Magellan Aerospace (TSX:MAL) Lands Canada Defence Contract As Valuation Questions Linger

Magellan Aerospace (TSX:MAL) recently reported a contract award from the Government of Canada to produce the M-72 Light Anti-Tank Weapon under the Munitions Supply Program, putting fresh focus on the stock’s defence exposure.

See our latest analysis for Magellan Aerospace.

Magellan Aerospace’s new M-72 LAW contract lands on top of strong recent momentum, with a 30-day share price return of 13.23%, a 90-day share price return of 40.85% and a 1-year total shareholder return of 110.92% pointing to building optimism around the stock’s defence exposure.

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After Magellan Aerospace’s sharp move and with the stock trading below both analyst targets and some intrinsic value estimates, the real tension is where fair value sits and how wide that remaining gap may be.

Price-to-Earnings of 44.4x: Is it justified?

Magellan Aerospace is trading on a P/E of 44.4x, a level that sits above several comparison points and raises questions about how much optimism is already reflected in the CA$35.10 share price.

The P/E multiple compares the current share price to earnings per share, so a higher figure usually means investors are paying more today for each dollar of current earnings. For a company like Magellan Aerospace, where earnings are forecast to grow 26.7% per year and are expected to outpace the wider Canadian market, a higher multiple often signals that the market is already baking in a solid improvement in profitability.

Against that, Magellan Aerospace’s current P/E of 44.4x is described as expensive versus the peer average of 37.4x and the North American Aerospace & Defense industry average of 40.9x. It is also above the estimated fair P/E of 36.9x, a level the market could move toward if sentiment cools or if earnings do not track the stronger forecasts.

Explore the SWS fair ratio for Magellan Aerospace

Result: Price-to-Earnings of 44.4x (OVERVALUED)

However, Magellan Aerospace’s relatively high P/E and reliance on government and defence-related programs mean that contract delays or weaker sentiment toward defence spending could quickly challenge that optimism.

Find out about the key risks to this Magellan Aerospace narrative.

Another view on Magellan Aerospace’s value

If the 44.4x P/E ratio makes Magellan Aerospace look stretched, the SWS DCF model points the other way, with an estimated fair value of CA$40.27 per share versus the current CA$35.10. This implies the stock is trading 12.8% below that estimate, raising the question of which signal to treat as the anchor.

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Magellan Aerospace for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 5 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

With sentiment clearly split on Magellan Aerospace’s valuation signals, it makes sense to review the numbers yourself and decide quickly where you stand. To see what the current optimism is built on, take a closer look at the 3 key rewards

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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