Home Deep Analysis Maxar Technologies Stock: Not for the faint of heart (NYSE:MAXR)

Maxar Technologies Stock: Not for the faint of heart (NYSE:MAXR)

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Maxar Technologies Stock: Not for the faint of heart (NYSE:MAXR)


I recently saw a CNN news article showing Russian ships allegedly stealing Ukrainian grain, and I was amazed at the detailed satellite imagery in the article. Apparently these images were taken by Maxar Technologies Inc. (NYSE: MAXR), my curiosity was piqued.

Maxar values ​​its existing business at a reasonable price-to-earnings ratio of 16.4 times LTM earnings. If we assume Maxar successfully launches its new fleet of imaging satellites, the stock price looks attractive, with a potential 50% upside. I recommend investors slowly build up the stock ahead of the planned September launch of the satellite. Keep in mind that the stock is 1-day volatile, so risk-averse investors may want to consider a smaller position size.

Maxar overview

Maxar has more than 60 years of experience designing and manufacturing satellite and spacecraft components for communications, Earth observation, exploration, and in-orbit service and assembly. It has two operating divisions: Earth Intelligence and Space Infrastructure.

The Earth Intelligence business unit provides customers with high-resolution satellite imagery and analysis. Maxar currently operates four satellites in orbit that have collectively collected over 137 petabytes of imagery over 20 years (Figure 1). Maxar is also designing and building a fleet of six new satellites, called the “Worldview Legion,” expected to launch in the fall. Customers of the Geointelligence Unit include the U.S. government, other international government agencies, and corporate clients.

Image from the Maxar satellite.

Figure 1 – Maxar’s satellites in orbit (Maxar 2021 Annual Report)

The Space Infrastructure segment provides solutions for communications, Earth observation, remote sensing, in-orbit services, robotic assembly, and space exploration. Maxar designs and manufactures satellite and space components primarily for commercial satellite operators and government agencies worldwide. Over the years, more than 287 Maxar-customized spacecraft, including 81 Low Earth Orbit (“LEO”) satellites, have been launched for 2,850 years.

Maxar has had a lot of problems lately

Investing in Maxar stock is definitely not for the faint of heart. Over the past 5 years, the company has endured a mid-2018 short-selling attack, satellite failures, a new CEO, major write-downs and dividend cuts, the brink of bankruptcy, the sale of a major business to pay off debt, and a delayed launch. A generation of imagery satellites, to name a few.

Figure 2 shows Maxar’s share price performance. Note that the chart is filled with huge 1-day gaps, some as high as 35%. While Maxar’s day-to-day price action can be volatile, the long-term chart does show the potential for a big cup + handle formation, with notable relative strength compared to the market in recent weeks.

stock price chart

Figure 2 – Maxar share price volatility (author created using price charts from stockcharts.com)

Financial performance has been volatile

One of the reasons Maxar’s stock price is so volatile is that its business model relies on winning contracts and is very volatile. It is difficult for analysts to accurately forecast Maxar’s earnings. Windfall earnings per share can range from -460% to +550% (Figure 3). Even though revenue unexpectedly rose +24% in Q4 2019, EPS ended up unexpectedly increasing by -300%!

Volatile EPS

Figure 3 – Maxar earnings are volatile. (look for alpha)

Aside from being clumsy, the underlying business has been steadily improving since the 2019 near-death experience (Figure 4). While 2021 revenue is still lower than in 2018, gross margin expanded by 470 basis points, leading to a sharp reversal in operating income from a loss of $145 million in fiscal 2018 to an operating profit of $130 million in 2021.

Financial Summary

Figure 4 – Financial Summary (created by the author using data from tikr.com)

Key catalysts for the upcoming Worldview Legion

A key catalyst for Maxar’s upcoming launch is the scheduled launch of its next-generation satellite, “WorldView Legion.” Worldview Legion will be a fleet of six high-performance satellites that can recapture images of rapidly changing areas up to 15 times a day, up from the current 4 times a day, which will more than triple Maxar’s ability to collect 30cm high-resolution images and improve Maxar’s overall capabilities in high-demand areas.

Figure 5 highlights the capabilities of Worldview Legion in more detail. Worldview Legion will have a native resolution of 30 cm and can use data analytics to produce 15 cm high-definition images. Worldview Legion will also be able to capture larger single images of 672 square kilometers each at sub-50cm resolution, while competitors can only capture a single image of 26 square kilometers at 78cm resolution.

Worldview Legion Ability Summary

Figure 5 – Worldview Legion Capabilities (Maxar Investor Presentation)

Enhancements to Worldview Legion will enable Maxar to provide novel use cases such as remote monitoring of high-demand areas, accurate multi-layer mapping, timely analysis of life patterns and human geography, and accurate 3D models of the world (Figure 6).

Summary of Novel Use Cases

Figure 6 – Key Use Cases (Maxar Investor Presentation)

In fact, some analysts are so fascinated by the new satellite fleet that they estimate Worldview Legion could reignite Maxar’s top-line growth and propel the company to $360 million in free cash flow by 2023. Clearly, Kerrisdale Capital’s analysis above should take into account a 1-year delay in satellite launches.

Reasonable valuation with room for upside

LTM EPS is $1.63, and the stock is currently trading at 16.4 times earnings, basically in line with the market. Interestingly, with Worldview Legion coming online in the coming quarters, Wall Street analysts estimate Maxar’s revenue to grow substantially from $1.8 billion in 2022 to $2.1 billion in 2024 (Figure 7).

Consensus Income

Figure 7 – Consensus Revenue (Seeking Alpha)

As we mentioned above, Wall Street analysts are notoriously bad at estimating Maxar’s EPS due to the volatility of Maxar’s business. Assuming an additional $300 million in additional revenue from additional satellite imagery and its EBITDA margin of 40% (Figure 8), similar to the existing geointelligence business, we may see an additional $120 million in EBITDA.

Ebitda profit margin

Figure 8 – Satellite Image EBITDA Margin (Maxar Q1/2022 Presentation)

If we value this $120 million in additional EBITDA at 8.5x (Maxar’s EV/EBITDA is 7x to 13x, most recently at 8.4x), this could add $1 billion or nearly 50% to Maxar’s market cap Upside potential (Figure 9).

EV/EBITDA valuation

Figure 9 – Maxar EV/EBITDA Valuation (Tikr.com)

The Risks of Maxar’s Story

Worldview Legion release date biggest near-term risk

The biggest near-term risk is another delay in the launch of the Worldview Legion satellite fleet. Originally, Legion was scheduled to launch in mid-2021. It was then pushed back to the spring of 2022. In May, when Maxar released its Q1 results, it delayed the release to September of this year. There’s no guarantee that Legion will launch in the fall.

satellite may fail

Another key risk is the potential failure of satellites in orbit. Let’s face it, in January 2019, the Worldview 4 satellite failed and Maxar lost 50% of its value in two days, despite Maxar providing comprehensive insurance for its satellite fleet.

high debt

Finally, the issue that brought Maxar to near bankruptcy in 2019 was its high debt. Despite having paid off more than $1 billion, Maxar is still saddled with about $2.1 billion in long-term debt. This equates to 4.8x debt/EBITDA. High debt could limit Maxar’s operational flexibility or force the company to divest assets, as it did when it sold its MDA unit in 2019.

Fortunately, once Worldview Legion is operational, Maxar’s period of high capex should be over, and debt should be paid quickly from the free cash flow the satellite will generate.

in conclusion

In conclusion, I think investors should consider adding to Maxar stock ahead of Maxar’s launch of the Worldview Legion satellite, which is now slated for September. Its valuation is reasonable, and it has considerable upside once the new satellites are operational. However, Maxar is not a stock for the faint of heart as its business is inherently volatile and its share price is prone to large swings in 1 day. Investors should keep this in mind when adjusting their positions.

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