Recently a Member of Pat McKeough’s Inner Circle asked about a stock that is best known for its satellite technology.

Formerly known as MacDonald Dettwiler and Associates, the company changed its name to Maxar Technologies last year. It also acquired a Colorado firm specializing in high-resolution imagery with clients such as Facebook, Uber and a big U.S. defence contractor. While Maxar’s earnings jumped last year, Pat notes that a large acquisition like this adds risk. So does the company’s reliance on government spending.

Q: Hello Pat and Team: What is your opinion on Maxar Technologies? Thanks.

A: MAXAR TECHNOLOGIES (symbol MAXR on Toronto; www.maxar.com) changed its name from MacDonald Dettwiler and Associates in October 2017.

The company remains a global provider of communications systems, high-resolution earth-imagery products and services, and information systems for the surveillance/intelligence and communications markets. Its customers include global satellite operators, government entities, and other corporate clients.

Maxar completed the purchase of Colorado-based DigitalGlobe Inc. (symbol DGI on New York) in October 2017 for $2.3 billion U.S.

That firm is a leading global provider of commercial high-resolution, world imagery products and services. Sourced from its own satellite constellation and aerial network, DigitalGlobe’s imagery has a wide variety of uses. They include mapping, analysis and navigation. Its services are used by companies such as Facebook, Uber and U.S. defence contractor Harris Corp.

DigitalGlobe is perhaps best-known as the satellite imagery company that helped look for the missing Malaysia Airlines jetliner in 2014. It used crowdsourcing to search for the aircraft: specifically, it invited Internet users to comb through satellite images covering 3,200 square kilometres of ocean surface for signs of wreckage.

Growth stocks: New acquisition helps spur big jump in earnings

Maxar’s revenue has grown slowly over the last five years, moving up just 15.4%, from $1.82 billion in 2013 to $2.10 billion in 2017. Over that period, earnings rose 23.0%, from $105.0 million, or $3.00 a share, to $129.2 million, or $3.14. (All five-year figures are in Canadian dollars.)

Starting with the 2017 fourth quarter, ended December 31, 2017, the company changed its reporting currency to U.S. dollars from Canadian. In those three months, Maxar’s revenue rose 44.7%, to $545.1 million from $376.6 million a year earlier. (All quarterly figures in U.S. dollars.) The jump came largely from the DigitalGlobe acquisition, which was partly offset by lower revenue from the company’s Space Systems segment.

Earnings, excluding one-time items, jumped 72.3%, to $66.5 million from $38.6 million. That was also mostly due to the DigitalGlobe acquisition. However, earnings per share rose just 12.3%, to $1.19 from $1.06, due to more shares outstanding as a result of that purchase.

Despite the profit gains in the quarter, the stock took a big drop in late February 2018 because full-year earnings failed to meet expectations. Earnings per share, in fact, fell 15.8%.

Growth stocks: Company has security clearance for classified U.S. government space<

Maxar’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 due to uncertainty around the future direction of satellite technology. However, in January 2017, the company received security clearance to work in classified U.S. government space. That means it is eligible for defence contracts.

The DigitalGlobe acquisition will help the company offset the uncertainty in commercial satellite markets, but a purchase of that size still adds risk.

The stock trades at just 12.0 times Maxar’s forecast 2018 earnings of $4.66 U.S. a share. It yields 2.5%. Those numbers are superficially appealing, but they reflect a high degree of political uncertainty and acquisition risk.

The company’s high debt is also a significant risk factor: following the DigitalGlobe acquisition, Maxar’s long-term debt stood at $2.9 billion U.S., or a very high 112% of its market cap. It also holds cash of $19.1 million U.S., or $0.34 a share.

Inner Circle recommendation: Maxar Technologies is okay to hold, but only for highly aggressive investors.

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