A breakdown of Aerojet Rocketdyne and whether its space unit can rival its strong defense business

Published Sat, Nov 14 20208:48 AM ESTUpdated Sat, Nov 14 202010:21 AM EST

Michael Sheetz @in/michaeljsheetz @thesheetztweetz

(This story is for CNBC PRO subscribers only.) Rocket engine and spacecraft propulsion maker Aerojet Rocketdyne has a long history of supporting successful launches and operations, both for U.S. missile defense systems and numerous space missions. But while the company's defense portfolio is a point of strength, and the likely source of its stock growth, Aerojet Rocketdyne's space business is on the sidelines of much of the widespread transformation and growth occurring in the more than $420 billion space economy – facing new competition from the likes of Jeff Bezos' Blue Origin and Elon Musk's SpaceX. With investors increasingly looking for opportunities in companies with significant exposure to the space industry, CNBC spoke to analysts and took a closer look at Aerojet Rocketdyne and its opportunities. "Aerojet's defense business is the much more driven side, versus space which is a little bit more about maintaining its position," Jefferies analyst Greg Konrad told CNBC. Aerojet Rocketdyne is headquartered in El Segundo, California, with offices and manufacturing around the country – located close to many of the large aerospace contractors it counts as customers and partners. The company has about 4,800 employees in total. The company's stock is near $36 a share, about 30% below the $50 a share average price target of Wall Street analysts. It has dropped about 20% this year. Its closest publicly-traded peers, Northrop Grumman and Lockheed Martin, have slipped just 9% and 4% year to date, respectively. While its stock has underperformed recently, the company's market value has steadily grown from about $1 billion five years ago to near $3 billion today. Of the six analysts covering the stock, four rate Aerojet Rocketdyne shares as a buy and the other two as a hold. Aerojet's business is best understood as split between defense and space, with about 60% of its sales to the former and 40% to the latter. Analysts say sales were more evenly split in prior years, but the company's defense growth is outpacing space. One closely watched metric for Aerojet's performance is its backlog of orders. The business of rocket and space propulsion "defines long cycle," Canaccord Genuity analyst Ken Herbert explained, as government orders typically come years in advance of delivery dates. Despite its shares falling this year, the company has delivered on recent expectations for its quarterly performance. In its latest report, Aerojet showed solid third quarter earnings, with an adjusted profit of $63 million on revenue of $528 million – just above analysts' consensus expectation of $519 million, according to FactSet. Strength in defense Aerojet's defense portfolio includes a wide range of missile and missile defense technologies, such as the STANDARD, THAAD, GMD and PATRIOT systems. "The missiles and missile-defense side is where a lot of the growth has been over the last few years and that's where a lot of the growth is going to come from in the future," said J.P. Morgan analyst Ben Arnstein, who has a hold rating on the stock and a $43 price target. In the missile propulsion business Aerojet's only other U.S. competitor is Northrop Grumman , which bought rocket maker Orbital ATK for $7.8 billion in 2017. Aerojet is notably working with Northrop on the Air Force's GBSD program, and the company also expects to win more contracts in hypersonic weapons technologies development. "It's a fairly simple defense portfolio ... GBSD and hypersonics are potential revenue and growth accelerators," Konrad said. Jefferies has a buy rating on the stock with a $55 price target. Truist analyst Mike Ciarmoli, who also has a buy rating with a $54 price target, said he categorizes Aerojet as a "single shot play" in the realm of hypersonics. "You're not going to buy Lockheed Martin to to get pure play exposure to hypersonics," Ciarmoli said. "But Aerojet Rocketdyne is about as close to a pure play on hypersonics as there is." Despite its strength, Aerojet's defense portfolio is not without risk – mostly outside of the company's control. For example, the State Department under President Donald Trump's administration approved a $15 billion sale of THAAD missiles to Saudi Arabia . While Herbert noted that "it's hard to unwind these sales," President-elect Joe Biden's administration could take a harder line on foreign sales of missile defense systems. Minimal exposure to growing space sectors Aerojet has a remarkable legacy in the space industry, but its two biggest customers are no longer looking to the company as the only option. Its space sales have largely come from NASA and United Launch Alliance (ULA), the rocket-building joint venture of Boeing and Lockheed Martin . The company's two major space products are its RS-25 engines – originally developed for NASA's space shuttle and now redeveloped for the agency's Space Launch System (SLS) – and RL10 engines – used to power the upper stages of ULA's rockets. Notably, ULA is retiring the rockets that use the RL10, but Aerojet is finishing development work on a new RL10C-X engine for use on ULA's coming Vulcan rocket. Aerojet also makes smaller spacecraft control thrusters in Redmond, Washington. Dozens of those thrusters are used by NASA and ULA for missions, such as on the Perseverance Mars rover spacecraft or for Boeing's Starliner crew capsule. NASA in May added to Aerojet's RS-25 engine contract, awarding the company an additional $1.79 billion for more engines with deliveries set to begin in 2023. The company is contracted to build 24 of the RS-25 engines under a total value of $3.5 billion. "Aerojet's total NASA revenues were about $228 million in 2016, and they're tracking for about $400 million this year," Ciarmoli said. "So NASA has actually had some pretty good growth for them." But space is where Aerojet's once wide competitive moat has significantly shrunk – a factor the company itself emphasized in last year's annual report. "While historically these factors posed substantial barriers to entry, modern design tools and manufacturing techniques (such as additive manufacturing) are enabling new entrants with the funding to enter this industry, leading to increased competition," Aerojet wrote. "For example, new entrants such as SpaceX and Blue Origin ... have signaled their intent to compete primarily on price and are willing to take on substantial risk exposure on development programs." Aerojet has already lost market share. The company spent about $90 million, with the U.S. Air Force funding another $215 million, to develop the AR1 rocket engine to power long-time customer ULA's next-generation Vulcan rocket – only to lose out to Blue Origin's BE-4 engine in 2018. Since then AR1 has "been an afterthought," Ciarmoli said, and "kind of just died on the vine even after it got some modest funding." ULA has increasingly come under pressure from SpaceX to win launch contracts, so Konrad thinks the loss to Blue Origin "was probably price driven." Another engine Aerojet had been developing was the AR-22, for an experimental suborbital spaceplane ordered by the Defense Advanced Research Projects Agency (DARPA). But, in January, the spaceplane's sole contractor Boeing decided to end its involvement – effectively stopping development in its tracks. Finally, while NASA has continued to vocally commit to the SLS program, ULA, SpaceX and Blue Origin are each developing powerful next-generation rockets that could decrease its need. NASA has maintained the SLS rocket will not be replaced, but the agency has awarded companies with contracts that are assisting the development of crewed spacecraft that could fly on the privately-built rockets instead. "The company is probably in the next three to five years facing a pretty significant inflection point around either having to find some way to participate in the new space market, which is a completely different model business model than what they're used to, or finding a way to accelerate innovation," Herbert said. Aerojet is trying to compete in small ways. Last year Aerojet and rocket builder Firefly Aerospace signed a cooperative agreement, a deal which could result in a new customer for Aerojet's AR1. Firefly Aerospace highlighted the engine as "incredibly well suited to power Beta," the rocket it plans to begin developing next year after the first launch of its Alpha rocket. The company's CFO Dan Boehle told CNBC in a statement that "we believe the market and the government recognize the value of Aerojet Rocketdyne propulsion. Our RL10 and RS-25 engines are great examples of advanced rocket engines that have been important to the success of multiple launch vehicles, continue to be improved, and are being used for current launch vehicles. We are using the same multi-platform approach with a number of our in-space propulsion products. In addition, we are developing new launch and in-Space propulsion engines and thrusters." $1 billion in 'firepower' for deals, investment Aerojet is not without options, however. The company ended the third quarter with $1.1 billion in cash on its balance sheet, despite under $300 million in current debt – a factor Herbert credited to Aerojet management "being incredibly risk averse." "But they might need to find a way to open up the aperture a little bit here moving forward, because speed and cost and other things are going to become more important factors in the market than purely safety and risk aversion," he added. Jefferies' Konrad noted that, while Aerojet has "key flagship program," the company doesn't have "a program that's starting from zero and is a home run. The company said it is looking at possible solutions, although it's unclear yet whether that would be through an acquisition or significantly committing funding to a next-generation product. "We continue to examine ways to grow organically and inorganically," Boehle said. J.P. Morgan's Arnstein cited defense contractor Leidos' recent $1.7 billion acquisition of space business Dynetics as an example of the type of deal Aerojet could do. But while he thinks it would have fit well in the company's portfolio, Arnstein thinks the multiple Leidos paid is much higher than what Aerojet would be willing to spend. "I think that they are very interested in doing M & A. But I think that there's a wide disconnect between the capabilities that they want to buy for that are attractive to them and what they would be willing to pay for, you know, for a deal," Arnstein said. "Meaningful M & A in something that changes the outlook for this business; doing something that is strategic and creative and changes how people think about this." – CNBC's Michael Bloom contributed to this report. Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.

The four RS-25 engines slated to fly on the maiden flight of NASA's SLS rocket, at the company's facility at NASA's Stennis Space Center.

Aerojet Rocketdyne

(This story is for CNBC PRO subscribers only.)

Rocket engine and spacecraft propulsion maker Aerojet Rocketdyne has a long history of supporting successful launches and operations, both for U.S. missile defense systems and numerous space missions.

But while the company's defense portfolio is a point of strength, and the likely source of its stock growth, Aerojet Rocketdyne's space business is on the sidelines of much of the widespread transformation and growth occurring in the more than $420 billion space economy – facing new competition from the likes of Jeff Bezos' Blue Origin and Elon Musk's SpaceX. With investors increasingly looking for opportunities in companies with significant exposure to the space industry, CNBC spoke to analysts and took a closer look at Aerojet Rocketdyne and its opportunities.

"Aerojet's defense business is the much more driven side, versus space which is a little bit more about maintaining its position," Jefferies analyst Greg Konrad told CNBC.