Maxar Technologies: A Risky NewSpace Stock
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It’s been a little over two years since we were scouring the stock market universe looking for “picks-and-shovels” plays which stand to benefit from all the money pouring into the space industry, something which prompted us to ask Will NewSpace Supernova Into a Trillion Dollar Business? Morgan Stanley thinks it will by 2040, and they put together a list of “Space 20” stocks that didn’t seem to quite capture the exposure we’d expect from a NewSpace themed stock portfolio.
If you’re wondering why names like GoDaddy and Shopify make the list, they’re expected to reap benefits as everyone around the world connects to the Internet and immediately becomes a future customer. (Except for the Chinese, who constitute one in five people on this planet but are suspiciously absent from the above list.) Morgan Stanley provides a breakdown of where they expect the NewSpace growth to come from. The category referred to as “second order impacts” captures the growth expected in a world where everyone is connected to the Internet.
We’ve talked before about the race to provide cheap global Internet access so that everyone on the planet can become a future customer. As satellites become smaller and cheaper, we’re now able to take pictures of the entire planet’s surface and analyze them for insights. Soon, those satellites will be beaming down cheap Internet access so that everyone and everything can be connected to the cloud. It’s an ambitious plan that comes with a great deal of risk for NewSpace investors – operational risk, geopolitical risk, space junk risk, credit risk, political risk, and the list of risks goes on.
While Morgan Stanley’s list of “space stocks” provides somewhere for retail investors to start, we’re more interested in stocks that provide exposure to specific areas of NewSpace – like satellite infrastructure or space imagery. One such stock which didn’t make the Morgan Stanley list is Maxar Technologies (MAXR), a company that operates along the entire NewSpace value chain.
Not the Prettiest Sight in the World
“If you look at our stock chart, it’s not the prettiest sight in the world. We’ve had a rough year,” said CEO Dan Jablonsky to an audience of investors last month. That’s from a recent article by SpaceNews that attributes Maxar’s stock price decline to “earnings warnings, along with the failure in early January of the WorldView-4 imaging satellite.”
In the past rolling year, Maxar Technologies’ stock price has plummeted -75% compared to a Nasdaq return of +3% during the same time frame. The same month their flagship imaging satellite failed, their CEO of less than three years, Howard Lance, resigned. The big question to be answered is, what sort of company does Maxar Technologies want to become? In our previous article on investing in space stocks, we talked about Maxar Technologies’ acquisition of “the global leader in earth imaging and geospatial solutions”, a company called DigitalGlobe which was said to give them a dominant position in space imaging.
That all changed with the failure of the WorldView-4 satellite earlier this year. Following that traumatic event, let’s look at where the company’s revenues are coming from based on their latest regulatory filing.
Maxar Technologies’ Revenues
In 2018, Maxar Technologies pulled in $2.2 billion in revenues. That was before things started going downhill for the company, so we’re interested in looking at more recent numbers – like Maxar Technologies’ latest 10-Q filing which reports the results for the three months ending June 30th, 2019. In the filing, we see three reporting segments with “Space Systems” accounting for just over half of total revenues followed by Imagery at 41% (below numbers in millions).
When we move down to look at EBIDTA (that’s a proxy for simple earnings), it’s clear that the Imagery business is far more profitable with very high margins. Maxar recognizes this citing the decline of their geostationary satellite manufacturing business (“GeoComm”) as a risk factor in their filing which goes on to say:
We have explored strategic alternatives regarding the future of our GeoComm business, including partnering with an existing satellite manufacturer to gain scale benefits; selling the GeoComm business; or exiting the GeoComm business following completion of existing contracts in backlog and the sale of its facilities.
Now, we don’t know what proportion of the “Space Systems” segment GeoComm constitutes because we’re not given that information. However, the company says that “the future revenue and operating results of the Space Systems segment are dependent on our ability to generate a sustainable order rate for the satellite manufacturing operations.” That statement implies that without GeoComm, there is no “Space Systems” segment. This means that the satellite Imagery segment becomes a key part of the company’s future prospects.
Update 12/31/2019: Maxar recently entered into an agreement to sell their subsidiary — MacDonald, Dettwiler and Associates (“MDA”) — to a group of private equity firms for $765 million to retire some of their debt. Shares rose on the news by ~15%.
Maxar Technologies’ Imagery Segment
The WorldView-4 satellite was lost in the second year of what was to be a 10-15 year mission, though the impact of that event on the Imaging segment wasn’t that bad (Imaging revenues are expected to be flat this year). In an interview with SpaceNews this past April, Maxar CEO Dan Jablonsky talked about how this was a testament to how resilient their space imagery business is. Future growth in Imaging will be dependent on WorldView Legion, a constellation of smaller satellites that will replace the company’s three oldest satellites and provide additional capacity as well. Those satellites are contracted to launch with SpaceX and the latest schedule is for the first quarter of 2021, though the CEO hopes to move that milestone to late-2020. By that time, the company should have figured out what to do with their GeoComm segment. That’s also when one stock analyst thinks that Maxar Technologies’ stock could be pushing $20 a share (today it trades at around $8 per share).
Cautious Optimism
While passive equity investors simply try to match the performance of benchmarks, active equity investors try to outperform benchmarks by making predictions as to which stocks will outperform or underperform. The analysts who make these predictions are increasingly being held accountable for the advice they give, which has led to lots of hemming and hawing with vague advice like “proceed with cautious optimism.” One firm that’s bullish on the future potential of Maxar Technologies is J.P. Morgan which sees the stock as “a high-risk/high-reward opportunity in the Space industry,” something which we kind of knew already. Benjamin Arnstein of J.P. Morgan says:
- We believe the next 24 months are critical as the company progresses on its turnaround plan and addresses its high leverage and debt levels, which should create value for equity holders
Mr. Arnstein believes that Maxar is in “the early stages of a turnaround that would yield over 70% upside by the end of 2020.” Hedging his bets, Mr. Arnstein then goes on to spell out an alternative reality where Maxar slowly gets crushed to death by its debt with the share price falling to zero. He’s talking of course about the $3.144 billion in debt that Maxar Technologies has on their books with a leverage ratio covenant of 6.0x (in the latest earnings report, that number was 4.7x). Remember when we mentioned EBITDA earlier? That’s used to calculate Maxar Technologies’ leverage ratio which means that divesting the Space Systems segment puts the company at a much lower risk of violating a covenant which would mean lenders could “take certain actions with respect to the amounts owing under such agreements, including early payment thereof.”
Another risk that’s not so obvious is just how reliant Maxar Technologies is on the U.S government. In their latest 10-Q filing, the company lists their single biggest customer as “U.S. Federal Government and agencies” accounting for 53.67% of revenues.
Although the company sees increased U.S. government spending as a tailwind, any sudden change in government budgets or policy could have a detrimental effect on Maxar Technologies’ future prospects. This risk could be diversified away through organically growing commercial clients or by acquiring startups that service an existing client base with satellite imagery, like RS Metrics.
Conclusion
The NewSpace theme is quite risky for investors, particularly retail investors, who aren’t playing with the sort of capital pools that may help them hedge various risks using more sophisticated financial engineering methods. For Maxar Technologies, the internal uncertainty around the GeoComm segment represents operational risk, the $3.144 billion in debt represents credit risk (though they’ve taken steps to hedge this risk with interest rate swaps), the heavy reliance on government contracts represents political risk, and the list of risks goes on. With another fun-filled U.S. election right around the corner, investors should proceed with cautious optimism.
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