MacDonald Dettwiler & Associates Ltd. (MDA), the top technology stock in Canada over the past year, has more room to rise as it taps the U.S. government satellite market through its Space Systems/Loral acquisition.
The maker of the International Space Station’s Canadarm2 robotic arm as well as the Radarsat earth-observation satellites, has surged 65 percent over the past 12 months, the best-performing stock among six peers in the S&P/TSX Information Technology index. It’s also the second-best performing stock in the benchmark S&P/TSX Composite Index (SPTSX) in 2013, rising 30 percent to an intraday record on March 6. MacDonald Dettwiler fell 0.3 percent to C$72.77 in Toronto today for a market value of C$2.32 billion.
MacDonald Dettwiler last month reported fourth-quarter adjusted earnings that topped analysts’ estimates after adding revenue from its $875 million deal for SS/Loral, a unit of New York-based Loral Space & Communications Inc. (LORL)
“The Loral purchase is a game-changer for them,” said Luc Fournier, a fund manager at Industrial Alliance Insurance Financial Services Inc. in Quebec City, who oversees about C$800 million ($776 million) in Canadian equities including shares of MacDonald Dettwiler. “Analysts have really warmed up to the stock in recent weeks because MDA has entered a new market. This acquisition really opened a lot of eyes.”
Shortly after Vancouver-based MacDonald Dettwiler reported earnings, six analysts raised their price targets for the stock. There are currently nine buys, three holds and one sell for the company, according to data compiled by Bloomberg.
The SS/Loral purchase is critical to MacDonald Dettwiler’s growth, Thanos Moschopoulos, an analyst with BMO Capital Markets, said in a phone interview from Toronto.
“If you’re trying to sell into the U.S. government or NASA the key is having SS/L -- it’s a multi-billion dollar market,” Moschopoulos said. “Most of their business is commercial, so the government contracts are the growth opportunity.”
SS/Loral, based in Palo Alto, California, makes commercial satellites designed for transmitting television and radio, broadband Internet and mobile communications signals. It has also provided batteries to the International Space Station and antennas for the Voyager spacecraft.
Moschopoulos expects a total return, including dividends, of about 13 percent this year, raising his price target to C$78 from C$71.25 while maintaining an outperform rating for the stock.
A risk to anticipating growth through government contracts is the $85 billion of automatic federal budget cuts called sequestration, which began on March 1 and point to tighter spending in the future.
Defense contract awards shrank to $12 billion in January from $36 billion in December, said George Ferguson, a senior analyst with Bloomberg Industries, in a research note.
With net debt of C$800 million, about 2 1/2 times earnings before interest, taxes, depreciation and amortization, as well as C$350 million in unused debt, MacDonald Dettwiler is in a manageable financial position for further acquisitions, Moschopoulos said.
“We have a growth strategy and acquisitions are a fundamental component of that growth strategy,” Anil Wirasekara, chief financial officer, said on the phone from Vancouver. “We want to expand our geographical base from North America to more multinational. There’s lots of opportunities in emerging economies in Brazil, Russia, the Asian economies.”
The company is willing to add to its debt or go to the capital markets to fund acquisitions as big as SS/Loral, as long as the price is right, Wirasekara said.
MacDonald Dettwiler disclosed its backlog of C$2.9 billion in January, after winning a C$706 million contract from the Canadian government to help build three Radarsat satellites to be launched in 2018. The satellites will be used to monitor Canadian territory for military and environmental purposes, the federal government said.
This backlog, along with several active bids awaiting approval, will keep the company busy well into 2014, Moschopoulos said. By then, MacDonald Dettwiler should be in the thick of competing for contracts alongside Boeing Co. (BA) and the European Aeronautic Defence and Space Co., he said.
This year “and onwards will mark a period of strong revenues and earnings growth at MDA as the company endeavors to win more business and increase its market share in the U.S. commercial satellite market,” Naser Iqbal, analyst with Salman Partners Inc., said in a note to clients Feb. 28.
Projects on the horizon include NASA’s satellite servicing initiative, which is in the request-for-information stage. MacDonald Dettwiler is “well-positioned to participate as either a prime or a sub-contractor,” said Paul Steep, analyst with Scotia Capital Markets, in a note March 1.
Steep maintained a sector outperform rating, the equivalent of a buy, while raising his price target to C$78 from C$70.
Daniel Friedmann, chief executive officer of MacDonald Dettwiler, said sequestration’s impact on the company will not be substantial.
“The big impact is that there’s nothing new and big coming up,” Friedmann said in a conference call discussing the most recent earnings. “To the extent that nobody is spending the money on our competitors, that’s good.”
The company is concentrating on smaller proposals this year in anticipation of making bigger bids in 2014, Friedmann said.
Depending on how long sequestration lasts, it may reduce 2013 revenue by as much as C$10 million, he said.
“Whether or not they do cut back, there are still billions being spent,” Moschopoulos said. “That’s a big opportunity.”
In the meantime, MacDonald Dettwiler continues to snap up projects in Canada and the U.S.
On Feb. 25 the company said it successfully launched Sapphire, the Canadian Department of National Defence’s first dedicated operational military satellite.
The company has also secured a C$15.8 million deal with the Canadian Space Agency to design equipment for mapping an asteroid as part of a NASA mission to be launched in 2016.
“Personally I think they’ll be able to deliver,” Industrial Alliance’s Fournier said. “The only question is how fast. Long-term prospects for the satellite communications business are excellent.”
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