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Is This Tech Company a Value Trap?

Value investing is one of the safest ways to invest and make good returns over the long run. However, there’s one thing about value investing that can frustrate investors — sometimes, value stocks can become even cheaper.

Maxar Technologies (TSX:MAXR)(NYSE:MAXR) was already a cheap stock on Friday, but amazingly, after the long weekend, it fell 13% on Tuesday. The decline was apparently triggered by the release of a short sell report from Spruce Point Capital Management.

Maxar Technologies quickly responded with a press release that stated the report “contains a number of inaccurate claims and misleading statements.” And that “Maxar … recently reaffirmed its full-year 2018 guidance for revenue and cash flow from operations, while increasing its full-year adjusted EPS outlook.”

The 2018 guidance includes revenue decline of 2-4%, adjusted cash flow from operations of US$300-400 million, and adjusted earnings per share of US$4.65-4.85.

A stock price graph showing declines

Image source: Getty Images.

The business

Maxar Technologies was formerly known as MacDonald, Dettwiler and Associates. It changed its name after merging with DigitalGlobe in 2017.

Maxar Technologies provides advanced space technology solutions for commercial and government markets including satellites, Earth imagery, geospatial data and analytics, globally.

Maxar Technologies provides end-to-end advanced systems capabilities and integrated solutions expertise to help its customers. An application for its high-resolution imagery is supporting autonomous driving applications.

Recent results

In the second quarter, Maxar Technologies generated US$578.9 million of revenue, which was an increase of 54% compared to the same period in 2017. The increase was largely due to the contribution of DigitalGlobe’s imagery and services businesses.

For the quarter, Maxar Technologies reported adjusted EBITDA of US$171.2 million, which equated to US$1.22 on a per-share basis.

High debt levels

One thing that’s troubling about Maxar Technologies is that it’s swimming in debt, which was largely used to fund acquisitions in the past. Its long-term debt has ballooned more than three times compared to three quarters ago. Specifically, it carried long-term debt of US$3.15 billion on its balance sheet at the end of the second quarter.

Just to put it in perspective, in the first half of the year, the company paid US$98.4 million of interest on its long-term debt and US$32.5 million on dividend payments and other. Together, they already use up nearly 93% of the company’s cash generated by operating activities in the period!

Investor takeaway

At the Tuesday market close price of US$38.44 per share, Maxar Technologies trades at a cheap multiple of about 9.1 based on last year’s adjusted earnings.

Investors can bet for a short-term dead-cat bounce or a three- to five-year turnaround, but there could be more pain down the road, while Maxar Technologies digests its acquisitions. The space company would be a much safer investment if it reduces its debt by, say, half. However, the stock should trade higher by then.

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Fool contributor Kay Ng has no position in any of the stocks mentioned. Maxar is a recommendation of Stock Advisor Canada.

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