Pat McKeough recently replied to an Inner Circlemember looking for an opinion on this satellite contractor. While the stock’s price and its dividend yield are appealing, investors should be cautious, says Pat.
Q: Pat: Can I have your views on MacDonald Dettwiler as a potential investment? Thanks.
A:MACDONALD DETTWILER AND ASSOCIATES (symbol MDA on Toronto; www.mdacorporation.com), offers satellite space to a range of service providers, including television and radio broadcasters, and broadband Internet and mobile communications companies.
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The company is also a leading supplier of communication satellites and satellite-antenna subsystems, including related ground infrastructure and support services. Its main customers in this area are makers and operators of communication satellites and government agencies worldwide.
In the three months ended September 30, 2016, MacDonald Dettwiler’s revenue fell 3.8%, to $495.9 million from $515.4 million a year earlier. The decline was because of a drop in the number of satellite contracts over the past 18 months. A revenue increase for the company’s surveillance and intelligence businesses offset most of that decline.
Excluding one-time items, earnings fell 15.6%, to $46.1 million, or $1.26 a share, from $54.6 million, or $1.50 a share. A big factor in the drop was MacDonald Dettwiler’s one-time, $10 million loss on a fixed-price contract. That technology work was on a robotic space vehicle.
MacDonald Dettwiler holds cash of $22.5 million, or $0.62 a share. Its $785.1 million of long-term debt is a reasonable 31% of its $2.5-billion market cap.
The company has a $2.6 billion order backlog; About 75% of those contracts are for its surveillance and intelligence business.
MacDonald Dettwiler continued to add new contracts in the latest quarter. These included: a four-year deal with the European Maritime Safety Agency to provide Radarsat-2 imagery for border security, fisheries control and maritime safety; and a contract to build two high-power satellites for SiriusXM. Also in the quarter, the company launched three orbiting satellites for companies in Europe, Asia and Australia.
More recently, MacDonald Dettwiler won a $170 million contract with NASA as part of the agency’s development of its Restore-L spacecraft. That spacecraft will use robotics to grasp, refuel and relocate an existing U.S. government satellite already in orbit. The company’s job was to demonstrate technologies and techniques that can be implemented on future government and commercial missions.
MacDonald Dettwiler’s space and defense contracts are largely dependent on U.S. and Canadian government spending, which adds risk. As well, growth in commercial satellites has slowed lately, in part because of uncertainty over the future direction of satellite technology. However, the company expects to soon receive security clearance to work on classified U.S. government space contracts. It believes that will let it to add more than $500 million in revenue each year.
The stock trades at 11.6 times the forecast 2017 earnings of $5.78 a share. It yields 2.2%. Those numbers are superficially appealing, but they reflect a high degree of political uncertainty.
Inner Circle recommendation: MacDonald, Dettwiler and Associates is okay to hold for highly aggressive investors only.
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