Four space stocks show promise entering 2023 as war rages in Ukraine.
Despite a handful of space stocks showing promise, many others in the industry struggled in 2022. Indeed, the past year was marred by poor performance of special-purpose acquisition companies (SPACs) that operate as shell organizations to merge with private companies.
SPACs, an alternative to traditional initial public offerings (IPOs), typically have no tangible assets other than the cash they obtained from investors. Transactions involving private companies going public through a combination with a SPAC are called de-SPACs.
Long Beach, California-based Rocket Lab (NASDAQ: RKLB) became the best-performing de-SPAC last year in the space industry among the stocks tracked by BofA Global Research, yet RKLB still underperformed the S&P 500 by 50 percentage points. The worst-performing name in BofA’s coverage universe, Astra Space (NASDAQ: ASTR), traded down 94% during 2022.
“We believe the strong underperformance of these names can be attributed to a multitude of factors — general de-SPAC discount, limited institutional ownership and pre-earnings nature of most businesses,” according to BofA. “However, we see several factors that point to an inflection on the horizon for some, but not all, space names.”
Four Space Stocks Show Promise, Especially Iridium
McLean, Virginia-based Iridium Communications Inc.’s (NASDAQ: IRDM) CEO Matthew Desch and Vice President of Investor Relations Ken Levy met with analysts at Chicago-based investment firm William Blair on Jan. 17 to discuss a Qualcomm Inc. (NASDAQ: QCOM) Snapdragon Satellite (QSS) partnership. The Iridium leaders emphasized that their company’s core business was growing 10% annually, before factoring in the new Qualcomm smartphone partnership.
William Blair’s analyst Louie DiPalma described the Qualcomm partnership as “net incrementally positive.” Iridium shares are already up 18% year-to-date on top of its 25% return in 2022. Despite the valuation increase, the investment firm forecasts further upside in 2023 to a range of $63 to $78, up from the investment firm’s prior projected range of $60 to $75. Iridium’s stock closed at $59.58 in afterhours trading on April 24.
Chart courtesy of www.stockcharts.com
Iridium’s third in-orbit satellite constellation may cost less than the $3 billion required for Iridium NEXT. Iridium spent $3 billion to fund its 66-satellite constellation from 2010 through 2019, before it likely will have another hefty capital expenditure from 2030 through 2037. Desch estimated that the company’s third-generation constellation should cost less than the $3 billion it paid for the NEXT constellation, partly due to SpaceX’s Starship launch vehicle slashing the cost to reach orbit by half.
Four Space Stocks Show Promise: Auto Industry Application
Iridium management voiced optimism about opportunities associated with the auto sector and machine-to-machine (M2M) data. The auto industry has the potential to generate significantly more usage fees per device than smartphones.
Consumer internet of things (IoT) cannibalization should be mitigated by new features. Iridium has consumer IoT messaging partnerships with Garmin (NYSE: GRMN), Zoleo and Bixby.
These partners should unveil devices that will let users send and receive picture messages. The enhanced feature, along with an ecosystem of products, should provide differentiation relative to the Qualcomm Snapdragon Satellite partnership and allow the consumer IoT segment to keep its momentum.
“Carrier subsidies could be a source of upside,” DiPalma wrote. “Cellular carriers or device OEMs such as Samsung may subsidize recreational messaging plans to drive customers.”
Iridium will continue to be valued on a sum-of-the-parts basis, DiPalma wrote. First, he estimated Iridium’s interest in Aireon is worth $4.35 per share. Second, he gave a free cash flow (FCF) multiple of 22 times to 28 times his 2024 FCF estimate of $63 to $78 per share for the next 12 months. The valuation estimates of William Blair do not factor in the smartphone partnership.
“We believe that this FCF yield is warranted due to Iridium’s strong competitive moat,” DiPalma wrote. “In our view, Iridium deserves this premium multiple due to its record of execution and new products and services in the pipeline.”
Four Space Stocks Show Promise: Iridium Rated ‘Outperform’
For these reasons, William Blair reiterated an “outperform” rating on Iridium. The main risk for Iridium’s stock is that its smartphone technology experiences quality of service issues or Samsung does not initially adopt the satellite service.
Iridium is the leading global provider of low Earth orbit L-band satellite services for customers across commercial, aviation, recreation, maritime, and defense markets. Environmental, social and governance (ESG) considerations should be accounted for when assessing Iridium. The most important considerations for Iridium and the satellite sector generally relate to space sustainability and the risks associated with orbital debris and orbital collisions.
Consider the de-orbiting process for the original Iridium satellite constellation. Working satellites were removed within 30 days of service being turned off. However, there are many nonworking Iridium satellites that remain in orbit.
Iridium has collaborated with the Combined Space Operations Center (CSpOC) to develop optimal practices for collision mitigation. Iridium publishes an annual ESG report. In 2021, Iridium appeared on Newsweek’s “America’s Most Responsible Companies” list.
Four Space Stocks Show Promise: Leidos Holdings
Reston, Virginia-based Leidos (NYSE: LDOS), a science and technology company, has been awarded prime contracts by the U.S. Army. One example is the Geospatial Center’s (AGC) High-Resolution Three Dimensional (HR3D) Geospatial Information Operation and Technology Integration program. That single-award contract has a total estimated value of $600 million, if all options are exercised.
The period of performance for the contract includes a one-year base, as well as three one-year options. Work will be performed predominantly in Virginia and other locations.
Chart courtesy of www.stockcharts.com
Leidos, previously known as Science Applications International Corporation, serves the U.S. defense, aviation, information technology and biomedical research industries. The company also provides scientific, engineering systems integration and technical services.
Four Space Stocks Show Promise: BofA Recommends Leidos
BofA set a price target of $130 on Leidos, forecasting that the company should trade in line in the defense prime contractors amid strong U.S. national security demand for innovative technologies and solutions. The company also has solid free cash flow, countered by a lumpy contract award environment, near-term supply chain pressures and mounting concerns about labor inflation.
Risks to reach the price target include cuts to the U.S. government budget, compared to expectations, increased competition from non-traditional competitors and problems integrating mergers and acquisitions (M&As), hiring the right personnel, containing costs, estimating costs and executing on fixed price contracts. The company also could face reputational risk.
Potential outperformance could come from a better-than-expected federal budget allocated to innovative technologies and modernization, inexpensive and well-integrated M&A activity, along with unexpected capital return to shareholders through dividends or share buybacks, market share gains, or better-than-forecast margin, BoA wrote.
Michelle Connell, who leads Dallas-based Portia Capital Management, recommends Leidos as a strong mid-cap defense stock that is not covered as prominently as the large-cap stocks in the industry. The company has a large domestic customer base that produces 90% of its revenues.
LDOS has a record for beating earnings estimates, and it is likely to beat estimates again on Feb. 15 when the company reports, Connell said.
“The options market has an interesting take on the stock,” Connell said. “When you break down the part of the premium that compensates for implied volatility, the compensation is high for the Feb. 17 calls.”
This means that the options market expects a big move one way or another for the stock, Connell said. Given that Leidos typically exceeds expectations, it would be logical for the stock to outperform estimates.
With the company’s stock price down 7.5% so far this year through Tuesday, Jan. 24, maybe the market has been incorrect in its recent assessment, Connell continued.
Four Space Stocks Show Promise: Skousen Questions SpaceX Chairman Elon Musk
Mark Skousen, the head of the Forecasts & Strategies investment newsletter, also is a leader of the Fast Money Alert trading service that invests in stocks and options. Skousen queried 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, recommended Tesla with Jim Woods in Fast Money Alert this month due to the stock’s reduced valuation after it plunged 66.3% in the last year.
Mark Skousen, a scion of Ben Franklin and chief of Fast Money Alert, meets Paul Dykewicz.
Skousen and Woods, co-leaders of the Fast Money Alert trading service, combined to produce a short-term gain of nearly 10% with their Oct. 3 recommendation of defense, space and cyber consulting firm Booz Allen Hamilton (NYSE: BAH), of McLean, Virginia. The call options they recommended soared 239.27% in just 28 days before they advised selling.
U.S. Military Veteran Woods Seeks out Defense and Space Stocks on the Ascent
Woods, a seasoned investment guru and the leader of the Bullseye Stock Trader advisory service, recommends stocks and options that include defense and space stocks. Woods, who concurrently heads the Intelligence Report investment newsletter, is a former Army paratrooper who has invested in defense and space stocks profitably. In fact, he recently recommended the stock and options in a traditional defense investment.
Paul Dykewicz meets with Jim Woods, head of Bullseye Stock Trader.
Four Space Stocks Show Promise: Rocket Lab
Rocket Lab received a $13 price objective from BofA, 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. BofA’s DCF factors in a 13% discount rate and assigns 33% probability to the Base case, 33% probability to the Bull case and a 33% probability to the Bear case.
BofA employs a lower discount rate relative to peers to account for the company’s more mature launch capabilities. In its view, the equal weighting fairly reflects current investor risk appetite, momentum for new technology space stocks and the perceived viability of Rocket Lab’s business model compared to peers.
Risks to BofA’s price objective 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. Potential outperformance could come from 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
Four Space Stocks Show Promise: Terran Orbital
BofA values Boca Raton, Florida-based Terran Orbital Corporation (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 assumes 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
China COVID-19 News
Last weekend, China reported 13,000 COVID-19-related deaths in just one week. The death toll from that week is in addition to 60,000 deaths that the country has attributed to the virus since December.
With many people in China returning to their hometowns to celebrate the Lunar New York, the country’s most important festival, risk mounts that elderly people may be infected by COVID-19 from those visiting from elsewhere. Government officials have cautioned about the risk.
In general, the country has been accused of lacking transparency since the virus emerged in late 2019. Critics contend China may not be sharing data about evolving strains that may spark fresh outbreaks in other countries.
Along with the United States, Japan, India, South Korea, Taiwan and Italy have announced passengers from China will need to test negative for COVID. An internal meeting of China’s National Health Commission estimated that up to 248 million people contracted the coronavirus during the first 20 days of December. COVID-19 still is roaring through cities in China.
The U.S. government began requiring negative COVID-19 tests starting Thursday, Jan. 5, for all passengers seeking to enter the country from China after the latter country’s spike in COVID-19 cases. France and several other countries also mandated clean COVID-19 tests for passengers arriving from China, reflecting global concern about new variants.
Four Space Stocks Show Promise Despite COVID
Worldwide COVID-19 deaths soared to 6,741,826 people, with total cases of 669,247,236, Johns Hopkins announced on Jan. 24. COVID-19 cases in the United States totaled 102,078,090, while deaths reached 1,105,176, as of Jan. 20, according to Johns Hopkins University. Until reports found China had 248 million cases of COVID-19, America had ranked as the nation with the most coronavirus cases and deaths.
The U.S. Centers for Disease Control and Prevention reported that 268,765,902 people, or 81.0% the U.S. population, have received at least one dose of a COVID-19 vaccine, as of Jan. 18. People who have completed the primary COVID-19 doses totaled 229,08,443 of the U.S. population, or 69.1%, according to the CDC. The United States has given a bivalent COVID-19 booster to 47,859,040 people who are age 18 and up, equaling 18.5% as of Jan. 18, up from 18.2% on Jan. 11, 17.7% as of Jan. 4, 17.3% as of Dec. 28, rising from 16.8% the previous week, up from 16.3% the week before that one and and jumping from 15.5% the preceding week.
Ukraine’s President Volodymyr Zelensky’s secret Dec. 21 flight to Washington, D.C., let him to speak face-to-face with U.S. President Joe Biden to advocate for essential military equipment to defend effectively against Russia’s continuing attacks. Zelensky’s address to a joint session of Congress that evening appears to have won support of many U.S. lawmakers. The surprise visit marked Zelensky’s first international trip since Russia’s invasion.
Russia is sustaining its onslaught of intensified strikes that began in October, targeting Ukraine’s energy and civilian infrastructure.
Four Space Stocks Show Promise Amid War Against Ukraine
Even though Russia’s leaders describe their attack of Ukraine launched on Feb. 24 as a “special military operation,” its soldiers are intensifying their assault of Ukraine, especially the city of Bakhmut. One of Russia’s military leaders claimed his troops had gained control of a nearby city in eastern Ukraine called Soledar.
Secretary of Defense Lloyd Austin recently cautioned that time is short for the United States and other Western countries to provide Ukraine with the advanced weapons required to thwart a Russian offensive in the spring. Ukraine not only needs the weapons but training to use them.
The Ukraine Defense Contact Group, a group of U.S.-assembled defense ministers, announced major new commitments of weapons, including an additional $2.5 billion of Bradley fighting vehicles, Stryker vehicles and other important military equipment.
The four space stocks show promise to assist in many ways, including in-orbit surveillance of battlefields. Billions of dollars of Western weapons have been sent to Ukraine and others reportedly are on the way. With Russia’s military releasing criminals to serve in the front lines of attacks to let commanders identify pockets of Ukrainian resistance, then have contractor soldiers follow up next, the death toll is mounting for both sides.
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 uplifting book is great 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.