Magellan Aerospace is undervalued, says Paradigm

Recent weakness in shares of Magellan Aerospace (Magellan Aerospace Stock Quote, Chart, News: TSX:MAL) only serves to makes the stock more attractive, says Paradigm Capital analyst J. Marvin Wolff.

Last Thursday, Magellan Aerospace reported its Q2, 2016 results. The company earned $23.32-million on revenue of $252.6-million, a topline that was 7.8 per cent higher than the same period last year. Commenting on the outlook for the rest of 2016, the company said things are looking strong.

“The commercial aircraft market continues to be robust with single-aisle aircraft production ramp rates dominating discussions,” said the company in a press release. “Aircraft manufacturers are focused on executing schedules, on meeting cost challenges and on ensuring the supply chain is sufficiently prepared to support them.”

Wolff, who notes that this quarter came in approximately where he expected it would, says there are currently a myriad of reasons to own Magellan, including a large commercial aircraft order book, recently streamlined operations, “dramatically” improved inventory turns, a dividend that was recently increased, and balance sheet that has improved from 84 per cent to 37 per cent debt to equity.

“The strong demand for commercial aircraft through 2020 is producing a very solid increase in OEM production rates,” notes the analyst. “Magellan is poised to benefit directly from these increases and to grow its EPS substantially. We estimate Magellan has sufficient financial flexibility to accommodate this growth and to make a complementary acquisition. With the strong underlying growth in production and deliveries, we maintain our target multiple of 17x; applied to our new 2016 EPS forecast of $1.48 (was $1.47).”

In a research update to clients today, Wolff maintained his “Buy” rating and one-year target price of $24.00 on Magellan Aerospace, implying a return of 45 per cent at the time of publication, including dividend.

Wolff thinks Magellan will post EBITDA of $171-million on revenue of $1.015-billion in fiscal 2016, numbers he expects will climb to EBITDA of $177-million on $1.055-billion the following year.