Investors hoping a new American chief executive officer at MacDonald, Dettwiler and Associates Ltd. would help boost the shares of the satellite technology firm may have to be patient this year, analysts say.
A weaker communications satellite market and some uncertainty around how much its initiative to boost its U.S. defence business will cost the company have been – and will continue to be – headwinds for the company, known as MDA.
Shares of Richmond, B.C.-based MDA have fallen 15 per cent over the past year and nearly 20 per cent since Howard Lance took over as CEO in mid-May.
Mr. Lance replaced long-time CEO Dan Friedmann, who stepped aside in favour of his American replacement to give the company a better chance at getting security clearance to bid on sensitive U.S. government contracts.
The company has set up a U.S. operating company but remains listed and headquartered in Canada.
In fairness to Mr. Lance, analysts say the drop has been driven by a market slowdown, which was reflected in third-quarter earnings that were below forecasts. Revenues were $495.9-million, down from $515.4-million a year earlier and below expectations of $534-million.
Operating earnings came in at $1.26 per share compared with $1.50 a year earlier. Analysts expected earnings of $1.50 per share in the third quarter. The earnings miss was due in large part to a $10-million loss on a fixed-price contract.
Some analysts lowered their price targets as a result, but say the stock is looking inexpensive and now could be a good time to buy.
Among eight analysts who cover the stock, five have a "buy" recommendation and three a "hold." The analyst consensus price target over the next year is $88, which is about 25 per cent above where it's currently trading, at about $71.
"I think some of the issues will resolve themselves," over the next year or so, says BMO Nesbitt Burns analyst Thanos Moschopoulos, who has an "outperform" rating, which is similar to a "buy," on the stock and $83 target for the next 12 to 18 months.
He says the commercial satellite market should start to pick up again in the months ahead and MDA should gain some traction in the U.S. market.
"I think on a longer-term basis it will all work out well," Mr. Moschopoulos said. "It's just that on a short-term basis we have some of this lingering uncertainty."
He doesn't believe a Trump administration and its protectionist measures will have a negative impact on the company, in part because it's expanding and plans to do work in the United States.
"It's more a question of how long until they get those clearances, how long until we see some revenues from that business start to pick up and grow and become material relative to some of the initial costs of investment they have to make," Mr. Moschopoulos said.
Mr. Lance declined to be interviewed for this article, but in the third-quarter conference call with analysts in November, he said the overall commercial market "remains below historic averages for the second year as satellite operators delay awards to consider competing technologies and to assess regional excess capacity and their profitability issues."
Still, Mr. Lance said the company is "bullish on the long-term health of the satellite industry," and will continue to invest in new technology to meet demand down the road.
Mr. Lance also said the company's additional push into the U.S. space market, the largest in the world, "offers significant growth opportunities for us."
Earlier this year, its U.S. business unit, Space Systems/Loral Inc., was picked to provide a spacecraft platform for a NASA Discovery Mission.
That contract is expected to exceed $100-million and was the second major U.S. government project for the company in recent months.
The company is also looking to grow its Canadian business.
"We remain encouraged by the active dialogue and activities surrounding the new Canadian government innovation agenda," Mr. Lance said.
MDA recently announced a contract valued at $3.7-million from the Canadian Space Agency for NASA's OSIRIS-REx mission.
Analysts have looked favourably on MDA's latest moves. RBC Dominion Securities analyst Steve Arthur has an "outperform" rating, which is similar to a "buy," on the stock.
"We continue to like MDA's market position and longer-term growth prospects," Mr. Arthur said in a note in November, when he downgraded his target price on the stock to $92 from $100.
Raymond James analyst Steven Li has a "market perform" rating, which is similar to a "hold," on the stock and an $84 target price, which he lowered from $93 in November, citing "a confluence of headwinds hitting MDA near-term."
He said the classified U.S. government business is "incremental but won't likely contribute meaningfully until 2018 at the earliest."
John Stephenson, chief executive officer of Stephenson & Co. Capital Management, owns the stock and is considering buying more in the near future given the cheap valuation – trading at about 12.5 times forward earnings – and growth potential in the United States.
"It's pretty attractive," Mr. Stephenson says. "I think it has real potential to be north of $90 in a year's time. That's a pretty hefty return."