And now for something completely different… since it’s been a nutty week in the markets, I’m going to cover a teaser pitch that doesn’t have much to do with Chinese growth fears, interest rates, gold prices, or momentum stock valuations: This one’s all about space.
Which itself is in the news today, thanks to the failure of that Soyuz rocket that caused the latest attempted delivery to the International Space Station to get aborted after launch (thankfully, the passengers survived).
So what’s the story? Christian DeHaemer is selling his Crisis and Opportunity newsletter ($999/year) with a story about the “Billionaires Space Race”, with the hook being a photo of a “$700 quintillion space rock” in DeHaemer’s initial emails.
That’s because some of the impetus for all this billionaire-led excitement about private space exploration is financial… there are folks who’d like to be the first to get out there and mine an asteroid for valuable metals that are rare on earth.
Of course, most of the folks developing private space flight companies and capabilities are not at all focused on space mining, since that’s decades into the future if it ever becomes feasible at all, they’re focused on other stuff like building platforms for further exploration (or a Mars mission), or delivering more satellites more efficiently, or adventure and space tourism, or energy production (like solar collection outside of our atmosphere)… or, really, maybe they’re just looking for something cool and maybe important or humanitarian that they can do with their unthinkable wealth (Andrew Carnegie builds everyone a library, Jeff Bezos builds a company that might put libraries out of business and builds rocket ships… every generation of billionaires comes up with a new hobby).
The ad implies that the opportunity here will be like the opportunity you could have had in the early days of the Space Race, buying companies like Northrop Grumman, Boeing and Rockwell Collins for 1,000-160,000% gains (those gains are real, though very long term and — Boeing, for example, has had a total return of about 90,000% if you bought in the early 1970s and held for 45 years, though I’m sure there must have been companies involved in aerospace in the 1960s and 70s that failed or fizzled out as well).
Here’s a taste of the ad:
“The clock is ticking on… The Billionaires’ Space Race
“Man’s first foray into space sparked epic stock runs of 26,454%… 12,957%… and 162,862%
“Here are THREE ways to play today’s billionaire-driven space exploration boom for 129 times your money”
The short version of DeHaemer’s thesis is that although billionaires and entrepreneurs are trying to exploit space, and we’re entering a new era, perhaps, of spending on space exploration (or even the “Space Force” proposed by President Trump), the space companies that might really make a profit are the ones that everyone needs — the companies that make the parts and rocket engines and technology that most of the new wave of space billionaires will depend on.
And what are the plays that benefit from the rise of companies like Elon Musk’s SpaceX, Jeff Bezos’ JBlue Origin, Paul Allen’s Stratolaunch Systems, Richard Branson’s Virgin Galactic and the rest? Here are the clues we get from DeHaemer in the ad:
“Space Race Company #1
“97 Times Smaller Than Boeing
“The first company you need to know about has actually been around since the 1950s….
“… has a crucial piece of technology that Boeing absolutely needs in order to keep its space program afloat.”
Someone complained when I parroted that kind of silly “97x smaller” language a while back, so I’ll clarify here and say that yes, what DeHaemer is talking about is “1/97th the size of Boeing” — which would make it roughly a $2 billion company. Any other clues aside from this mysterious part?
Well, we do get an image of it… so that, at least, lets us confirm the Thinkolator’s answer: This is a pitch for Moog (MOG.A or MOG.B), and the image is of Moog’s MONARC engine. The two share classes seem to pretty reliably trade at identical prices, but pretty much all the trading volume is in the A shares.
The company is not just an aerospace widget-maker, their specialty is motion control — the little servos and controllers and actuators that enable lots of advanced and high-end technologies in aircraft, space, health care, energy and industrial devices and a lot more that I don’t understand at all. I assume that should give them a pretty steady business, since they are tightly integrated with a lot of their major customers and have such a specialty focus on their high-end engineered equipment that it wouldn’t make sense for customers to take the work in house or take chances with less capable competitors.
I don’t know what competition they might have that isn’t “less capable,” though — they seem to be doing just fine, and seem to be priced for a pretty strong aerospace contracting and military spending environment, with a trailing PE of 28. The four analysts who have forecasts expect them to earn $5 a share next year, so that’s a forward PE of 15, which seems very reasonable. The stock has been through a little up-and-down over the past five years, with a dip in revenue a few years ago that might have been partially caused by defense budget cuts, but this past quarter was their best one ever on a net income and per-share earnings basis… and they started to pay a dividend this year, for the first time in 20 years, which tends to be good news for investors (the dividend is 25 cents/quarter, so it should be a 1.25% or so yield if they stick with it — which they should, it’s only about a third of trailing earnings, so it’s manageable).
I don’t know a lot about Moog and have never looked at it before today, but it’s an interesting idea at a very reasonable forward PE valuation. They carry a bit of debt (about $900 million, compared to the equity market cap of $2.7 billion), but it’s easily manageable with their level of cash generation and their cash flow is probably fairly predictable with project work and spare part contracts. Probably worth a look if you like the aerospace/defense sector and can’t stomach the somewhat richer valuation of the huge companies, though I don’t know what impact, if any, they might feel from the ongoing trade disputes.
“Space Race Company #2
“The Most Powerful Rocket in the World
“A company that was just awarded a contract by NASA to restart production of its RS-25 engine for the Space Launch System.
“It’s the most powerful rocket in the world, designed to go to Mars…
“… the world’s most reliable rocket booster engine — one that’s been used for more than three decades and 135 space flights.”
OK, so that’s enough to get us an answer… but let’s see if they drop some other clues:
“… the company’s contract to produce these engines is worth $1.16 billion and runs through 2024….
“These guys were also tapped to supply maneuvering thrusters, which were used to navigate the Cygnus cargo spacecraft to its ninth successful berthing to the International Space Station.
“On top of that, they also provided the R10 engine that will fly atop the new Vulcan Centaur launch vehicle.
“And they’ve provided the boosters for the Atlas V rocket, supplied the engine for the OmegA rocket, and helped propel the Delta II rocket.”
This is the “go to” company for rocket engines, particularly because there used to be two meaningful rocket engine “pure play” companies and they merged into one about five years ago — the company is Aerojet Rocketdyne (AJRD), which has also been teased by a few other newsletters in the past (most recently Michael Robinson a couple months ago with a pitch about their “hyper-x” hypersonic engine work).
The stock has come down a bit since it was teased in the mid-$30s, so the valuation is a little more compelling here, but it’s still a very lumpy business and quarterly earnings are hard to predict, so I’d expect it to be volatile — as with most of these companies, the big drivers will probably continue to be just the level of defense and space spending by the feds, though private space companies are having a financial impact as well. And not just in a good way, Blue Origin recently won one of the engine contracts that Aerojet was also under competing for — Aerojet has part of the business for that launch vehicle, too, so it’s not all bad, but it is perhaps a small indication that the private guys might go further into the supply chain to cut costs and make an impact… kind of like the way Apple keeps pushing to make their own chips for the iPhone to get more control and save money.
Still, they’re a major supplier in aerospace, to pretty much everybody, and you don’t have to overthink it: Aerojet will probably do well if space funding rises, and they do have a fairly large revenue base that’s likely to stay quite high — though a billion-dollar contract doesn’t have as huge an impact on these companies, because lots of it ends up outsourced to other partners and they don’t trade at big price/sales multiples (Moot and AJRD both trade at pretty close to 1X sales right now, with Return on Equity and profit margins in the 6-7% neighborhood). On the other side of the argument, If defense or space budgets are ever cut meaningfully, which could easily happen if we ever begin to worry about deficits again, AJRD and other suppliers will likely suffer.
And one more…
“Space Race Company #3
“The third company essential to the new space race is a software company.
“It specializes in developing, manufacturing, and testing things like space telescopes, space cameras, and imaging systems.
“Recently, two of the company’s advanced imaging systems were launched into space onboard an environmental research satellite.
“The imaging systems — or cameras — are able to detect objects that are as small as 20 inches long and can orbit the Earth 29 times in two days.”
This one I can’t promise as a 100% certain match, unlike the others, but from those clues I suspect he’s teasing the newly US-listed Maxar Technologies (MAXR), which is pretty large and new but was built by combining a few space technology companies — most importantly DigitalGlobe, which is a big provider of satellite imagery, and MDA Holdings… they also own the old Space Systems Loral and Radiant Solutions. I don’t know that they specialize in developing, manufacturing and testing telescopes or cameras, but they have a pretty broad satellite business — communication satellites, ground systems, imagery and sensing systems, and, thanks to DigitalGlobe, a subscription-based high-resolution satellite imaging network that refreshes frequently and provides data to governments and intelligence services and other players. They even have a business that sounds like a combination tow truck/repair business for existing satellites.
So this is a newer company with a recently collapsing share price (down 50% since they listed in the US about a year ago), and they trade at a really cheap multiple to analyst estimates (about 6X forward earnings) and pay a pretty substantial dividend (more than 3.5% now), so there must be something that’s worrying investors — and there is, it appears to be summed up pretty well in the reports of short seller Spruce Point Capital Management, whose report says it should go to zero eventually, but first to $20-25 — they say that the acquisitions have been used to generate inflated earnings numbers, that the dividend will have to be canceled, and that their deleveraging plan will fail (they carry quite a bit of debt).
You can see a bit of an interview with Spruce Point’s Ben Axler here if you’d like info on that short, and Maxar did respond with a press release that pretty much just reiterated their 2018 guidance and says the short report “contains a number of inaccurate claims and misleading statements” but didn’t provide any detailed rebuttal (they’re not obligated to respond to short-seller reports, of course, but I always find it more comforting when the response is detailed). And as I noted, I’m not sure that this is DeHaemer’s third stock — it’s just the best match I’ve found among the smaller aerospace suppliers, if you’ve got a better one, well, let us know with a comment below.
Likewise, if wisdom about any of these “rocket” stocks is on the tip of your tongue, or you have other space insights to share, please use the happy little comment box below. Thanks for reading!
P.S. We’re always looking for reader feedback on newsletters they’ve subscribed to, so if you’ve ever tried out DeHaemer’s Crisis and Opportunity, please click here to share your experience with your fellow readers. Thanks again!
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