Magellan Aerospace: A Strong Stock to Buy Based on Aerospace Growth (OTCMKTS:MALJF)

The aerospace and defense industry offers significant potential for rewarding investment. However, not all companies may be equally profitable for investment. So it’s important to evaluate individual names, and to this report I add Magellan Aerospace Corporation (OTCPK:MALJF) to my aerospace coverage.

What does Magellan Aerospace do?

Magellan Aerospace is a Canadian aerospace and defense company with a market capitalization of approximately $400 million. What I like about the company is that it has exposure to commercial aircraft manufacturing, space and defense. What I definitely like a lot less is that the company provides extremely little information about the platforms it’s active on, and its earnings release frankly doesn’t include that much information about the moving parts of the business.

In the production of commercial aircraft, the company supplies cold and hot aircraft engine sections as well as engine shafts and specialty materials. Its aerostructures segment focuses on materials, components and major assemblies, while in space and rockets, the company provides booster engines, avionics and component and assembly manufacturing. In addition, the company offers aluminum and magnesium sand casting, enabling civil and defense aerospace markets, as well as MRO capabilities.

While the company does not provide an overview of its activities, looking through the site I found that the company offers control surface fins for the Boeing 777X, landing gear packages for the Boeing 787 and Boeing 737 MAX, exhaust nozzles for Boeing 767, wings. components for the Boeing 737 MAX, tank doors for the KC-46A, titanium accessories for the Boeing 787. Essentially, it is active in all key Boeing programs. Similarly, the company supplies major wing components for the Airbus A320neo family, the wing center box and keel beam for the A350, precision machined parts for the A320neo and A330 for which it also produces wing ribs and the engine exhaust system P.W. Aircraft from the A320neo family. The company also supplies parts and assemblies to RTX and Lockheed Martin. So Magellan Aerospace is actually a Tier 1 supplier that fails to underline its importance to OEMs in the commercial and defense markets for investors.

Magellan Aerospace’s margins are improving but still below historic levels

Total revenue increased 10.6% to $242.9 million (amounts are in Canadian dollars unless explicitly stated otherwise or when discussing share price). In Canada, revenue decreased 6.7% due to lower molding product revenue due to a work stoppage partially offset by higher sales of specialty products. In the US, sales increased 16.9% (14.7% constant currency) driven by higher sales of defense and wide-body aircraft parts, higher helicopter parts revenue and sales of castings . In Europe, driven by the A320neo program, sales increased by 30% (28.4% at constant currency) due to volume increases and there was also a positive impact related to the Airbus A330 and A350 programs. Gross profit increased 10%, and this added positively to the EBIT line, which increased 57.7% to $10.9 million, as higher EBITDA was offset by lower restructuring costs and other expenses smaller. Net income increased 276.3% to $7.5 million due to operating strength and lower net tax expense, slightly offset by higher interest income.

So we see that demand has led to good revenue growth, and while cost of revenue hasn’t shown significant volume absorption, we’ve seen fixed costs have been well absorbed, resulting in margins growing from 3.2% to 4.5%. It should be noted that this is still significantly below the pre-pandemic level of 8.9%. So margins are still not where they should be due to higher input costs and lower production rates for some key programs.

What are the risks and opportunities for Magellan Aerospace?

While Magellan Aerospace provides disappointingly little information regarding its earnings results and the positive and negative impacts of key program production rates, it certainly appears that there is an opportunity that simply boils down to the fact that all programs key should eventually increase significantly in production rates and there is a lot of margin to recover. The risk right now for the business is that production rates are not stable and changes are being made to production planning as the aerospace supply chain is less recovered than originally thought and Boeing is dealing with its own wave of rate-pressure issues . On the cost front, labor and material costs remain inflated, which is also a risk to the business.

Specific to Magellan Aerospace, it should be noted that the company derives its revenue in Canadian dollars, US dollars and British pounds. A strengthening of the latter two means that denominated in Canadian dollars have a positive impact on earnings.

Magellan Aerospace stock is a strong buy

To determine multi-year price targets, the Aerospace Forum developed a stock analysis tool that uses a combination of analyst consensus on EBITDA, cash flows and the latest balance sheet data. Each quarter, we revise those assumptions and stock target prices accordingly. In a separate blog, we detailed our analysis methodology.

Magellan Aerospace faces some uncertainty regarding commercial aircraft production. However, in the coming years, things should start to calm down and the company should be able to grow its EBITDA by almost 20% annually between 2023 and 2026, with free cash flow turning from negative to positive. I currently believe the stock has a 25% upside for 2024 and even 75% upside for 2025, leading to a strong buy rating.

Conclusion: Magellan Aerospace has a significant advantage

Magellan Aerospace is active in markets with growing demand, and this growth is highly unlikely to evaporate in the coming years, while there should be significant growth in volumes and margins. Accordingly, I think the company is attractively positioned to see its earnings and share price grow, and rate the stock as a strong buy.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.