In 2017 we set up our business, Cestrian Capital Research, Inc. We thought that the space sector was showing signs of entering a long run secular growth curve. Two years back - a long time in space! - our logic was that the privately owned commercial launch vendors - SpaceX, BlueOrigin - had brought cost-to-orbit down so much that there would be a supply-side-driven acceleration of growth in the sector. Less money per kilo in orbit equals more things in orbit. We come at space from the tech side, and this looked a lot like Moore's Law to us. The downward cost curve is what sits behind the pervasiveness of technology in everyday life. More transistors per chip, more compute power per dollar, more computing devices in every household. And as SpaceX in particular was clocking up 10x cost reductions in only a few years, the cost curve in space looked a lot like the cost curve in tech to us.
Well, we were half right. Certainly the private launch companies are growing well, new such vendors have taken off since 2017 - we're thinking Rocket Lab here - and commercial launches are growing in number all the time. And the next time NASA sends humans to the International Space Station, it won't be on a government rocket, it will be on a ship built and operated by either Boeing or SpaceX. So - good for us and good for the future of this industry as we expect many of the privately owned companies in the sector to IPO.
What we didn't expect was the resurgence of the government space program in all its forms. And that has delivered gains to investors right now - with, we believe, more to come.
We believe the space sector offers returns which are not correlated to the general economy. At a time when markets are at an all-time high, yet fundamentals are slowing, we believe space is a compelling place for investors to be. Below we set out our logic.
Quietly, very quietly, a New Space Race has taken flight.
You know that the first such sprint, from the late 1950s to the early 1970s, was the US vs. the USSR. You know that it played out in public from the first satellite (USSR) to the first human in space (USSR) to the first spacecraft rendezvous (USSR, kind of) to the ultimate KO, the first humans on the Moon (US). Whereupon the US kept spending to establish further dominance through the end of the Apollo program, and the USSR's efforts faded. And then after a little while longer came 1989 and all that meant for the fate of the USSR and its ability to spend.
The US won first time around because of a political will to spend whatever it took and to go as fast as possible ("waste everything but time" was the exhortation at the time).
Fast forward to the financial crisis of 2008/9. The Obama administration canceled the Shuttle program and its planned successor. No Space Shuttle has flown since 2011. And in the near-decade that has followed, two things have happened. First, the private vendors above have stepped in to fill the void where once government ships flew; and second, China has edged forward in lunar exploration and, perhaps, in next-gen hypersonic missile technology which shares its DNA with spacecraft rocket boosters. The new Russia is now also touting its hypersonic capability. And a number of other nations - notably India with a government mission, and Israel with a privateer effort - have a Moon program.
Against this background, where the US has ceded much ground to other spacefaring nations, there is a very particular issue which the US is seeking to solve, and quickly. Right now the only way to send an American astronaut to the International Space Station is by whisking them to Kazakhstan and placing them in a Russian Soyuz capsule atop a Russian rocket. And although you won’t hear the US government say so out loud, that’s a little embarrassing.
Solving this problem led to the first major step by the US in the New Space Race. It was decided that NASA would no longer have the monopoly on building and operating US spacecraft. In 2014 NASA awarded two contracts to two public companies, Boeing and SpaceX, to build and operate spacecraft that could be used to “send American astronauts to the International Space Station on American rockets launched on American soil”. So just in case the message weren’t clear, this is the US taking back ownership of their astronauts’ taxi rides to low Earth orbit. Those programs remain under development – both are midway through their testing and flight certification – and are expected to deliver mission success sometime in 2020 or 2021.
Further moves have also been made by the US to reassert superiority in space. An old-style federal program is underway to return American astronauts (“the next man and the first woman”) to the Moon, and then on to Mars. The launch vehicle for this is the enormous Space Launch System (SLS), the largest rocket built since the famous Saturn V of the Apollo era. And coming down the pike is the replacement of the USAF Minuteman III nuclear arsenal, together with the potential introduction of hypersonic missile systems. Both use rocket and rocket-derived technologies and components.
Taken together what you see here is a big step up in spending on space matters, and a re-emergence of the strategic value of space. You don't see the same heat and light as there used to be in the 1960s - there is far less propaganda and counter-propaganda between the protagonists. But make no mistake, the US is serious about getting back ahead in space. And this has been to the benefit of very many US companies, and their shareholders. We think it will continue to be so.
Government being what it is, and with a couple of notable exceptions, it mainly does business with companies that have been around a very long time. And unlike the cost-down private companies we mentioned earlier – the SpaceXs and RocketLabs of this world – these older companies have securities already traded on public exchanges.
And quietly, very quietly, these space-sector companies have become hot properties. Many of these stocks are beating the Nasdaq and the S&P500 by a country mile.
Below we profile three such companies. We cover them extensively in our independent, space-focused equity research service, but here’s a taster.
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Iridium Communications (IRDM) is a $4.9bn EV satellite comms business – it’s a pureplay space business. In an era when fiber teledensity is increasing daily, one might question the need for a satellite comms service – or at the very least one might expect it to become an increasingly niche market. But IRDM has positioned itself wisely as a high-rel provider. It utilizes L-band spectrum which is a lower-bandwidth, more reliable frequency band than the K-band spectrum used by the civilian sector satellite companies (ViaSat, OneWeb, Starlink when it goes live). This means IRDM’s service is most suited to users with lower data requirements but higher reliability requirements. Think military, maritime, lone workers in remote areas. And those users tend to be a little less price sensitive than folks who live away from the fiber network, but still want to use Netflix.
IRDM’s key customer is the Department of Defense, which just signed a new 7-year contract. IRDM also offers broadband data services, both over its network (the new ‘Certus’ service line) and in partnership with other, K-band providers. Finally the company has a sizeable stake in Aireon LLC, a joint venture between IRDM and various national air traffic authorities which provides more accurate aircraft positioning data than has been available to date.
The 3-year total return chart of IRDM vs the Nasdaq is to the right. The stock started to outperform once the new generation of satellites were being deployed successfully. The fleet was completed earlier this year.
DISCLOSURE: We are long IRDM on a personal account basis.
Aerojet Rocketdyne (AJRD) is a $3.3bn EV manufacturer of propulsion systems and other components. Its rocket motors have powered some part of pretty much every major US space mission. Right now you can see its largest production engine, the RS-25, being installed on the NASA Space Launch System rocket. Four of them in fact. Today AJRD is one of two providers of solid rocket motors, which means it is likely to win a part of the Air Force's GBSD nuclear renewal program as well as flourishing already as a provider to the likes of United Launch Alliance. The company is also working on hypersonic missile development. AJRD has a long and storied history, but the current stock price performance (see right - beats the Nasdaq comfortably over the last three years) is down to the combination of an activist fund at the helm, followed by their installation of a turnaround management team led by a very cash-focused CEO. The company has been growing its backlog, increasing its cashflow margins, reducing capex and improving working capital, which has driven a rapid balance sheet swing from moderately levered to a net cash position.
DISCLOSURE: We are long AJRD on a personal account basis.
Northrop Grumman (NOC), at $73bn EV, is the product of many mergers in the aerospace & defense industry. Its latest is what qualifies the company as one of our leading space stocks. NOC completed the acquisition of Orbital ATK, former ticker OA, in Q2 2018. Orbital, growing revenues at 16% p.a. when it was acquired, became the most rapidly growing part of Northrop Grumman. And despite it being a $10bn acquisition, the deal now looks cheap. NOC paid a lower multiple of profits for Orbital than its own valuation multiple; and raised loans to fund the acquisition, rather than issuing dilutive equity. The added growth that Orbital brought to NOC is the main reason NOC has outperformed the NASDAQ in the last year (see right).
NOC has multiple roles supplying US Government space, not least the operation of International Space Station cargo resupply missions using the 'Cygnus' spacecraft. The comapny is also in a good position regarding the pending Air Force GBSD prime contractor award, and has recently been selected as the sole bidder for the NASA Lunar Gateway habitation module.
DISCLOSURE: We are long NOC on a personal account basis.
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