Space exploration company Maxar Technologies Inc (TSX:MAXR)(NYSE:MAXR) is hungry for good news.
On April 1, investors received some relief as the company inked a $4 million deal with Lockheed Martin Corporation. The transaction is still a consolation prize, however, seeing that the company has lost nearly $3 billion in market value over the past six months.
With customers like Lockheed Martin still turning to Maxar for deals, it’s still possible that the company could turn things around. After hitting $5 per share recently, is Maxar stock a bargain?
Here’s what caused the decline
Space exploration is a tricky business. Take Elon Musk’s SpaceX, for example.
Now renowned around the world for its tech savviness and forward-thinking, SpaceX is getting sizable new contracts every few months based on its reputation for low-cost services and reliable launch history, but it wasn’t always this way.
“A lot of people really only heard of SpaceX relatively recently, they may think Falcon 9 and Dragon just instantly appeared and that’s how it always was. But it wasn’t, ” Musk told an audience at the 2017 International Astronautical Congress.
Not only did SpaceX’s launches cost millions of dollars to execute, but any single failure had the potential to ruin the company.
“The first three launches failed. And fortunately the fourth launch…worked. Or it would have been— that would have been it for SpaceX,” Musk concluded.
Maxar Technologies is facing a somewhat similar problem.
On January 7, Maxar stock fell more than 30% after the company revealed issues with its WorldView-4 satellite, which rendered the equipment unusable. The following day, shares shed another 35% after analysts provided terrible forecasts.
“We hate turning negative after a significant pullback,” wrote National Bank of Canada analyst Richard Tse, “but given the latest development and a revised outlook that’s materially reset lower, we’re moving to the sidelines.”
Can Maxar pull off an incredible turnaround, similar to SpaceX?
There’s more to this story
If the satellite issue was the only story line, it would be tempting to take a position betting it was a one-off event. Unfortunately, other considerations make this a much messier story.
The biggest concern is the company’s poor financial controls.
Last year, a short-seller report called for 100% downside, accusing Maxar’s executives of cooking the books. As I wrote at the time, the report claimed that “Maxar’s management team has engaged in a latticework of accounting schemes and shenanigans.”
The facts of the case aren’t good.
For example, Maxar extended the depreciable lives of some long-lived assets not once, but twice in 2018, which effectively boosted reported earnings given the smaller annual depreciation charges. The acceleration of some tax credits along with one-time gains by changing the assumptions of its retirement plans also helped goose earnings.
Maxar’s CEO Howard Lance was involved in two other accounting scandals earlier in his career, so he likely doesn’t deserve the benefit of the doubt.
This is a binary story
There’s almost no way Maxar is worth its current share price.
If the company can retain the trust of its customers and book new contracts, there should be significant upside. If poor financial controls have disguised the company as a source of profitability, Maxar’s high debt load could bring down the house, leading to a complete wipe out of equity holders.
As of now, there’s virtually zero visibility into the likelihood of either scenario occurring. While there could be significant upside ahead, it’s likely best to leave this bet to other investors.
