Macdonald Dettwiler is looking fully valued, says Cormark

An enterprise cost improvement program at Macdonald Dettwiler (TSX:MDA) does not change the fact that competition is increasing for the company’s offerings, says Cormark analyst Richard Tse.

Yesterday, Macdonald Dettwiler reported its Q3, 2014 results. The company earned $21.5-million on revenue of $506.6-million, up 9.3% from last year’s $463.3-million topline.

Tse says the results were in the range of meeting to slightly missing his expectations. The analyst expected MDA would post operating EPS of $1.35, which the company beat by delivering $1.41 in EPS. But it failed to meet his topline expectation of $547-million.

Tse notes that Macdonald Dettwiler’s margins did improve in the third quarter, rising from 11.8% in Q2 to 13.5%. But the analyst warns that investors should not expect that this is a trend, but instead a temporary result of the implementation of an enterprise cost improvement program. He says he does not see competition from the likes of Lockheed abating any time soon, a development that will weigh on the company’s margins long-term.

The Cormark analyst does believe Macdonald Dettwiler has opportunities in front of it, but also notes that it is operating against the backdrop of a stock that has risen to near 52-week highs.

“Following the transformational acquisition of SS/L and sale of its Information Products Division, MDA is strategically aligned to open up new growth opportunities as the company aggressively targets international markets with the strategic, operating, and financial strength of SS/L,” he says. “But given the stock price appreciation, the risk-to-reward profile is neutral relative to our target price.

In a research update to clients this morning, Tse maintained his Market Perform rating and $90.00 target on Macdonald Dettwiler.