Weaker margins caused a quarterly miss for Magellan Aerospace (Magellan Aerospace Stock Quote, Chart TSX:MAL) but with strong prospects for production growth in the sector, analyst J. Marvin Wolff of Paradigm Capital is sticking to his assessment of the stock.
In a research note on Wednesday, Wolff maintained his “Buy” rating and $22.00 target, representing a projected 12-month return of 26 per cent at the time of publication.
Commercial and military aviation component maker Magellan announced its first quarter 2019 financials on May 10, showing revenue and EPS of $269.8 million and $0.35 per share, respectively. While the top line bested Wolff’s forecast for $251 million, there was a noticeable gap on earnings, where Wolff was calling for $0.42 per share.
The analyst chalks up the difference to two unexpected events, namely, a $1-million provision for the announcement that Airbus would be curtailing A380 production sooner than expected and the impact of Brexit in the quarter, which caused a higher-than-normal amount of product delivered from Magellan UK along with higher labour and transportation costs. Management contends that its gross margin, which was at 15.9 per cent in Q1, down from 17.3 per cent the previous quarter, should move up by one to 1.5 per cent.
Wolff likes MAL’s strong balance sheet, with total net debt-to-EBITDA of 0.4x and says that the grounding of Boeing’s B737 Max will have a small overall impact on the company, as the plane is expected to return to service in a few months, reestablishing production schedules.
In sum, Wolff says that both Airbus and Boeing will see continued product growth through 2022, which will positively impact Magellan.
“The strong demand for commercial aircraft through 2022 is producing a very solid increase in OEM production rates. Magellan is poised to benefit directly from these increases and grow its EPS. With the strong underlying growth in production and deliveries, using our target multiple of 13x, applied to our 2020 EPS forecast of $1.74, (unchanged), results in our $22.00 target price,” says Wolff.
The analyst thinks MAL will generate fiscal 2019 revenue of $1.01-billion (unchanged) and EBITDA of $169 million (up from $163 million).