Magellan Aerospace: A Strong Stock To Buy On Aerospace Growth (OTCMKTS:MALJF)

The aerospace and defense industry offers significant potential for rewarding investment. However, not all companies might be as rewarding for investment. So, it is important to assess individual names and with this report, I am adding 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 cap of around $400 million. What I do like about the company is that it has exposure to commercial airplane production, space, and defense. What I definitely do like a lot less is that the company provides extremely little information on what platforms it is active and its earnings release frankly doesn’t include that much information on the moving bits and pieces of the business.

In commercial airplane production, the company provides cold and hot sections for aeroengines 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 motors, avionics, and manufacturing of components and assemblies. Furthermore, the company provides sand casting of aluminum and magnesium allowing for the civil and defense aerospace markets as well as MRO capabilities.

While the company provides no insightful overview of its activities, looking through the site myself I found that the company provides control surface ribs for the Boeing 777X, landing gear packages for the Boeing 787 and Boeing 737 MAX, exhausts nozzles for the Boeing 767, winglets components for the Boeing 737 MAX, tanker doors for the KC-46A, titanium wing fittings for the Boeing 787. In essence, it is active on all Boeing key programs. Similarly, the company provides major wing components for the Airbus A320neo family, the center wing box and keel beam for the A350, precision-made parts for the A320neo and A330 for which it also produces wing ribs and the exhaust system for the PW-powered A320neo family airplanes. The company also provides parts and assemblies to RTX and Lockheed Martin. So, Magellan Aerospace actually is a tier 1 supplier that fails to highlight its importance to OEMs in the commercial and defense markets to investors.

Magellan Aerospace Margins Improve But Are Still Below Historical Levels

Total revenues grew 10.6% to $242.9 million (amounts are in Canadian dollars unless explicitly mentioned otherwise or in case share price data is discussed). In Canada, revenues declined 6.7% driven by lower casting product revenues due to a work stoppage partially offset by higher specialty product sales. In the US, sales grew 16.9% (14.7% on constant currency) driven by higher sales of defense and wide-body aircraft parts, higher helicopter part revenues, and casting product sales. In Europe, driven by the A320neo program, sales grew 30% (28.4% on constant currency) driven by volume increases and there also was a positive impact related to the Airbus A330 and A350 programs. Gross profit increased by 10% and that positively added to the EBIT line which grew 57.7% to $10.9 million as higher SGA was offset by lower restructuring costs and lower other expenses. Net income increased 276.3% to $7.5 million driven by operational strength, and lower net tax expenses slightly offset by higher interest income.

So, we do see that demand led to good growth in revenues and while the cost of revenues did not show a significant volume absorption, we did see that fixed costs were absorbed well leading to margins increasing from 3.2% to 4.5%. It should be noted that this is still significantly below the 8.9% pre-pandemic. So, margins are not yet where they should be due to higher input costs and lower production rates on some key programs.

What Are The Risks And Opportunities For Magellan Aerospace?

While Magellan Aerospace provides disappointingly little information on its earnings results and the positive and negative influences of key program production rates, there definitely seems to be an opportunity that simply boils down to the fact that all key programs should eventually go up significantly in production rates and there is a lot of margin to be recovered. The risk at the moment for the business is that production rates are not stable and there are changes being made to the production planning as the aerospace supply chain is less recovered than initially thought and Boeing is facing its own flurry of problems that pressure the rates. On the cost side, labor and material costs remain inflated which also poses a risk to the business.

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

Magellan Aerospace Stock Is A Strong Buy

To determine multi-year price targets The Aerospace Forum has developed a stock screener which uses a combination of analyst consensus on EBITDA, cash flows and the most recent balance sheet data. Each quarter, we revisit those assumptions, and the stock price targets accordingly. In a separate blog, I have detailed our analysis methodology.

Magellan Aerospace is facing some uncertainty regarding commercial airplane production. However, in the years ahead things should start to ease, and the company should be able to grow its EBITDA by almost 20% annually between 2023 and 2026 with free cash flow going from negative to positive. Currently, I believe the stock has a 25% upside for 2024 and even 75% for 2025 which leads to a strong buy rating.

Conclusion: Magellan Aerospace Has Significant Upside

Magellan Aerospace is active in markets with growing demand and that growth is very unlikely to evaporate in the years ahead while there should be significant upside to volumes and margins. As a result, I do believe that the company is attractively positioned to see its earnings and share prices increase, and I rate the stock a strong buy.

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