MDA Stock Offers Diversified Exposure to Space Theme
Only a few movie sequels ever truly succeed. One exception is “The Empire Strikes Back,” which every Star Wars fan knows is the best film of the series. The investors who backed the film would also agree, as it grossed about $550 million worldwide in 1980. In today’s greenbacks, that’s more than $1.7 billion when adjusted for inflation. However, more often than not, sequels rarely do better than the original – critically or financially. Spin-off companies are another type of sequel that bombs more often than not. Again, there are exceptions, such as Mondelez International (MDLZ), a Fortune 500 company with a market cap of more than $86 billion that was the core of Kraft Foods’ $36 billion snack division before the 2012 split.
That brings us to MDA (MDA.TO), a Canadian space company spun off from Maxar Technologies (MAXR) that went public last month. It’s an intriguing story, with a few plot twists along the way. But will we find the story compelling enough to buy in?
Investing in Space Stocks
Investing in space stocks may not be rocket science, but it’s not exactly a space walk either. In fact, in our Nanalyze Disruptive Tech Portfolio Report, available only to annual subscribers, we’ve only invested in one space stock, Spire Global, which has yet to complete its reverse merger with NavSight Holdings (NSH). Regular readers know that we generally avoid special purpose acquisition companies (SPACs) not just out of principle but because retail investors usually get the short end of the straw. Spire was one of a few exceptions given they have growing revenues from a compelling software-as-a–service (SaaS) business model. (The other SPAC we invested in was Desktop Metal.)
To date, we’ve been underwhelmed by the investment options in the NewSpace economy. Even legacy companies, such as satellite operators like Iridium (IRDM) and Viasat (VSAT), are an inherently risky business. The few space-themed ETFs hardly would be considered pure plays, including the new ARK Space Exploration & Innovation ETF (ARKX), which we’ll dissect in an upcoming article.
Back in 2019, we looked closely at Maxar Technologies, a fairly well-diversified space company that did everything from manufacturing satellites and satellite components to robotics and space imaging. One big problem was that the company was saddled with billions of dollars in debt, especially from some expensive acquisitions and ambitions to build a new fleet of imaging satellites. We deemed the company too risky an investment with little upside at the time. Only a couple months after our original story, Maxar Technologies announced it would sell its Canadian division, MDA, to a group of private investors to help pay down that debt.
The History Behind MDA Stock
So here’s where the story gets interesting, because while MDA is technically the spin-off from Maxar Technologies, parts of the Canadian company today have been around for more than 50 years. In other words, MDA is the original, not the sequel. Founded in 1969 as MacDonald, Dettwiler and Associates, MDA has been on both ends of the M&A tango, as one would expect of a company with such a long history. One of its key acquisitions was Spar Aerospace, which developed the robotic Canadarm for the Space Shuttle. A second version, creatively called Canadarm2, is currently operating on the International Space Station (ISS) for maneuvering payloads and other applications. More on Canadarm and robotics shortly.
After acquiring DigitalGlobe, a satellite imagery business, in 2017, MDA rebranded as Maxar Technologies. Whether the decision to split the combined company apart just two years later will work out remains to be seen. In the remainder of this article, we’ll focus on the value proposition for MDA. We’re fortunate that the new company was able to give us a look at its financials over the last three years – before, during, and after the separation. On the surface, we see declining revenues and a net loss in 2020:
One really nice thing that MDA does in the prospectus that was published prior to its IPO is to show us the breakdown of revenue across its three core business areas – geointelligence, robotics and space operations, and satellite systems.
Let’s dive into each area.
Geospatial intelligence is a topic that we’ve covered extensively, as a number of companies are leveraging satellites to collect data about the planet. It’s not just about taking a bunch of pretty Earth selfies. The imagery collected from space covers a broad swath of the electromagnetic spectrum, providing information about the health of crops or economic intelligence. Artificial intelligence and other sophisticated software are used to not only process the data but interpret the results for various types of geospatial analytics.
Geointelligence represents the biggest chunk of MDA’s business, and the company owns and operates the RADARSAT-2 satellite, a sophisticated synthetic aperture radar (SAR) that can collect high-resolution data in all kinds of conditions, including through clouds. In its dozen years of service, RADARSAT-2 has amassed an extensive data archive comprising about 45 billion square miles. MDA is also building its next-generation SAR satellite, SARnext (Canadians are practical folks when it comes to naming stuff), which it estimates will generate $2 billion in revenue over the next 15 years. The company also provides imagery and other satellite-based data to its customers using a variety of third-party platforms. Its biggest market is maritime surveillance.
One thing to keep in mind here is that a handful of startups are also introducing their own SAR satellites at reportedly more affordable prices, and on a scale much smaller than the 5,100-pound behemoth from MDA. The broader geospatial intelligence market is highly competitive, with companies like Planet operating large constellations of Earth-observing (EO) satellites. Not to mention players like Spire Global and its fleet of smallsat EOs.
Robotics and Space Operations
This is some of the cool stuff, starting with the Canadarm2, a robotic arm that has been used on the ISS for 20 years. The arm is capable of handling large payloads of up to 256,000 pounds and moves autonomously to different parts of the space station using an inchworm-like movement. MDA recently scored a new contract to build the third generation of the AI-powered robotic system for the Lunar Gateway, a space station in lunar orbit that will provide living space for astronauts before they embark to Mars with Elon Musk. The Canadarm3 is expected to generate $1.4 billion over 15 years.
The company also hopes to leverage the robotics technology it develops into other applications, particularly the nascent on-orbit satellite servicing market. These services include refueling, in-orbit repair, assembly (including 3D printing), inspection, and relocation of satellites. MDA claims to have performed the first robotic on-orbit service of a satellite back in 2007 for the shadowy government agency DARPA, as part of the Orbit Express program. Last year, MDA signed a bundle of contracts with Maxar Technologies (the two companies remain tight on multiple fronts) to provide the space robotics technologies for a NASA program to demonstrate on-orbit servicing, assembly, and manufacturing.
The satellite industry currently represents nearly 75% of the $366 billion global space economy, according to Bryce Space and Technology. In this sector, MDA provides satellite systems and subsystems, including antenna, electronics, and payloads. It claims to have one of the biggest testing and manufacturing facilities for satellites in the world, and employs robotics to assemble high-volume low-Earth orbit satellite systems.
That expertise and capacity earned it a pretty fat contract with another Canadian company, Telesat, which is building a 300-satellite strong constellation for global internet called Lightspeed. MDA will provide the phased array antennas for the satellites, which the company expects to bring in $800 million in revenue over the next five years. The French-Italian space company Thales Alenia Space is the prime contractor on the project, beating out Maxar Technologies, so here’s an example of where MDA is doing better as a standalone company.
To Buy or Not To Buy
With a market cap of $1.53 billion, MDA is well beyond our minimum market cap requirement of $1 billion. The biggest problem we see is that only one of their three business segments is growing revenues right now.
Canadarm3 and Telesat Lightspeed are two of three flagship programs that MDA is banking on to help double revenue by 2022. The third is a program called Canadian Surface Combatant, a high-tech combat ship for the Royal Canadian Navy. MDA is under contract with Lockheed Martin Canada as the systems integrator for the warfare technologies that will be installed on 15 ships at a cost of about $100 million each, or $1.5 billion for the base award. MDA also plans to sell the sensor, laser warning, and electronic system technologies it develops for the program to other defense customers, so everyone can play a high-tech version of Battleship on the seven seas.
The company is projecting revenue of between $800 and $900 million in 2022, with revenue growing to $1.5 billion by 2025. Those three programs alone would account for 78% of the anticipated increase in revenue between 2020 and 2022. While it’s certainly concerning that so much growth is so highly concentrated in three relatively high-risk programs, MDA is demonstrating that it can win big, lucrative contracts. It’s also encouraging that the company is pretty well divided between commercial and government customers, given the regulatory and change-of-administration risks often associated with the latter. It’s also geographically diversified.
As we’ve said before, we don’t invest in the promise of growth, we invest in actual growth. We’d like this company a whole lot more if they started growing revenues again. We prefer SaaS business models, but their three business segments are still compelling. From the sidelines, we’ll be watching how well this highly diversified company and its 2,000 employees can execute on some big, bold promises and trying to go where no one has gone before.
Building a portfolio of technology stocks to include space companies has been tougher than learning Klingon on Duolingo. We expect our technology stocks to be high-risk but also high-growth, and that’s been lacking from most of the space companies we’ve covered to date. NewSpace is potentially one of the most capital intensive industries on the planet, which is why you see SpaceX, for all of its success, repeatedly raise vast sums of money, including another $1.2 billion just last month. Retail investors interested in this theme need to temper their expectations accordingly.
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