MacDonald Dettwiler: Upgraded Despite Weak Short-Term Outlook

Jul.10.08 | About: MacDonald, Dettwiler (MDDWF)

The gloomy outlook for housing markets in the U.S. and even more so, the U.K. appears to be behind the recent sell-off in shares of MacDonald, Dettwiler and Associates Ltd. [MDA](OTCPK:MDDWF). However, despite the “dismal” short-term outlook for these markets, Dundee Securities analyst Richard Stoneman upgraded MDA shares to “buy” from “hold” based on valuation. His price target moves down to C$42.80 from C$44.40.

He does not anticipate a quick recovery in the U.K., where figures show home sale volumes averaged 61,950 between December 2007 and March 2008. That compares with 100,693 in the same period a year earlier. The analyst also noted estimates from Citigroup that one million homeowners will have negative home equity by the end of 2009, which suggests continued pressure on the housing market.

Mr. Stoneman told clients that MDA’s management indicated prospects for its information solutions business were weak before its deal with Alliant Techsystems Inc. (ATK) was announced, but since the Canadian government blocked the transactions the company has said the division looks good.

The analyst said:

We prefer to tread the middle path and have relied on historical growth rates for this business line.

As far as the potential sale of this division, he thinks it only adds value if it is sold to a U.S. domiciled company, although this looks unlikely in the near term.

Mr. Stoneman also expects MDA’s second quarter results due out at the end of July to include a C$4-million (C$0.07 per share) charge related to the failed sale, as well as a non-cash hedging loss related to the 19% share price decline in the quarter.

He said:

Together, these losses will make the headline quarterly earnings appear weak...