Recently a member of Pat McKeough’s Inner Circle had a detailed question about a Canadian stock with a well-established niche in satellite communications. MacDonald Dettwiler has grown on a diet of corporate clients and government contracts. This year it made a $3 billion acquisition of a U.S.-based firm specializing in high-resolution imagery.
Pat observes that the company could boost its revenue when it receives security clearance for classified U.S. space contracts. But he also notes that commercial satellite growth has slowed down and that this stock’s heavy reliance on government spending adds risk.
Q: Hi: I have held shares of MacDonald Dettwiler for many years. Over the long term I’ve done quite well with them, but the stock is only about 1% of my portfolio. It’s also not a recommendation of TSI. My question is related to the company’s recent acquisition. It seems like a significant purchase, compared to all of MacDonald Dettwiler’s corporate metrics. How is the company funding this deal? How much risk does that add? Thanks for the advice.
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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.
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 June 30, 2017, MacDonald Dettwiler’s revenue rose slightly, to $503.7 million from $502.5 million a year earlier. Sales were higher in the surveillance and intelligence segment; that was due to more contracts with the U.S. government, and other customers, to supply spacecraft for scientific research and development missions. That also offset a drop in the number of satellite-building contracts. Earnings rose 2.0%, to $25.8 million, or $0.71 a share, from $25.3 million, or $0.70 a share.
MacDonald Dettwiler holds cash of $7.8 million, or $0.21 a share. Its $880.0 million of long-term debt is a reasonable 34% of its $2.6 billion market cap.
The company has a $2.0 billion order backlog and has continued to add new contracts since the end of the latest quarter. These include a $100 million contract with the National Aeronautics and Space Administration’s (NASA) Jet Propulsion Laboratory. MacDonald Dettwiler will provide the spacecraft platform for a NASA Discovery Mission to explore the metallic asteroid 16 Psyche.
Growth stocks: DigitalGlobe used in search for missing Malaysian jetliner
Earlier this year, the company agreed to buy Colorado-based DigitalGlobe Inc. (symbol DGI on New York) for $3.1 billion. It will also assume $1.6 billion of DigitalGlobe’s debt. MacDonald Dettwiler expects to close the deal later this year.
DigitalGlobe shareholders will get about $1.3 billion of MacDonald Dettwiler shares and the rest in cash. MacDonald Dettwiler will take on debt of $1.6 billion in addition to DigitalGlobe’s debt. The total debt of the combined company will be roughly $4.1 billion, or a high 89% of the combined market cap of $4.6 billion. MacDonald Dettwiler will likely need to sell shares to the public at some point to pay down its debt.
DigitalGlobe is a leading global provider of commercial, high-resolution, world imagery products and services. Sourced from its own satellite constellation and aerial network, its imagery supports a wide variety of uses from mapping and analysis to navigation technology. The company’s services are used by companies such as Facebook, Uber and U.S. defence contractor Harris Corp.
DigitalGlobe is the satellite imagery company that helped look for the missing Malaysia Airlines jetliner in 2014. It used crowdsourcing to search for the missing plane, inviting Internet users to comb through satellite images of over 1,200 square miles (3,200 square kilometres) of ocean for signs of wreckage.
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 add more than $500 million in revenue each year.
The DigitalGlobe acquisition will help the company offset the uncertainty in commercial satellite markets. Still, a purchase of that size adds risk.
The stock trades at just 13.2 times the company’s forecast 2017 earnings of $5.39 a share. It yields 2.1%. On the surface, those numbers are appealing, but they reflect a high degree of political uncertainty and acquisition risk.
Inner Circle recommendation: MacDonald, Dettwiler and Associates is okay to hold, but only for highly aggressive investors.
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