Buy Maxar For The Cashflow
Summary
- Maxar Technologies, the once-embattled space sector pureplay, reported its Q4 earnings this week.
- Few investors appeared to notice, but Maxar generated positive unlevered pre-tax free cashflow for the year.
- Many investors are likely hesitant to commit to Maxar, since the market's worries about the company's ability to service its debt are only now beginning to abate.
- We believe perception lags reality and, further, that the stock is en route to all time highs. We rate the name a Buy - Long-Term Hold.
- This idea was discussed in more depth with members of my private investing community, The Fundamentals. Get started today »
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No Longer An Oxymoron
The words "Maxar" and "cashflow" have not, in recent times, sat well together in a sentence, unless elsewhere in the sentence you could also find the words "not enough" and "relative to the debt level". We've covered NYSE:MAXR for a long time and right from the off, back in 2017 before the company redomiciled to the US, we flagged the sizeable debt load built up by the prior management team in pursuing a series of space-sector acquisitions. As has been much written on these pages and elsewhere, the problems came home to roost when a single-point-of-failure event took place, that being the late 2018 on-orbit failure of a third party imaging satellite operated by MAXR. The subsequent damage to earnings and cashflow were painful in the short term but in truth have led to a series of structural improvements at the company. Chief among the improvements was the installation of a new CEO, management team and board of directors. This new team atop the company has delivered what in our view has been a stellar performance in a very trying environment. The result has been seen in the stock price, which has moved up from high single digits to the high $40s during the current CEO's tenure. Whichever way you care to measure it, you end up with around a 4.5x return in a little over two years - not too shabby even in today's high octane markets.
Source: TradingView
We believe there is plenty of growth left in MAXR's stock price. Risk, too, since the company is just six months away from launching a new fleet of Earth observation satellites that this time were built in-house. The space sector is a difficult business to be in, mainly because as everyone who works in the field likes to say, "space is hard". Bad things can happen during satellite manufacture that only become obvious once the machine is a long way from the workshop - a good example of that being the Hubble Space Telescope. Bad things can happen on launch day for any number of reasons. And unexpected events can happen once the machinery is in place - debris impacts, radiation events, all manner of challenges lurk in that particular operating environment. No space sector stock is ever likely to be relaxing to own as a result - if you want to invest in this lucrative sector you have to prepare yourself for some risk along the way.
Our note today on MAXR is an important one because we believe the Q4 and full year FY12/2020 numbers as delivered last week mark a key milestone in the company's growth under that new management team. Here's the numbers. (Note, if you're not familiar with the "pro forma" term we use for the FY12/19 comparison, this is a simple concept. MAXR sold a material division, MDA, in early 2020. The sale was the single most important step in delivering that share price recovery and was handled with great and still largely unrecognized aplomb - you can read our take on it here. The Pro Forma 2019 treatment strips out that disposed-of division so it is a way to compare like with like between 2019 and 2020).
Here's the numbers:
Source: Company SEC filings, YCharts.com, Cestrian Analysis
Look to the bottom right. You see that little $14m number in a green box? That's positive unlevered pre-tax free cashflow for FY12/20. Allow us to translate. In 2020 the company generated actual money before it has to pay lenders or the IRS. Forget Adjusted EBITDA or any other measure of GAAP or non GAAP earnings, look at actual money.
Now the IRS doesn't get a lot of money from MAXR on account of its huge depreciation charges and other tax shield matters. And that leverage, whilst big still, is coming down rapidly.
Source: Company SEC filings, YCharts.com, Cestrian Analysis
7.8x leverage (= net debt / TTM EBITDA) is scary no matter how loose your covenants and how far down the road your next amortization payment. So in December 2019 any cautious investor had at least in their own mind plenty of specters at the gate to worry about. Now, everyone will tell you MAXR is a winner, but few, very few, were saying that in 2019. We ourselves were highly critical of the company until the new team really got to work and began hacking at that debt pile - you can see the history of our Seeking Alpha notes on MAXR here and you can see our stance turn from "we do not like this" to "we are starting to like this" to "we do like this a lot". Some folks that post on Seeking Alpha can point to their faith in the company when its stock was at the $5 level. We were not so brave and we were not among them at that time. But they were there, they are still there, and they are to be saluted for their wise judgment. We ourselves got happy the minute they signed that MDA sale, which was the key step towards a manageable business and a viable balance sheet. You can see this in our ratings history of the stock on Seeking Alpha:
Cestrian Capital Research - Seeking Alpha Articles Rating History, MAXR
Source: Seeking Alpha
Now, with leverage at 6.1x and no meaningful amortization payments in sight, a growing revenue line, sight of a much more capital efficient imaging business in the acquired Vricon business - MAXR is a much less stressful investment than it used to be. And along the way, space got hot. You know it's hot because there are all manner of SPACs springing up here and there to buy startup space companies. The original being the acquisition of Virgin Galactic by the IPOA SPAC (all now trading under the SPCE ticker) - now you can just smush some letters together and there's a good chance the combination you come up with is a space SPAC. SRAC, HOL, NPA ... the list goes on. They all trade at crazy valuations unrelated to most anything save for the potential that Ark Invest's planned new space ETF, ARKX (see our note on that here), starts buying them.
MAXR trades at the following valuation:
Three times last year's revenue, and thirteen and a half times last year's EBITDA. That's like what you had to pay for a solid but unexciting old-line kind of industrials business in maybe 2015, 2016 - since which time, valuation multiples have expanded materially across the market. MAXR's multiples lag in our view - we believe because investor perception of the stock lags current reality.
We think MAXR is a business which is going to grow revenue, EBITDA and cashflow. We think that the new satellite fleet launch is more likely to succeed than fail - no doubt there will be some bumps in the road but the management team knows that the new fleet is the major hurdle facing both the company's operating performance and the stock valuation. We think that the stock can reach new all-time highs during 2021-22; the ATH (all-time high) currently stands at around $68, around a 40% uplift to last week's closing price. We don't think this is a fanciful target. Firstly, on fundamentals, in during 2021-22 the company achieves a modest 12% uptick in EBITDA and the market assigns a modest 11% improvement in EV/EBITDA multiples - that would deliver a stock price in that $68 zip code - even if there was no further improvement in the balance sheet. (We assume further stock issuance too). Here's a worked example.
Sources: Company SEC filings, YCharts.com, Cestrian Analysis
That's not very scientific on our part - it merely shows the power of multiple expansion. A not very large increase in EBITDA can deliver a sizeable improvement in share price if the market re-rates a stock even slightly.
We believe that the space sector will continue to garner investor attention through 2021, and that alone is capable of elevating multiples somewhat. We also believe the company is very capable of delivering 12% or better EBITDA growth. And so, absent some major market downturn which at this point we don't anticipate, we're comfortable with a price target of say $70 in the next year or so.
Cestrian Capital Research, Inc - 1 March 2021
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This article was written by
Cestrian Capital Research, Inc. is an independent, SEC-regulated investment research business led by CEO Alex King. Alex is a professional investor with 3 decades of experience. Cestrian specializes in covering growth stocks, index ETFs and index options, long-run investing, swing trading and risk management via hedging.
Alex runs the investing group Learn more.Analyst’s Disclosure: I am/we are long MAXR.
Business relationship disclosure: See disclaimer text at the top of this article.
Cestrian Capital Research, Inc staff personal accounts hold long position(s) in MAXR.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (67)
I'm still in, but if I had more than a nickel, I'd buy a partial share.
But why no love for NPA? Heck it only has a 1946 PE (TTM)! ;-P
It's very different in terms of coverage, timing and resolution. BlackSky is the little guy, in most terms. They don't offer anything that MAXR doesn't already do better. The one positive is that being in the right spot at the right time, can change many things (temporal resolution). But, I wouldn't bet the farm on it. Especially since MAXR can see a book and BlackSky would miss a dog.MAXR resolution (www.euspaceimaging.com/...) (www.euspaceimaging.com/...)
BlackSky resolution (www.euspaceimaging.com/...
Back when the sat bricked it. We started watching this. (There were several of us). When they paid off 100% on the flying brick, and I saw that the poison pill was a great idea, I went ahead and pretty much went all in. (5-6, with a touch more @ 14).
That bag-o-gold, has done nothing but grow.
Now as we get to the point where FCF and debt are going to obviously NOT be an issue. We will see the next massive move up with Legion 1 launch this fall. If all goes well with L1 and L2 launches (very happy they are on SpaceX) and warmups, that's where it should be obvious to every one. And that what's going to take PPS to triple digits.
It's nice to not have much in the way of competition and that also adds to the fun we will see over the next year. You should only expect to find one or two of these stocks in your career.
My number one pick. Next year will be awesome.
