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....
In a note this morning, J.P. Morgan initiated coverage of Maxar stock with an overweight rating and a $12 price target -- predicting better than a 50% profit for investors who are willing to buy a high-risk stock in hopes it will turn out to be a "high-reward opportunity," says TheFly.com today.
And as we learned over the weekend, J.P. Morgan isn't the only one excited about this stock.
Maxar's CEO talks up his stock
Last week, G.research held its 25th Annual Aerospace & Defense Conference in New York City. At that conference, Maxar CEO Dan Jablonsky made an appearance to talk up his stock. He said that despite some setbacks, he is "excited about the trend lines" he's seeing in Maxar's business, as SpaceNews.com reported Sunday.
Probably the most important setback, as I noted back in January, was the loss of the company's WorldView-4 imaging satellite, which had been contributing about $85 million a year to Maxar's overall $2.2 billion annual revenue stream. Now, the good news is that, in recompense for the satellite's loss, Maxar's insurers paid the company a $183 million settlement to make it whole. The bad news is that that will only cover about two years' worth of the revenue the satellite should have brought in -- and that Maxar will now have to spend the money to build some new satellites to take over the work that WorldView should have done.
Accordingly, Jablonsky described 2019 as "a reset and stabilization year as we get ready to return to growth on a better, more nimble cost basis and organization model."
To replace the lost WorldView-4, Maxar is building a fleet of WorldView "Legion" imaging satellites. This satellite constellation should be able to provide high-resolution images more frequently than the WorldView-4 sat they'll replace, beginning with the first Legion sat's entry into orbit in Q1 2021. Legions will also be cheaper to build than WorldView was. And -- perhaps crucially -- because there will be more of them sharing the workload, the loss of any one satellite shouldn't be as disruptive to Maxar's business as was the loss of WorldView-4.
Maxar's got friends in high places
And that's not the end of the good news. Maxar, it seems, has powerful friends in Washington, and over the months following the WorldView snafu, they've stepped up to award the company multiple space contracts that will help to keep its revenue flowing. These include a $375 million contract to build the power and propulsion element spacecraft for NASA's new lunar Gateway space station, and related contracts to develop solar cells and antennae for the station.
It's the winning of contracts like these that Jablonsky sees as the "trend lines" leading Maxar back to profitability.
What comes next
And J.P. Morgan thinks Maxar will get there -- eventually. In its note today, the analyst predicts Maxar will return to cash profitability by 2021. (Most analysts see the company burning cash this year and next, according to a poll conducted by S&P Global Market Intelligence.)
In furtherance of that goal, Maxar's CEO notes that the company has already reduced its annual expenses by $60 million from restructuring (albeit at the cost of $40 million in spending to effect the reorganization this year). 2021 will be the first year that cash from the new Legion satellites begins rolling in, and as deployment proceeds, the amount of cash generated by Legion should increase -- even as the company pauses capital expenditures (Jablonsky calls it a "capex holiday") once all the Legions have been built and orbited.
If all goes as planned, analysts expect (on average) to see Maxar generating over $150 million in free cash flow annually by 2021, and growing that number afterwards. For a company with a market cap of only $472 million, that could make for a pretty attractive valuation...
...if you can wait until 2021 to see it, that is.