Eight reasons to buy Magellan Aerospace stock

Its fourth quarter results are in the books and Paradigm Capital analysts J Marvin Wolff remains bullish on Magellan Aeropsace (Magellan Aerospace Stock Quote, Chart, News, Analysts, Financials (TSX:MAL).

On March 13, MAL reported its Q4 and fiscal 2024 results. The company posted Net Income of $15.9-million on revenue of $240.7-million, a topline that was up $17.1-million, year-over-year.

Wolff says the company may finally have a tailwind.

“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,” he wrote. “The aerospace sector is slowly improving as Magellan’s results indicate,” the analyst said. Despite an apparent improving aerospace climate, we remain cautious because of potential tariffs and are using 6x 2025e EV/EBITDA, giving us a target of $11.59 (rounded to $12.00), which is 0.85x BV of $13.99. We maintain our Buy rating as the shares are trading at 0.76x BV but warrant caution.”

The analyst thinks the company will post EBITDA of $106.2-million on revenue of $970.3-million in fiscal 2025.

Wolff listed his reasons to buy Magellan stock now.

“1. The growth in deliveries through 2025 and beyond 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 14,253, up from 12,218 a year ago.

3. Magellan has content on the B737 Max, B777x, B787, A320neo, A330neo and A350XWB programs, which have deep backlogs, and F35 release rates are increasing with Magellan having delivered more than 200 sets of F35 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% was 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 whil doubling revenue. Inventory turns fell to 3.4x in 2023 (3.3x in 2024) 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 7%, cash of $56M 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.”