Space company Maxar Technologies (MAXR) reported its Q3 2020 earnings late last week, and -- on the surface, at least -- they looked very good indeed.
Heading into earnings day, analysts had forecast that Maxar would earn $1.06 per share for the quarter. In fact, Maxar did better than that, reporting profits of $1.34 per share, outperforming expectations by 26%. Maxar's profits looked even better when compared to how it performed a year ago. Instead of losing money like it did last year, this time around Maxar reported a profit.
Now, you might expect that a huge reversal in fortune like this, and one that crushed consensus earnings expectations to boot, would have netted Maxar Technologies stock price a big gain. That didn't happen, though. To the contrary, Maxar shares collapsed, falling 25% on Friday, and then basically sat out Monday's big stock market rally, rising just 0.5%.
Why is that?
Why that is
The first reason Maxar stock performed so poorly last week can be summed up in one word: "revenue." Analysts had expected Maxar to reap revenue of $560.3 million in Q3 2020, but the company fell far short of that goal, reporting sales of just $436 million.
The second reason, curiously, can also be summed up in one word: "earnings."
Yes, I know. I just said the earnings Maxar reported looked better than last year's, but here's the thing: All of the $85 million that Maxar reported as its net profit for Q3 came from a single "gain on remeasurement of the previously held equity interest in Vricon," according to the company. Maxar didn't make more money building satellites or selling digital imagery. It just recalculated the value of a subsidiary that it completed acquiring in July 2020.
Despite this, Maxar CFO Biggs Porter argued that "performance in the quarter was solid, with both year-over-year revenue and profit growth on a consolidated basis and positive free cash flow."
And yet, "solid" isn't always the same thing as "good." In fact, Maxar's revenue only grew about 6% year-over-year, with Space Infrastructure sales rising 12%, but Earth Intelligence sales falling 3%. And because Earth Intelligence is by far the more profitable business for Maxar, that tiny decline in Earth Intelligence sales prevented the company from growing operating income at all. (In fact, operating profits declined.)
On a related note, it's worth pointing out that one of the few bright spots in Maxar's earnings report was a note that order backlog had grown to $2.2 billion. Most of the increase, however, came in the form of a $532 million increase in Space Infrastructure orders.
On the one hand, this boost to backlog creates the potential for greater sales growth going forward than the mere 6% growth seen in Q3. On the other hand, though, because the revenue will flow through Maxar's less profitable Space Infrastructure business, we could end up seeing this additional revenue create little in the way of additional profits for the company.
Free cash flow is still negative
One final note: According to Porter, free cash flow was positive in the third quarter of the year. That may be so -- but year to date, things are still looking grim. For the first nine months of this year, Maxar has now generated $132 million in operating cash flow -- but spent $224 million on capital investment. As a result, the company's free cash flow for the year to date is negative $92 million, which is worse than the $57 million in negative free cash flow reported in the equivalent period from a year ago.
Long story short, despite apparently impressive net profits of $343 million year to date, Maxar remains a cash-burning business. Despite its apparently cheap price to trailing earnings ratio of just 3.4, Maxar stock is not as profitable as meets the eye -- and investors are probably right to avoid it.