Maxar Technologies (TSX:MAXR)(NYSE:MAXR) had a tough 2018, losing more than 90% of its value. By the end of the year, the stock was priced at just $6.
In 2019, shares traded sideways for months but ultimately moved higher to around $15. Tripling in value is impressive, but considering the stock was valued at $80 per share a few years ago, there’s still plenty of room for improvement.
In many ways, 2019 may have set the stage for a massive rebound. The company has been dealing with several headwinds, the biggest of which may be resolved in the coming months. If true, the stock could double or triple again in 2020.
How likely is a surge next year? Let’s dive in.
Understand the issues
If you want to bet on Maxar, it helps to know what you’re betting on. This story is a bit complex, but it breaks down into two key factors: accounting and debt.
When Maxar stock fell 90% in 2018, the chief impetus was a short-seller report from Spruce Point Capital, which had bets that would pay off if shares sank in value.
Spruce Point alleged the company was “engaging in a massive M&A accounting scheme to cover past problems.” It was difficult to interpret the charges as anything other than cooking the books. The report concluded that Maxar “pulled one of the most aggressive accounting schemes Spruce Point has ever seen to inflate Non-IFRS earnings by 79%.”
Accounting practices weren’t the end of the story. The report also noted that Maxar was “burdened by $3.7 billion of rising debt with almost no cash and free cash flow.”
Debt concerns weren’t a major issue in 2018, but as the stock price sank, liabilities become a stain on the company’s balance sheet. At one point, Maxar had an equity value of $500 million versus a debt load of around $4 billion.
How to bet
Spruce Point Capital made a tonne of money on its short bet, but not all seasoned analysts agreed with its take. In 2019, JPMorgan Chase called a bottom, noting that shares were now wildly undervalued. Its new price target called for 70% upside.
Over the coming months, JPMorgan was validated as Maxar stock doubled in value. Still, the stock trades at an 80% discount to its former highs. Shares could double or triple again and still remain below the market’s valuation in 2016.
There are two major reasons to expect a continued rebound.
First, the accounting issues likely overstated earnings, but most underlying segments are still profitable. Additionally, Maxar received more than a dozen new deals or contract renewals in 2019. It’s clear that there’s still plenty of demand for its services. A sinking share price hasn’t seemed to deter customers.
Second, the mounting debt load is being addressed by management. On November 4, the company refinanced $1.25 billion in notes, which are now due in 2023. On December 10, Maxar executed a sale-leaseback deal, which converted many of its owned properties into cash. This freed up another $291 million. Finally, on December 30, the company agreed to sell its MDA space robotics business for $1 billion.
With continued strong demand for its services, plus diminishing concern over its debt load, Maxar is quickly eliminating all of the concerns that pushed the stock down 90%. As the improvements gain traction, shares could be in for a major rise in 2020.
