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J.P. Morgan began coverage of Maxar Technologies on Tuesday with an overweight rating, telling investors that the diminished space conglomerate is in the early stages of a turnaround that would yield over 70% upside by the end of 2020.
"We see Maxar as a high-risk/high-reward opportunity in the Space industry. We believe the next 24 months are critical as the company progresses on its turnaround plan and addresses its high leverage and debt levels, which should create value for equity holders," J.P. Morgan analyst Benjamin Arnstein said in a note.
Maxar shares climbed 19.2% in trading to close at $8.38, its best single day of trading since May 23.
J.P. Morgan has a $12 price target on the stock. Arnstein explained that the firm's target is conservative, based on its sum-of-the-parts analysis of Maxar's four business units.
"We could see even greater upside after the company addresses its debt overhang," Arnstein said.
J.P. Morgan's "blue-sky scenario" would see Maxar's stock at over $20 a share, which would represent an increase of nearly 185%. But the firm's downside case, where Maxar's debt load would slowly crush the company, would see the stock's value at $5 a share, "or potentially zero," Arnstein said.
"We believe investors will need to become more comfortable with the company's cash generation potential and removing the debt and leverage overhang," Arnstein added.
About 2½ years ago, Maxar's stock traded as high as $66.46 a share and was completing its merger with Digital Globe. The company had also previously merged with Space Systems Loral (SSL), the satellite manufacturing company that is today a Maxar unit.
"Maxar came together in late 2017 but quickly ran into trouble at SSL ... and then lost a high margin Imagery satellite," Arnstein said. "Additionally, the company entered an investment cycle that resulted in significant cash outflows all while saddled with new debt from the transaction that created Maxar."
At the stock's low in March of $3.96 a share, Maxar had lost nearly 95% of its value. But Maxar shares have slowly begun to rise over the past six months. Maxar appointed Dan Jablonsky, previously the leader of its DigitalGlobe unit, as CEO in January. The stock has also had large percentage gains following recent wins, such as a NASA's contract for Maxar to build a lunar orbiting platform and a report it may sell its space robotics business MDA for more than $1 billion.
"Maxar is not yet out of the woods but we see a viable path forward as the investment cycle tapers off and cost reduction efforts offset lower volumes at SSL," Arnstein said.
The company has about $3 billion in debt outstanding, Arnstein noted.
"Modest asset sales are likely," he said, and "larger pieces of the business may be in play." A sale of MDA , for instance, would be one of the keys to Maxar's stock passing $20 a share, Arnstein added.
Arnstein also said that Maxar should generate cash in 2021. His firm expects about $150 million in free cash flow from Maxar in 2021, as investments in the new DigitalGlobe satellite constellation slow down and Maxar reduces cost at SSL.
"Maxar is embarking on its turnaround that is focused on reducing leverage and improving operations in company's core businesses," Arnstein said.