MacDonald Dettwiler and Associates Ltd. to Benefit From DigitalGlobe Inc. Acquisition

Increased diversification and attractive valuation make MacDonald Dettwiler and Associates Ltd. (TSX:MDA) a good addition to investors’ portfolios.

The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn moresdf

MacDonald Dettwiler and Associates Ltd. (TSX:MDA) is a global company that provides operational solutions in communications and in surveillance and intelligence. In 2012, MacDonald Dettwiler acquired Space Systems/Loral, a market leader in commercial satellites, in a deal that provided the company with critical mass in the U.S. market.

Also, after that deal, the revenue base was mostly from commercial sources as opposed to mostly from government sources before the deal.

Another transformational deal for MacDonald Dettwiler was announced in February. The company reached an agreement to buy U.S.-based DigitalGlobe Inc. (NYSE:DGI), a leading global provider of high-resolution satellite imagery, for $3.1 billion. And this is a move that will strengthen its position in the satellite market and accelerate its push toward U.S. expansion.

The new entity will be a much larger one, a more diversified one, and one with significant revenue from the U.S. government. The company’s revenue will increase from $2 billion to over $3 billion, and while the combined entity’s leverage will increase significantly, so will its earnings and cash flow generation.

The stock has a three-year return of -26% — a reflection of a very lumpy business that has seen a stagnation of revenue in the last three years as satellite orders have been weak over this period. Even in the company’s latest quarter, backlog decreased to $2 billion from $2.4 billion reported in the last quarter.

So, while the acquisition increases the company’s leverage ratios, the expected cash flow of the combined companies going forward should give us comfort. And management intends to reduce leverage with cash flows generated in the coming years.

NYSE listing

With the merger, MacDonald Dettwiler will apply to have its shares listed on the New York Stock Exchange, which is good for liquidity, marketability, and to reach a new set of shareholders.

Valuation

There is light at the end of the tunnel. The fact that the last few years have been difficult and less than impressive for MacDonald Dettwiler leaves us with a stock that is very attractively valued at this point. And with the acquisition of DigitalGlobe acting as a catalyst and improving the company’s fundamentals, I can comfortably say that the shares represent good value at this time with good upside.

Trading at 12 times this year’s consensus expected earnings and 10 times next year’s consensus expected earnings, the stock has more upside potential than downside risk, in my view. And combined with a dividend yield of 2.3%, this stock is an attractive addition to investors seeking yield as well as those focused on capital appreciation.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas has no position in any stocks mentioned. MacDonald Dettwiler and Associates is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

growing plant shoots on stacked coins
Dividend Stocks

5 Dividend Stocks to Buy With Yields Upwards of 5%

These five companies all earn tonnes of cash flow, making them some of the best long-term dividend stocks you can…

Read more »

funds, money, nest egg
Dividend Stocks

TFSA Investors: 3 Stocks to Start Building an Influx of Passive Income

A TFSA is the ideal registered account for passive income, as it doesn't weigh down your tax bill, and any…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

3 of the Safest Dividend Stocks in Canada

Royal Bank of Canada stock is one of the safest TSX dividend stocks to buy. So is CT REIT and…

Read more »

Growing plant shoots on coins
Dividend Stocks

1 of the Top Canadian Growth Stocks to Buy in February 2023

Many top Canadian growth stocks represent strong underlying businesses, healthy financials, and organic growth opportunities.

Read more »

stock research, analyze data
Dividend Stocks

Wherever the Market Goes, I’m Buying These 3 TSX Stocks

Here are three TSX stocks that could outperform irrespective of the market direction.

Read more »

woman data analyze
Dividend Stocks

1 Oversold Dividend Stock (Yielding 6.5%) to Buy This Month

Here's why SmartCentres REIT (TSX:SRU.UN) is one top dividend stock that long-term investors should consider in this current market.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

Better TFSA Buy: Enbridge Stock or Bank of Nova Scotia

Enbridge and Bank of Nova Scotia offer high yields for TFSA investors seeking passive income. Is one stock now undervalued?

Read more »

Golden crown on a red velvet background
Dividend Stocks

2 Top Stocks Just Became Canadian Dividend Aristocrats

These two top Canadian Dividend Aristocrats stocks are reliable companies with impressive long-term growth potential.

Read more »