Is Magellan Aerospace stock a buy?

Its first quarter results are in the books and Paradigm Capital analyst J Marvin Wolff thinks there is money to be made on Magellan Aerospace (Magellan Aerospace Stock Quote, Chart, News, Analysts, Financials TSX:MAL)

On May 2, MAL reported its Q1, 2024 results. The company posted Adjusted EBITDA of $21.7-million on revenue of $235.2-million, a topline that was up 5.3% over the same period a year prior.

The analyst said this was a “solid quarter”

“Magellan’s results are on a steadily improving trend as the commercial aerospace sector is returning to pre-COVID levels and the military component is seeing increased R&O from higher aircraft utilization. The aerospace sector is steadily improving as Magellan’s results indicate. We are tweaking our 2024 estimates. Using a 7x EV/EBITDA multiple (unchanged), our target price remains $12.00, which is 0.91x BV of $13.13.”

In a research update to clients May 6, Wolff maintained his “Buy” rating and price target of $12.00 on MAL.

The analyst thinks MAL will post EBITDA of $112.9-million on revenue of $975.6-million in fiscal 2024. He expects those numbers will improve to EBITDA of $137.9-million on revenue of $1.09-billion in fiscal 2025.

Wolff listed his reasons that investors should be looking at Magellan Aerospace.

“1. The growth in deliveries through 2023 and 2024 is improving as airline traffic demand has bounced strongly off the COVID bottom. We believe the aircraft production curve has bottomed.

2. The commercial aircraft order book is growing and stands at over 12,218, up from 11,400 a year ago.

3. Magellan has content on the B737 Max, B777x, B787, A320neo, A330neo and A350XWB programs, which have deep backlogs, and F-35 release rates are increasing with Magellan having delivered more than 200 sets of F-35 Lightning II horizontal assemblies. The program is for 1,000 sets before any expansion.

4. The company has streamlined its operations for profitability through the MOS (Magellan Operating System) program, which is in its 13th year. This program has seen gross margins improve from 9.9% to 18.0%, and we expect the current slippage to below 10% will be temporary. The company has rolled out the SAP system across all 19 plants to gain efficiencies on many fronts, including bulk purchasing and inventory control.

5. Magellan has dramatically improved its inventory turns from 2.1x in 2005 to 5.3x in 2018 while doubling revenue. Inventory turns fell to 3.3x in 2021, as revenue dropped quicker than work in progress as customers wanted some cushion. We expect the turns to increase commensurate with higher throughput and the company has open manufacturing capacity to meet improving demand.

6. The balance sheet is strong with a debt/equity ratio of 10%, cash of $2M and unused credit lines of $150M, giving the company plenty of liquidity.

7. The company is now poised to look for accretive growth opportunities, and valuations in the industry are lower than they were a few months ago.

8. The stock, in our view, is undervalued.”