This Deep-Value Stock Is Not for the Faint of Heart

Maxar Technologies Ltd. (TSX:MAXR)(NYSE:MAXR) has huge upside potential if it rights the ship over the next few years.

Kay Ng

Author Bio Kay graduated from the University of British Columbia with a Bachelor of Science in Computer Science and furthered her studies in financial markets, finance, and financial accounting. She began investing in dividend stocks in 2008, turning an early interest into a lasting passion. Over the years, Kay has refined her investment approach to focus on high-quality businesses, using fundamental analysis and valuation to identify long-term investment opportunities. Her investment research and articles have been featured in The Motley Fool, Sure Dividend, and Seeking Alpha. Outside of investing, Kay enjoys playing the piano, from popular songs learned by ear to challenging classical compositions. Her favourites include Fantaisie-Impromptu by Frédéric Chopin and La Campanella by Franz Liszt. Education Bachelor of Science (BSc) in Computer Science, University of British Columbia Further studies in financial markets, finance, and financial accounting Areas of Expertise Dividend stocks, fundamental analysis, company valuation, quality investing, long-term investing, business fundamentals, and identifying investment opportunities in high-quality companies. Social Media Profiles LinkedIn Favorite Investment Quotes “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” — Benjamin Graham “A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.” — Warren Buffett

Published January 9, 2019 8:41 am EST

What bad luck! Maxar Technologies (TSX: MAXR)(NYSE: MAXR) just showed that things can go from bad to worse when the stock came tumbling down more than 32% on Monday and another 24% on Tuesday for a cumulative decline of almost 50% since Friday.

What triggered the fall in the stock was that the space technology company released news that its WorldView-4 imaging satellite could not produce usable imagery anymore and that the satellite was likely not recoverable.

To Maxar, how big of a blow is the lost satellite?

WorldView-4 was acquired by GeoEye prior to its merger with DigitalGlobe in 2013, while MDA Corp., a commercial satellite operator, merged with DigitalGlobe in 2017 before renaming itself to Maxar. The satellite was launched in November 2016 and generated revenues of about $85 million in 2018. This revenue amount is nearly 4% of the revenue Maxar generated from the last four reported quarters.

Dice engraved with the words buy and sell — *Image source: Getty Images.*

The satellite had a net book value of about $155 million, including related assets, as of the end of 2018. If the satellite is not recoverable, Maxar will write off the net book value in Q4 2018. The satellite’s net book value is about 2.5% of Maxar’s total assets at the end of September.

The roughly 50% loss of the stock from the news seems overblown. First, on an initial review, Maxar believes it can offset $10-15 million of the annual revenue from WorldView-4 with imagery collected by its other satellites and outside resources. Second, WorldView-4 is insured for $183 million, and Maxar intends to seek full recovery for the loss of the satellite under its insurance policies.

Maxar’s biggest problem is its debt levels

No doubt that WorldView-4 is a blow to Maxar. However, the space technology company’s biggest problem is still its huge debt levels. In the last reported quarter at the end of September, Maxar had about US$3.17 billion of long-term debt on its balance sheet.

In comparison, it had US$10.6 million of cash and cash equivalents, and it generated US$426.3 million of operating cash flow in the last four reported quarters. After subtracting capital expenditures, Maxar had US$289.7 million of free cash flow. If its free cash flow generation remained stagnant, it’d take Maxar about 11 years to pay off the debt.

The company’s debt-to-capital and debt-to-equity ratios are 60% and 1.8, respectively, which are on the high side.

Investor takeaway

Maxar has a weak balance sheet, and losing its satellite made things worse. It’s now estimated to have declining earnings this year. At US$6.03 per share (CAD$8.06 on the TSX) based on yesterday’s market close price, Maxar is a deep-value stock trading at about 1.7 times forward earnings.

Contrarian investors with at least three years of investment horizon may be interested in taking a bet here. The most bearish analyst from Thomson Reuters has a 12-month target of US$17 per share on the stock for nearly 182% near-term upside potential.