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Stock Analysis - Magellan Aerospace Corp

Initial Screening

All figures presented will be in CAD unless otherwise stated. The stock is currently exclusive to trading on the Toronto Stock Exchange under the ticker symbol MAL. Data collected prior to earnings report releasing the week of March 9th, 2020.

Market Cap: 675.22 Mil (Small Cap)

Sector: Industrials | Aerospace & Defense

Dividend Yield: 3.62% 

Forward PE: 9.21

Price to Book: 0.85

Price to Sales: 0.66

Revenue

Revenue has been steady for the last 5 years at just around 1 billion. With expansions to new facilities, it remains to be seen whether the revenue and business can increase in years to come.

Operating Margin

The operating margin for Magellan has been stable between 11% and 12% over the last 5 years. There is no clear upwards or downwards trend visible and it’s not substantially higher or lower than the sector average.

Cash Flow and Debt

The company's debt was greatly reduced in 2017 and 2018. Together with strong cash flow, Magellan Aerospace is now in a position to cover its short and long term liabilities with the current assets.

Business Model

Magellan Aerospace’s products and services range from aerospace engines to other aerostructures to repairs and maintenance of current aircraft engines. Its customers are commercial, defense, and space agencies worldwide. The split between commercial aircraft and defense products is estimated at around 69% to 31%, respectively. The company’s biggest partners are Boeing and Airbus and General Electric which account for just below 50% of their revenue.

Dividend Growth and Sustainability

Magellan’s dividend yield as of 3/3/2020 is 3.62%, considerably high yield for an industrial company. Especially with room to grow the dividend, it makes it a fairly attractive option for dividend growth investors. The next sections will go in-depth and show the dividend history and sustainability from recent years.

Year EPS Dividend Payout Ratio YOY Dividend Growth
2019 1.37 (estimated) 0.41 30% 14%
2018 1.53 0.36 24% 29%
2017 1.91 0.28 15% 17%
2016 1.52 0.24 16% 9%
2015 1.36 0.22 16% 22%

Dividend History

Magellan Aerospace introduced a dividend in 2013 and has grown it every year since meaning there has been a 7-year streak of dividend growth. The dividends are paid out quarterly with an increase to be expected in the last quarter of every year.

Dividend Growth

Below you will find the Year-over-Year growth of the dividend per share. The growth ratio is rounded to full percentages. The average annual growth rate for the dividend can be calculated to 25.6% which makes this stock prime in terms of dividend growth.

Payout Ratio

Below you can find a table with the payout ratio over the last 5 years, rounded to full percentages. Since the Q4 report for 2019 is not available publicly yet, I took the analyst estimates found on Yahoo Finance to calculate the 2019 EPS.

With a rounded average payout ratio of 20%, the company has a more than sustainable dividend. This leads me to the conclusion that there is room for dividend growth in addition to the opportunity to sustain the dividend in case of an economic downturn or recession.

SWOT Analysis

Strength

The aerospace sector is heavily regulated by government agencies. Contractors like Magellan Aerospace have to be certified in each jurisdiction and the entry barriers for new players are high.

Their strong balance sheet with low debt sets the company up for future growth during economic uprises and poses less risk in case of an economic downturn.

Magellan has reduced its carbon footprint by over 50% ever since taking early action in 2008. This sets the company up for success in the future as meeting emission targets will be costly for companies in the industrial sector who are just leaning into the initiative.

Weakness

A definite weakness is the illiquidity of their shares. The average daily trading volume is around 20,208, which is very low and indicates that the shares are harder to trade. 74% of the company is owned by a single individual (Norman Murray Edwards) who founded several major Canadian companies, including Canadian Natural Resources Ltd. and Ensign Energy Services.

Opportunity

An increasing global air passenger traffic enables growth for Magellan. Having contracts and relations with two of the biggest aircraft manufacturers, Boeing and Airbus sets the company up for future success. In addition, global defense spending has increased over the last few years which may provide an opportunity to increase Megellan’s market share in their specialty and defense products.

Threat

Since Boeing accounts for 16% of Magellan's total revenue, a relative weakness from Boeing could negatively impact business for Magellan in a substantial way.

Furthermore, depending on how the status of COVID-19 progresses, we could see a decline in global air passenger traffic in addition to economic weakness. As industrial companies have more of a cyclical nature, an economic downturn could hurt Magellan in the short run.

Conclusion

Magellan Aerospace is a small-cap stock in a generally safe and regulated sector. It is my view that the business offers room for growth in the future. The company’s initiatives to pay down debt as well as meeting economic targets sets it up for success in the future. Aligning with their vision, Magellan has built a strong balance sheet to mitigate potential risks as well as enabling them for strategic acquisitions in the future.

The stock will not be a core holding for my portfolio but the dividend history and current evaluations warrant adding shares at the current price levels. In my opinion, the dividend seems well secured and the company is diversified enough to deal with potential headwinds.

If you can weather the storm and are willing to take on the risk posed by an impending economic downturn, COVID-19, and a business partner under pressure, you may find yourself owning shares of a company with a solid balance sheet and dividend history.

Is Magellan Aerospace Corp a falling knife or a value play with great potential and solid dividend growth? Let me know what you think in the comments!

Also thanks for reading through my first Stock Analysis; I invite you to share any feedback you have to offer to help me improve future research.

Disclaimer

I hold long positions in Magellan Aerospace Corp (TSE: MAL) and The Boeing Company (NYSE: BA). This article expresses personal opinions and observations of someone who is not licensed to provide financial advice. I am not receiving compensation for writing this analysis and have no business relationship with any company whose stock is mentioned in this article other than the long positions I own. Furthermore, I cannot guarantee the accuracy of the financial metrics gathered from 3rd party services like Morningstar and Yahoo Finance.

Sources

Financial Metrics

MorningstarYahoo FinanceMarketScreener

Company information and publications

Investor Relations

Other

BNN on Magellan Aerospace 2019BBN on Magellan Aerospace 2018

Post Comments(2)

user-avatar
DannyMay 23, 2020, 12:47 p.m.

I was going through their products today. It seems that they have signed two deals recently that will continue to generate steady revenue in the next few years. The current stock price of slightly above 5 dollars looks really attractive. This also puts their dividend yield above 7%. However, since they rely heavily on commercial airlines to purchase their products, I wonder if they are able to sustain the dividend payment in years to come. What I dislike about the company is that it is basically owned by one person. Therefore the volume is really low. However, given its current stock price, it is still a buy for me. But I will only keep it below 5% of my portfolio at the moment.

user-avatar
Just-DividendsJune 6, 2020, 6:53 p.m.

I totally share your sentiment there Danny. For me, it's a small-cap holding. I don't want to build up a sizable position in the current environment. Nevertheless, the yield is still attractive even after the run last week.

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