Benzinga’s weekly Stock Wars matches up two leaders in a major industry sector with the goal of determining which company is the better investment.
The Case For Aerojet Rocketdyne
This rocket and missile propulsion manufacturer can trace its roots back to 1915 as the General Tire and Rubber Company, which partnered in 1945 with a rocket engine manufacturer to form Aerojet-General. General Tire and Rubber became GenCorp in 1984 and acquired Aerojet’s rival Pratt & Whitney Rocketdyne in 2013.In December 2020, Lockheed Martin announced it was acquiring Aerojet Rocketdyne for $4.4 billion, with the transaction slated to close in late 2021. However, Raytheon Holdings Corp raised an objection to the acquisition in February 2021. At publication, the U.S. Federal Trade Commission has not ruled on whether the acquisition can go forward and Lockheed Martin has pushed back its expected closure of the deal to the first quarter of 2022.
Among its recent corporate developments was a new NASA contract for the construction of the Orion Main Engine, the primary propulsion element for the Orion spacecraft that will be used to explore deep space; the expansion of its Los Angeles facility to support the production of new-generation RS-25 main engines for NASA’s Space Launch System that send astronauts to the Moon; and the successful test of a full-scale advanced solid rocket motor as part of an ongoing series in support of a Department of Defense program to develop a ground-launched tactical hypersonic weapon.
In its most recent earnings report, the third-quarter data published Oct. 26, the company recorded $545.3 million in net sales, up from $527.7 million one year earlier, and $42.6 million in net income, up from $31.7 million in the previous year. Its diluted earnings per share of 52 cents was higher than the 38 cents in the third quarter of 2020.
President and CEO Eileen P. Drake noted the company ended the third quarter “with a record backlog of $7 billion, $2.3 billion of which we expect to convert to sales in the next 12 months—this amount is up from $2.1 billion in the third quarter of 2020 and up from $2.2 billion last quarter. We continue to see momentum in the defense business and strong support for our space programs.”
The Case For Maxar Technologies
This company can be traced back to 1969 when John MacDonald and Vern Dettwiler founded MacDonald, Dettwiler, and Associates (MDA), an aerospace, information systems, and technology company headquartered in the basement of MacDonald’s Vancouver residence. Maxar was created in 2017 following MDA’s acquisition of DigitalGlobe, a Colorado-based commercial vendor of space imagery and geospatial content.Among Maxar’s most recent corporate developments are the appointment of former OneWeb CFO Thomas Whayne as chief strategy officer; the winning of an Option Year 2 contract renewal by the U.S. National Geospatial-Intelligence Agency (NGA) for the Global Enhanced GEOINT Delivery program; orders to build two communications satellites SiriusXM Holdings Inc; and a five-year, $60 million contract with the NGA to continue development and operations of a classified big data analytics program.
In its most recent earnings report, the third-quarter data published Nov. 3, Maxar recorded $437 million in revenue, up from $436 million one year earlier, and net income of $14 million, a drop from $85 million in the previous year. Its diluted net income per common share was 19 cents, versus $1.34 in the third quarter of 2020.
“Adjusted EBITDA margins expanded 330 basis points, driven by the expansion of contracts with existing commercial and international defense and intelligence assistant tells us customers contributing to positive margin growth,” said Biggs Porter, executive vice president and CFO. “On a full-year basis, revenue is at 8 percent year-over-year, driven by increases from international defense and intelligence commercial customers and adjusted EBITDA margins expanded on 100 basis points.”
Maxar opened for trading on Wednesday at $31.53, closer to its 52-week low of $21.35 than its 52-week high of $58.75.
The Verdict: Aerojet Rocketdyne is in a precarious situation with the FTC’s delayed ruling on whether Lockheed Martin will be able to acquire the company. In its earnings report, the company bluntly stated that “failure to complete the Merger could negatively impact the price of the Company’s common stock, as well as its future business and financial results.”
FTC Chairwoman Lina Khan, a Biden administration appointee, has already voiced her skepticism about acquisitions where a major corporation takes over one of its key suppliers. The fact that she shared her concerns in an Aug. 6 letter to progressive Sen. Elizabeth Warren (D-MA), an opponent of the proposed transaction, is not playing in Aerojet Rocketdyne’s favor. Also, approving the transaction would contradict President Joe Biden’s July 9 executive order “Promoting Competition in the American Economy,” which clearly opposed the type of union that Lockheed Martin is seeking.
Maxar, on the other hand, came out of its third-quarter earnings report with a bump-up in its stock price even though its year-over-year revenue was flat and its net income was down due to a deferred revenue burn off from its EnhancedView contract with the U.S. National Reconnaissance Office that was slated to expire in 2020 but was extended on Sept. 1, 2021.
In this Stock Wars duel, Maxar is the stronger aerospace stock, primarily due to the impossible circumstances that have frozen Aerojet Rocketdyne in place. Maxar is performing far below its 52-week stock price high, which is curious given how the company has been checking all the right boxes in its operations. And if the aerospace industry undergoes an aggressive wave of consolidation, Maxar would certainly be in some acquiring entity’s crosshairs.
