Maxar Technologies: Well-Positioned For Times Of Strife And Beyond

Summary

• NATO is not sending troops to the Ukrainian territory just yet, making intelligence stocks look well-positioned to give investors exposure to the ongoing conflict.
• Earth imagery revenues raised more than 10% in the last three months, which hints demand for this kind of services could grow in the short term.
• New government contracting opportunities appear to be a reasonable source of income for the short-term future of the company.

gorodenkoff/iStock via Getty Images

Wars are not usually won by those who use the most powerful forces, but instead by those who can build winning tactics based on crucial information. Nowadays, the weight of intelligence in wars is surging due to a higher implication of technology on the battlefield, and since the beginning of the space race, also in the Earth's orbit.

In the context of the ongoing war in Ukraine, Maxar's (NYSE:MAXR) satellite imagery support has been of great importance to the Ukrainian forces for controlling the movements and actions perpetrated by the Russian troops. This type of insight is critical in this field as it is a fast-changing environment in which a fast decision-making process can literally save lives.

Investment thesis

Despite the recent increase in prices since the beginning of the Ukrainian conflict, the company seems to be still cheap given the following factors:

• Ukrainian war: This conflict has already shown some of the potential benefits of the services provided by the company. The conflict in Eastern Europe will cause an increase in the short-term demand as it has been seen in the last report with revenues up 10% in the Earth imagery segment and the impact of the latest governmental deals is still to be weighed by the markets. Moreover, if the conflict ends in Kyiv, it is likely that we fall into Cold War II, for which geospatial intelligence stocks are set to be the big winners, given that European countries will remain vigilant on their borders with Russia.
• Governmental customers and new contracts: Maxar is rapidly growing its relations with Federal Institutions like NASA for which the company is building a key component to the Artemis mission. Moreover, a new Electro-Optical Commercial Layer proposal could provide the company with solid cash flows through the coming years.
• Valuation: Even though the company looks expensive in valuation terms, the fact that the company is profitable in a sector where most of the competitors cannot achieve a positive price-to-earnings ratio has to be taken into account. This reflects the efficiency of the firm, a key component to leading a fast-growing yet small industry.

Company recap

Maxar has a long history of space exploration as the company successfully achieved the milestone of deploying its 100th satellite in orbit back in 2015. They have plenty of them and the highest quality ones, something that helped secure their latest institutional contracts. Particularly, the European Space Imagery center is the main provider of Earth Observation (EO) services in Europe and Africa, and as cited in a recent Maxar's press release:

European Space Imaging and Space Imaging Middle East provide Maxar high-resolution satellite imagery to a wide spectrum of government and commercial organizations for applications including border security, disaster response, and agriculture. Continuing an 11-year partnership, European Space Imaging has reserved dedicated capacity on Maxar's existing WorldView satellite imaging constellation, accessed directly via its ground station in Germany. The agreement also provides for upgrades to European Space Imaging's ground station that would allow it to access Maxar's next-generation WorldView Legion satellites.

There are two main ideas to be highlighted in this statement. On one hand, the fact that the European Space Imaging center renews its existing contract for the term of 11 years is a really good sign that the company can successfully deliver institutional services. Also, notice that this latest contract is not only an extension from the last deal reached between the parties but also an upgrade; the European Space Imaging will now have access to the newest and highest-resolution satellites providing 15-cm HD imagery.

On the other hand, it is necessary to understand the first sentence of the quote in the context of the war that is taking place just outside of the European borders. During the last week of January, just at the beginning of the bilateral talks held on the Ukrainian border with Belarus, a Maxar-owned satellite spotted a 40-mile long Russian convoy approaching Kyiv. This last news confirms how critical this kind of insight is for modern warfare and hints this kind of service is going to be in high demand during the following weeks, which will inevitably have a positive impact on upcoming business deals and future guidance, as the publicity it is receiving for providing such valuable information is enormous.

Even though most of these images are available to the media free of charge or at minimum costs, it allows the company to show the world the numerous applications of this technology and foster future clients to take the service into account for future business operations.

Contracts coming from the U.S. Government are increasing at a fast pace

The company has been pursuing government contracts since the very beginning. Former DigitalGlobe was awarded $3.55 Billion for the Enhanced View contract and its parent company aims to follow its path. The contract, effective since September 2010, was signed for 10 years with 9 one-year options. In any case, the U.S. Government has moved fast in releasing the Electro-Optical Commercial Layer (“EOCL”) contract Request for Proposal which would be a replacement for the Enhanced View Program. Even though the company has reduced its revenue from space infrastructure governmental contracts during the year ended December 31, 2021 by $45 Million, revenues from the Earth Intelligence segment increased by $12 million for the year 2021 and $31 million in the last three months ended December 31, 2021 compared to last year.

FPDS.gov

In any case, the graph displayed above shows that revenues from the public sector may soar this year as the company has already secured as much revenue as last year in just 2 full months. This, combined with the fact that the company is set to be awarded the EOCL contract, as it is the best-positioned and most-experienced provider for this type of missions intelligence, makes the short-term outlook of the company look extremely attractive.

Price action

The market seems to have already weighed in the latest events as the company's share price skyrocketed the day after the earnings of the 10-Q filing was published on February 22, which coincides with the invasion of Putin on Ukraine's territory. Revenues in the space imagery sector rose 10% in the last three months ended December 31, 2021, which also helped the stock rally on that date.

Data by YCharts

The latest price movement has sent the stock back to the $35-$36 area, which is serving as a resistance level. Once this level is cleared, the $38-$40 would be the next stop before breaking previous highs. Although this last event has caused market cap indicators to increase, which could indicate overvaluation of the stock, it could also be a sign that the market expects higher income coming in the following months, which is a highly probable scenario given the current situation.

Seeking Alpha

Furthermore, based on Seeking Alpha data, it seems clear that, from a risk-reward approach, the stock at the current price of nearly $36 leaves us with plenty of room for gains with limited losses.

Fundamentals and comparable analysis valuation

For this comparison, two relatively close businesses have been selected. The first one is Kratos Defense (KTOS) which operates in the UAV and satellite communication sector; it has also been considered for the market valuation of the company which is very similar to Maxar's. The second one is BlackSky (BKSY), a blank check company that focuses primarily on the earth imagery and observation segment, and it has been selected for being a close competitor of Maxar with a similar business model. Finally, the sector column was retrieved from Seeking Alpha for the industrial sector.

Liquidity & Solvency	MAXR	KTOS	BKSY	Sector
Current ratio	0.85	3.43	7.68	2.71
Quick ratio	0.65	2.87	7.38	1.97
Debt to Equity ratio (%)	158.17	39.98	51.09	NM
Profitability and Efficiency
Coverage ratio (%)	1.24	1.25	NM	NM
Gross Margin (%)	44.41	27.74	1.08	29.19
Net Margin (%)	2.60	-0.25	NM	6.55
ROA (%)	1.89	1.18	-	5.16
ROE (%)	3.83	0.05	NM	13.68
Market Valuation
EV/EBITDA	11.09	45.92	-	13.03
P/E	56.51	-	-	21.27
P/B	1.77	2.54	1.77	2.58

Click to enlarge

Source: author using data from seeking alpha.

We can appreciate in the observed ratios that Maxar has a valuation position of a better outlook than that of its peers, being the only one with a positive P/E ratio and an EV/EBITDA close to x10. Profitability numbers seem to be good in comparison to the sector. In particular, Maxar has a far better gross margin compared with Kratos, not to mention with BlackSky. This could imply that it's more likely that Maxar obtains the EOCL contract, because it can be more competitive in price - not to mention the experience obtained during the last 10 years of collaboration with the government.

Nevertheless, it has to be mentioned that the liquidity of the firm seems to be a little bit weak with a quick ratio which is closer to 0.5 than to 1, but this should be offset by the growing capabilities of the company, existing (unfunded contract options totaling $650 million) and new governmental customers and order backlog which is composed of $1,893 million in orders for the company. Also to be mentioned that those two ratios measuring the liquidity of the firm have been stable and close to this level for the past >5 years, which could indicate that the company should be able to conduct its activities as normal without incurring an insolvency risk.

Finally, comparing the stock with the industrial sector, it is even more clear that the balance sheet of the company seems weak in comparison with its peers and that profitability may still have room for growth in the coming years. In any case, taking valuation ratios into account, it is to be said that the company achieves a great performance in this aspect with respect to its closest peers. In the Earth Observation industry, Maxar is one of the only companies that report positive net earnings. Furthermore, if the company were to be valued at a P/B multiple of x2.58, we could be expecting an increase in the price of roughly 45% or to around $52.2.

Risk assessment

After having analyzed the numerous ideas behind this article, it is time to talk about the risks of the company. One of the principal risks for the company's activities is security, both on the physical and digital ground. This risk includes cyberattacks from computer viruses, malware, worms, attacks by hackers or foreign governments. This last kind of threat has been growing in the past months as the company has given support to the Ukrainian troops. In this context, the company has been working on a new selection process to increase the capabilities of the cybersecurity team. Moreover, the company uses end-to-end encryption in its constellation of satellites which ensures the safety of the data and prevents leaks. Physical attacks could be performed on the company's satellites, but at a ridiculously higher cost and difficulty.

Another major threat to the investment thesis behind this article is that the company is not awarded with the EOCL contract, which is still a proposal. This would imply lower guidance for future cash flows and therefore a lower valuation. Nevertheless, the company still has a solid backlog of orders which is more than 3x the annual revenue of the company which would contribute to a stable set of cash flows for the short term. In any case, after more than 10 years of successful partnership with the government on the leading contract in the geospatial intelligence industry, it is highly probable that the company will remain as the main supplier of Earth imagery to the United States, not to mention the rest of the deals that the company is involved in at the moment.

Conclusion

Having said all this, although the price may seem a little high at the moment, if the war continues for more time than expected, then military stocks could be the only hedger alongside commodities. Also, as it was said earlier, taking intelligence stocks into account can be a safer play and could potentially be a very profitable position if we are heading into a cold war where Maxar's spy satellites could be a highly valuable asset.

Furthermore, the ongoing EOCL contract could potentially provide a stable cash flow for the company in the coming years as well as a notable reputation.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.