Now that Canadian space technology company MacDonald Dettwiler and Associates Ltd. has closed its much-lauded purchase of California-based commercial satellite maker Space Systems/Loral, it's time to take a down-to-earth look at what investors should expect. MDA stock perked up on news of the $875-million (U.S.) deal in June, but the company's first year as a larger entity is shaping up to be a disappointment.
Make no mistake, SSL is a solid established market leader with a 30-per-cent share of the commercial satellite business. The purchase, which was finalized Friday, gives MDA a foothold in the United States, positioning it to bid on government work that had become inaccessible to the Richmond, B.C.-based firm because of its lack of a U.S. presence.
But investors should do a gut check on the two key assumptions behind the deal – that there are substantial underlying growth opportunities in SSL's commercial satellite business, and that the purchase will provide MDA with an entry point into lucrative contracts from Washington. Neither is a sure bet.
SSL is having a softer year than anticipated. So far it has sold just four major satellites, down from six in 2011. It has warned it will generate operating margins of between 8 per cent and 10 per cent next year, down from 15 per cent or so in the recent past.
When the deal was announced, Raymond James analyst Steven Li forecast MDA would increase earnings in 2013 by 60 per cent from his estimate of $3.87 a share this year; now, he's only forecasting 40 per cent growth.
MDA, which reported earnings Monday that fell slightly short of expectations, appears to be picking up SSL at the peak of the cycle. Satellite industry research firm Euroconsult notes that operators have launched between 20 and 25 satellites a year since 2006 to replace older satellites that reached the end of their service life. That is expected to drop to less than 20 a year starting in 2015. Given the typical time between orders and launches, Euroconsult's forecast suggests the market could start to soften in the next year, unless MDA can deliver new sales to emerging markets.
MDA is also facing resurgent competition from giant defence contractors, led by Boeing Co., which has scored telecommunications satellite manufacturing deals this year from operators in Asia and Mexico. Facing lower cyclical demand and stronger competition, MDA could struggle to maintain Loral's revenue growth rate of about 10 per cent a year.
Loral has been touted as a way for MDA to bid on U.S. government contracts and there are early indications those hopes will pan out. MDA has recently won a small contract with the U.S. Defense Advanced Research Projects Agency, and chief executive officer Dan Friedmann told analysts on Monday the company has identified about 50 U.S. agencies and well over 100 bidding opportunities, and put forward a few preliminary bids.
Keep two things in mind, however. MDA is a newcomer bidding for contracts against established U.S. contractors at a time when the government is under intense fiscal pressure (SSL, for its part, has little government business); secondly, any breakthroughs will take at least a year or two, Mr. Friedmann said.
Now that MDA's acquisition is a done deal, we have liftoff. But this mission has a ways to go before it can be called a success.
Sean Silcoff