Stocks set to launch on rising space spending

The industry's expected to skyrocket in size, and these companies have the right products and partnerships to take off

Vikram Barhat 2 October, 2019 | 1:26AM

Rocket taking off

Over the past week, the UAE became the 40th country in history to send one of its citizens into space. Space exploration activities have become an increasing global endeavour, and have been gathering momentum in recent years with a host of international scientific missions and launches attempting to gain a deeper understanding of space.

Global government spending on space exploration is set to grow from US$14.6 billion in 2017 to US$20 billion by 2027, according to a report by Euroconsult. While the overall global space industry is expected to skyrocket from US$350 billion in 2016 to US$1 trillion by 2040 according to Morgan Stanley.

With growing space ambition and multiple space programs in the works, future funding for space missions is only expected to grow. This could directly benefit companies that provide hardware and technical knowhow necessary for the success of such complex projects as lunar probes and deep space explorations.

The following are the top tier of space companies with strong partnerships with NASA and other space agencies. These companies, owning diverse businesses, have been drawing robust funding from government-backed space agencies to supply a variety of crewed and unmanned spacecraft, satellites, robotic cargo craft, and other space vehicles for a slew of ongoing and upcoming space programs and exploration activities.

Boeing Co

 

Ticker

BA

 

Current yield:

2.13%

 

Forward P/E:

17.27

 

Price

US$386.20

 

Fair value:

US$335

 

Value

Fairly valued

 

Moat

Wide

 

Moat Trend

Stable

 

Star rating

***

Data as of September 26, 2019



American aviation behemoth Boeing (BA) makes commercial airplanes (70% of sales) and provides defense equipment (30% of sales). The Chicago-based company clocked more than US$100 billion in sales in 2018.

The aerospace giant is working in collaboration with the U.S. space agency, NASA, to develop spacecraft designed to carry crew and cargo for missions to the International Space Station and help with scientific research. In 2014, NASA awarded contracts worth US$4.2 billion to Boeing to develop crew ships to ferry astronauts to and from the space station.

“Areas where Boeing has won sole-source awards (not opened to any competition) include missile defense, U.S. presidential transport, satellite terminals, and space launchers,” says a Morningstar equity report.

Further, the company’s wide moat, or sustainable competitive advantage, stems from the fact that “since Department of Defense funds much of the development on major weapon systems, it would need to spend considerable amounts of money to cultivate a new competitor to Boeing,” says Morningstar equity analyst, Joshua Aguilar.

Boeing’s budding services business could boost operating income in coming years, as the company aims for US$50 billion in annual revenue from this segment. “A backlog of nearly 6,000 aircraft will allow Boeing to boost production into the next decade and drive commercial aircraft growth,” says Aguilar, who pegs the stock’s fair value at US$335 and projects average annual consolidated revenue growth of around 7% over the next five years.

Boeing’s defense business got a boost from recent expansion of U.S. defense budget, which, coupled with the company’s wins on high-profile defense contracts will further drive revenue growth, adds Aguilar.

Northrop Grumman Corp

 

Ticker

NOC

 

Current yield:

1.41%

 

Forward P/E:

16.69

 

Price

US$375.01

 

Fair value:

US$331

 

Value

13% premium

 

Moat

Wide

 

Moat Trend

Stable

 

Star rating

**

Data as of September 26, 2019


Northrop (NOC) operates four business segments: aerospace systems, mission systems, technology services, and innovation systems. Aerospace includes aircraft and space systems. The innovation systems business focuses on missile defense, space systems, hypersonics, and space launchers.

As part of Commercial Resupply Services-2 contract with NASA Northrop’s Cygnus spacecraft recently delivered several tons of supplies and scientific experiments to the International Space Station. A second Cygnus spacecraft is scheduled for launch in October. NASA has also reportedly awarded Northrop a contract to build a habitation module for its lunar Gateway – a small spaceship that will orbit around the Moon – to assist with the Artemis program, the planned lunar landing in 2024.

“Northrop expanded its footprint in satellites, launchers, and missile defense via its acquisition of Orbital ATK,” says a Morningstar equity report, adding that Orbital ATK is a wide-moat business “thanks to its focus on high-end weapon systems and missiles and munitions for the U.S. military combined with its space systems work for NASA.”

Orbital ATK develops and manufactures solid rocket motors, space launch vehicles, stealth aerostructures, satellites, and satellite payloads.

Both Northrop and Orbital ATK possess highly specialized engineering knowhow, says Morningstar sector director, Keith Schoonmaker. The latter is one of only two suppliers of “solid rocket motors (SRMs) for Department of Defense missiles, and according to the recent DOD industrial base report, Orbital ATK will soon be the only supplier of SRMs for strategic nuclear missiles and space launch,” adds Schoonmaker, who recently upped the stock’s fair value from US$297 to US$331, prompted by revenue outlook.

Lockheed Martin Corp

 

Ticker

LMT

 

Current yield:

2.25%

 

Forward P/E:

15.36

 

Price

US$390.43

 

Fair value:

US$384

 

Value

Fairly valued

 

Moat

Wide

 

Moat Trend

Positive

 

Star rating

***

Data as of September 26, 2019


The world’s largest defense contractor, Lockheed Martin (LMT) is a leading aerospace and defense company generating 40% sales from aeronautics business (which makes fighter jets F-35 and F-16). The firm, which clocked a whopping US$54 billion in sales in 2018, derives 60% of sales from the U.S. Department of Defense, about 10% from U.S. government agencies, and nearly 30% from international sales. The company's other businesses include rotary & mission systems (around 27% of sales), space systems (18%), and missiles & fire control (16%).

Lockheed has partnered with Boeing to form United Launch Alliance, or ULA, a company that jockeys for government launch contracts. ULA was awarded a US$150 million contract by NASA earlier this year to launch a spacecraft for an extraplanetary mission scheduled for 2021. More recently, the company won an even bigger NASA contact, worth a staggering US$4.6 billion, to build astronaut capsules.

The firm’s wide moat is built on experience in dealing with onerous government regulations and superior technical knowhow that “locks its customers into long-term relationships,” says a Morningstar equity report.

While aeronautics is the strongest segment, Lockheed’s space systems business brings in 18% of revenue through selling satellites and space-launch services, among others, says Schoonmaker.

“The bulk of Lockheed’s business in this [space systems] segment, over 50% of revenue, remains focused on providing satellites to the U.S. Department of Defense,” he says, adding that satellites are often classified because of their advanced technologies and secretive missions, creating a regulatory barrier to new entrants.

Around 15% to 20% of the segment’s sales come from space-launch services, adds Schoonmaker, who recently revised the stock’s fair value from US$328 to US$384 to reflect improved 2019 revenue and margin projections.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Boeing Co346.29 USD-1.06
Lockheed Martin Corp384.05 USD-0.57
Northrop Grumman Corp345.90 USD-0.81

About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry. He also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.