this quarter. This non-cash charge reflects the decline in the business and our decision to evaluate strategic alternatives for GEO Comsat."
Space systems sales sank 12% for Maxar in Q3, versus services revenue that more than doubled, and imaging revenue that shot even higher (both helped by the addition of DigitalGlobe's imagery and services businesses to Maxar's revenue stream). Worse, as profits in its other divisions grew, adjusted EBITDA in the space systems division fell 69%. Maxar blamed "a significant increase in estimated costs to complete programs as a result of supplier performance issues and delays" for the decline in profits. More than that, though, Maxar advised that "there has been a step down in total number and dollar value of geostationary communication satellite awards compared to historical averages prior to 2015" -- a trend we've been following here for some time.
Result: "The Company continues to review strategic alternatives for its geostationary communications satellite business to improve its financial performance and is in active discussions with potential buyers of the business. No final decision has been made and there can be no guarantee that a transaction will result."
What comes next
Removing GEO Comsat from the mix would obviously take away a large part of Maxar's revenue stream, but could potentially also help to improve the profitability outlook for the Maxar businesses that remain. In the near term, Maxar still says it's expecting to see 2018 revenue fall 6.5% by the time this year wraps up, and there's a very real possibility the company will go free-cash-flow negative.
Regardless, BMO notes that at less than $14 a share today, Maxar stock is selling for "just 7-times expected FY18 EBITDA of its Imaging and Services" businesses alone. And if you look a bit farther out, RBC Capital argues that Maxar stock as a whole costs a mere 3.2 times "FY20 earnings."
I have to admit that thanks to this week's sudden sell-off, the stock is looking very tempting -- if Maxar can stop the bleeding. For long-term buyers, today's series of downgrades may prove a blessing in disguise, as they bring the space star's valuation down even closer to Earth.