Will This Satellite Company Crash to Earth?

Great growth expectations may cause trouble for this high-flying satellite company.

The Motley Fool

In addition to developing communication satellites that deliver direct-to-home television, satellite radio, broadband internet, and mobile communications, MacDonald, Dettwiler and Associates, better known as MDA (TSX:MDA), also builds space-based and airborne surveillance and information systems.

However, MDA’s greatest “claim to fame” may be Canadarm, the robotic arm designed and built as our nation’s contribution to the NASA Space Shuttle program.

Let’s look at three important questions to determine if MDA’s stock will maintain its current orbit, or crash back to earth.

1. Is MDA stock value-priced?

MDA investors have done very well over the past few years. During the past 12 months, the stock has appreciated over 25%, doubling the 12.3% return posted by the S&P TSX Composite Index (TSX:^OSPTX). Over the past five years, the stock has more than tripled, up just over 202% — handily beating the S&P TSX Composite index, which increased just 57% over that same period. Currently, the stock is trading just above $87, threatening to establish a new 52-week high.

With its strong stock market performance, MDA is expensive by historical standards. Its trailing price-to-earnings ratio of 29.2 is high, and represents a 32% premium to its five-year average. And though its forward P/E ratio is a more modest 14.5, it still represents a 3% premium to its five-year average of 14.0.

2. Is MDA too dependent upon government?

MDA used to be heavily dependent upon government for business, but that’s not the case anymore.

In 2012, MDA acquired U.S.-based Space Systems/Loral for U.S. $875 million. The purchase transformed MDA’s business, and made it a major player in the commercial market, particularly in the U.S. Sales to non-government clients effectively doubled with the acquisition — commercial clients now account for an estimated 65% of combined revenue.

Prior to being acquired, Space Systems/Loral was a market leader in commercial satellites having been awarded more geostationary communication satellites than any other firm over the preceding five years. With over 300 satellites in orbit, each having an average lifespan of 15 years, repeat revenue from commercial clients like DIRECTV and Sirius XM will ensure MDA does not become overly reliant on government contracts.

3. Can MDA deliver upon the market’s growth expectations?

Earnings growth is expected to be exceptionally high over the next few years, due primarily to the Space Systems/Loral acquisition. Revenue was up nearly 30% in the fourth quarter compared to the same period a year earlier, and for the full year 2013, revenue more than doubled. Earnings increased 22% last year but earnings per share grew by a more modest 11%.

MDA’s current valuation and stock price is predicated upon the company delivering EPS growth in the range of 15% annually over the next five years. Anything short of that will be a disappointment, and limit any further stock price appreciation.

Foolish bottom line

MDA has proven to be an excellent investment. With the acquisition of Space Systems/Loral, it has diversified its business, and dramatically increased growth expectations. But today, MDA’s stock price fully reflects those growth prospects, and does not not offer much upside for investors. And if earnings do not materialize as most analysts expect over the coming quarters, investors will see this high flying stock crash back to earth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Justin K Lacey has no positions in any of the stocks mentioned in this article.

More on Investing

stock research, analyze data
Dividend Stocks

How Much to Invest to Get $500 in Dividends Every Month

TSX dividend stocks such as Enbridge, TD Bank, and Telus, can help you earn $500 in monthly dividend payments.

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

Clean Energy Play: Is Brookfield Renewable a Good Stock for a TFSA?

Add this top renewable energy stock to your self-directed TFSA portfolio for significant long-term and tax-free wealth growth.

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Powerhouses: Canadian Stocks to Fuel Your Portfolio

These two top Canadian dividend aristocrats are some of the top stocks on the TSX to buy now and hold…

Read more »

Dial moving from 4G to 5G
Dividend Stocks

This Undervalued Dividend Stock is Worth Buying Right Now

Want an undervalued dividend stock with long-term potential and a juicy yield? Here's an option you may regret not buying…

Read more »

A worker gives a business presentation.
Dividend Stocks

1 Stock I’m Buying Hand Over Fist in July Despite the Market’s Pessimism

This top dividend stock is going through a rough patch, but don't let that count out all the growth we've…

Read more »

financial freedom sign

2 Stocks With Millionaire-Maker Potential

These two top Canadian stocks are among the best on the TSX, and each has the potential to be millionaire-maker…

Read more »

Piggy bank next to a financial report
Stocks for Beginners

Is It Finally the Right Time to Buy Bank Stocks?

Canadian bank stocks are some of the most secure investments out there, but of them all, this bank stock is…

Read more »

clock time

3 Blue-Chip Stocks Every Canadian Should Own

Want some reliable blue-chip Canadian stocks to buy and hold for the next 10 years? These three stocks are worth…

Read more »