Space stocks focused on defense leave investors in suspense as Russia’s ongoing invasion of Ukraine shows no signs meaningful peace talks will soon commence.
The space stocks focused on defense give investors ways to help support U.S. companies that are providing important capabilities in the face of growing threats not only from Russia but from China. The latter country, the world’s most populous with the second-largest economy, has been described by U.S. government officials as America’s biggest military and economic threat, spurring the development of new defense and national security strategies.
As federal spending for the United States Space Force (USSF) increases, some American companies likely will try to expand their product and service portfolios to be eligible for space-related U.S. Department of Defense (DoD) contracts. Additionally, rocket reusability has driven down costs, enhancing the affordably of launch services for space business start-ups.
Reinvestments in R&D Strengthen Space Stocks Focused on Defense
In 2021, the total space economy reached an estimated $469 billion, up 62.8% in 10 years from 2011 estimates of $288 billion, according to BofA Global Research. Approximately 79% of that total market value is attributed to commercial space products and services, the investment firm added.
Global government spending on space was estimated at $87.35 billion in the same time period, accounting for a sizeable 20% share of the market, according to Statista. In the United States, defense spending has been rising steadily for the last 15 years to the benefit of both publicly traded and privately held companies. However, the current free-market dynamics just became a feature of the space industry in recent years.
The emergence of digital technologies, such as advanced metal manufacturing and robotics, have cut production costs and sped up project completion, according to BofA. Furthermore, large investments in research and development (R&D) have allowed space companies to vertically integrate to try to gain increased control of their own supply chains, as opposed to minimal investments of 2-5% in research and development (R&D) annually by some defense prime contractors. Instead of spending their own earnings on R&D, large defense prime contractors often wait for DoD contracts to fund their projects.
“This sluggishness in development stands in stark contrast to the agility of space companies like Virgin Galactic and SpaceX,” BofA wrote in a recent research note. “For example, SpaceX produces 70% of Falcon launch vehicle components in its California production facility.”
Space Stocks Focused on Defense Feature Entrepreneurs Like Elon Musk
The decision that Russia’s leaders announced on July 26 to leave the International Space Station (ISS) program after 2024 proved them to be unreliable partners as launch providers, creating an opening for Western companies to fill. The U.S. commercial space industry now is gaining momentum as a major provider not only of launch capabilities but in-orbit satellite services.
The invasion of Ukraine injected urgency into the space race, with Russia’s leaders subsequently blocking the United States and its allies from using Soviet-era Soyuz rockets as launchers. American launch service providers such as SpaceX, Blue Origin and Space Launch System (SLS) are seeking to scoop up the business that Russia’s President Vladimir Putin chose to abandon. None of the U.S.-based launch service providers are pure play, publicly traded stocks, but two of them are traditional, broad-based defense companies.
Skousen Scouts out Space Stocks Focused on Defense
Mark Skousen, the head of the Forecasts & Strategies investment newsletter and a leader of the Fast Money Alert trading service that invests in both stocks and options, questioned SpaceX and Tesla (NASDAQ: TSLA) founder Elon Musk at the annual Baron Investment Conference held in New York on Nov. 4. Skousen, who also is a Chapman University Presidential Fellow and recently was named the first Doti-Spogli Chair in Free Enterprise at its Argyros School of Business and Economics, now is steering clear of Tesla due to the stock’s sky-high valuation, even though he has recommended it profitably in previous years.
Mark Skousen, a scion of Ben Franklin and head of Fast Money Alert, meets Paul Dykewicz.
When Skousen asked Musk about why investors should invest in non-dividend-paying Tesla at its much higher price-to-earnings (P/E) valuation rather than dividend-paying EV competitors, the entrepreneur told attendees at the Baron Funds Investment Conference in New York that he would not argue that point. Instead, Musk said has told the investing public in the past that Tesla shares were too high, “and they ignore me and buy the stock anyway.” SpaceX is not a public company yet, but its prowess as a launch and broadband satellites services provider could position it to go public in the future.
Paul Dykewicz meets with CEO Ron Baron at the end of the Baron Funds conference.
Jim Woods, a seasoned investment guru, also is the leader of the Bullseye Stock Trader advisory service that recommends stocks and options. Woods, who concurrently heads the Intelligence Report investment newsletter, is a former Army paratrooper who has strategically invested in defense stocks that are involved in the space industry. He recently recommended the stock and options in one of the traditional defense stocks that also operates in space.
Paul Dykewicz meets with Jim Woods, head of Bullseye Stock Trader.
Rocket Lab USA Is Among the Space Stocks Focused on Defense
BofA’s price objective of $12 is based on a long-term discounted cash flow (DCF) of Base, Bull and Bear cases for different revenue and cash generation scenarios between now and 2035. The investment firm’s DCF factors in a 13% discount rate and assigns 33% probability to the Base case, 33% probability to the Bull case and 33% probability to the Bear case.
In addition, BofA uses a lower discount rate relative to its peers to account for the company’s more mature launch capabilities. In BofA’s view, the equal weighting fairly reflects current investor risk appetite, momentum for new technology space stocks and the perceived viability of Long Beach, California-based Rocket Lab’s business model compared to its rivals.
Risks to meeting that price target are persistent COVID-19 restrictions in New Zealand, production delays, constellation launch market remaining captive to certain providers, setbacks to the economic recovery, inability to achieve mergers and acquisitions (M&A) synergies and setbacks to Neutron vehicle development.
Outperformance could occur with better-than-expected cost cutting and margin expansion, well-integrated M&A activity, market share gains in satellite components and services, higher reutilization levels and better-than-expected commercialization of the Neutron launch vehicle.
Chart courtesy of www.stockcharts.com
BofA Recommends Terran Orbital Among Space Stocks Focused on Defense
BofA values Boca Raton, Florida-based Terran Orbital (NYSE: LLAP) based on a long-term unlevered discounted cash flow (DCF) using Bull, Base and Bear cases, assigning an equal weighting to each scenario. The investment firm’s DCF extends for 10 years.
Terran Orbital’s revenue growth, margin growth and capital expenditure assumptions by scenario are primarily driven by assumption differences within Earth Observation Solutions, where revenues are mostly dependent on the number of satellites in orbit. BofA’s bull case assumes a constellation of 96 satellites. The base case assumes 48, while the bear case assume 24, all achieved by 2029. As a result, BofA derives a price target of $9 per share, which is based on a 9.9% discount rate. The investment firm applies a $0 value in scenarios where the value is negative. In this model only, the Bear case returns a negative value.
Risks could come from not building out the PredaSAR constellation or if the demand for SAR imagery does not come to fruition. Damage to the relationship with Lockheed Martin (NYSE: LMT) could also provide downside pressure. However, if the company is able to grow faster than BofA expects, then there could be heightened upside potential.
Chart courtesy of www.stockcharts.com
Northrop Grumman is Another of the Space Stocks Focused on Defense
Northrop Grumman, a multinational aerospace and defense technology company headquartered in Falls Church, Virginia, teamed up with NASA in July successfully to conduct a full-scale static fire of NASA’s Space Launch System (SLS) rocket motor, known as Flight Support Booster-2. The five-segment solid rocket booster is designed to have the world’s largest solid rocket motor to provide more than 75% of the SLS rocket’s initial thrust during launch.
In the test flight, more than 300 measurement channels assessed the 154-foot-long solid rocket booster as it fired for slightly more than two minutes to produce upwards of 3.6 million pounds of thrust. The test evaluated new materials and demonstrated an ignition system and an electronic thrust vector control system to steer the motors to provide data for the development of the next-generation Booster Obsolescence and Life Extension (BOLE).
Northrop Grumman won a contract to develop the BOLE booster in December 2021. The award included follow-on production and flight sets for Artemis IV through Artemis VIII, and a BOLE booster set for Artemis IX.
Michelle O’Connell, who leads Dallas-based Portia Capital Management, recommends Northrop Grumman. The company’s involvement in the growing space launch program only enhances its appeal.
Michelle Connell leads Dallas-based Portia Capital Management.
Continuous product improvements and obsolescence mitigation help NASA achieve its long-term mission to use SLS for its Artemis program, said Wendy Williams, vice president, propulsion systems, Northrop Grumman. This test offers a chance for early learning on next-generation systems, she added.
Chart courtesy of www.stockcharts.com
Connell Recommends Kratos Defense as One of the Space Stocks Focused on Defense
Kratos Defense & Security Solutions, Inc. (NASDAQ: KTOS), of San Diego, California, develops and fields affordable technology, platforms and systems for U.S. National Security customers, allies and commercial enterprises. The company aims to change the way technology “breakthroughs” for these industries are rapidly brought to market through proven commercial and venture capital approaches, including proactive research and streamlined development processes.
- Kratos Defense only has a $1 million market capitalization. Like other small-cap stocks, the company has been hit hard during the “horrific market” of 2022.
- The stock rose 1.50% in the past month, rebounding from drops of 9.62% in the past three months, 51.08% year to date through Dec. 27, 2022, 51.73% in the past year. Wall Street may speculate that KTOS has been a victim of tax-loss selling. Portfolio managers typically clean up their weak positions by taking losses and removing some potentially embarrassing purchases.
- If an investor believes in the long-term opportunities of KTOS to excel in its target markets of space, satellite and cyber, it makes sense to start creating a position in the name.
- One large potential catalyst for the stock is that several analysts have KTOS returning to positive cash flow in 2023. During periods of risk, companies with positive cash flow tend to fare best. If KTOS succeeds in this achievement, investors should be rewarded.
- JP Morgan and several other analysts have price targets close to $14 a share. The company closed trading at $9.49 a share on Dec. 27.
Chart courtesy of www.stockcharts.com
Reports Show China’s COVID Cases Climb Sharply After Relaxing Zero-Tolerance Policy
An internal meeting of China’s National Health Commission estimated that up to 248 million people contracted the coronavirus over the first 20 days of December, according to news reports. COVID-19 is slamming cities in China after its government recently chose to ease its strict anti-virus controls.
Criticized for probable underreporting of cases and deaths, China’s leaders recently reconsidered their Zero-tolerance policy for COVID cases had been in effect the last three years. Large protests in many of China’s cities last month may have led the nation’s leaders to modify the policy of strictly locking down communities where COVID outbreaks occurred.
China’s economy may gain a short-term boost from relaxing its COVID-19-related lockdowns, but a spike in cases and deaths could cause shutdowns to be ordered again by government leaders. Lockdowns cut the supply of goods and prevent many people from working, shopping and obtaining food and water without assistance. A real estate slump also would be a risk.
U.S. COVID Cases Exceed 100 Million
COVID-19 cases in the United States totaled 100,471,854 and deaths reached 1,090,595, as of Dec. 28, according to Johns Hopkins University. Until last week’s news that estimated China had 248 million cases of COVID-19, America had the dreaded distinction of incurring the most coronavirus cases and deaths of any country. Worldwide COVID-19 deaths soared to 6,682,716 people, up more than 5,500 since Dec. 23, while total cases reached 656,579,760, Johns Hopkins announced on Dec. 28.
The U.S. Centers for Disease Control and Prevention reported that 268,143,349 people, or 80.8% the U.S. population, have received at least one dose of a COVID-19 vaccine, as of Dec. 21. People who have completed the primary COVID-19 doses totaled 228,989,746 of the U.S. population, or 69%, according to the CDC. The United States also has given a bivalent COVID-19 booster to 43,385,791 people who are age 18 and up, equaling 16.8%, up from 16.3% last week, 15.5% the previous week and 14.7% the week before that one.
Ukraine’s President Volodymyr Zelensky flew secretly on Dec. 21 to Washington, D.C., where he met with U.S. President Joe Biden, before addressing a joint session of Congress that evening. Zelensky’s surprise visit marked his first international trip since Russia invasion the country he leads. The trip required Zelensky to travel by train to Poland, where he boarded a U.S. military aircraft to fly across the Atlantic Ocean. He took the trip to rally support for additional funding to help Ukraine defend itself from Russia’s unrelenting aggression.
Russia launched at least 76 missiles at different parts of Ukraine, including Kyiv, Odesa, Poltava, Zhytomyr, Kharkiv and Sumy, on Friday, Dec. 16, according to the Ukrainian Air Force. Russia is continuing its barrage of strikes that began in October that have damaged Ukraine’s energy and civilian infrastructure, causing power outages during frigid conditions.
Russia’s decision to sever its collaboration in space with the United States and other Western nations that have backed economic sanctions against the aggressor in its sustained attack on Ukraine have increased interest among U.S. space stocks focused on defense to pursue a heightened share of the U.S. government’s growing number of space exploration missions. The space stocks focused on defense are becoming key contractors in America’s renewed race for space.
Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, Guru Focus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Special Holiday Offer: Paul is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is great holiday gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others. Call 202-677-4457 for special pricing on multiple-book purchases.
