Orbital Grounded

I'll give Orbital Sciences (NYSE: ORB  ) one thing. This high-tech wunderkind made my valuation concerns look obsolete right quick.

A few days ago, previewing this rocket maker's fiscal 2007 earnings report, I praised the company for being among Motley Fool Rule Breakers recommendations -- the kind that generate real free cash flow. Problem was, Orbital's 30 price-to-earnings ratio looked pretty steep relative to the low-to-mid-teens P/Es of peers such as Raytheon (NYSE: RTN  ) , Northrop (NYSE: NOC  ) , Lockheed (NYSE: LMT  ) , and Boeing (NYSE: BA  ) . What's more, although existent, Orbital's free cash flow wasn't quite strong enough to support the stock's similarly altitudinous price-to-free cash flow ratio.

Um, on second thought ...
Orbital answered that latter concern in spades yesterday, with a report of Q4 free cash flow that nearly equaled what it had generated in the first three quarters of the year combined. Annual free cash flow has rocketed to $81.9 million, to give the stock a price-to-free cash flow ratio of 18 -- not at all unreasonable if Orbital manages to live up to the analysts' projected 15% annual profits growth.

Judging from 2007's performance, that looks entirely believable. Revenues grew 35% for the year, to $1.1 billion. The company's most profitable business, launch vehicles, posted 27% growth. Its biggest business, satellites, grew by a respectable 14%. But what really launched sales into orbit were the two smallest divisions -- "advanced space programs" (which works on the NASA Orion space program), and "transportation management systems." The latter unit grew sales 33%. The former more than tripled its revenues.

Nor does it seem this growth spurt will flame out any time soon. Orbital booked nearly twice as much new business as recorded sales and ended the year with a backlog doubled to $3.9 billion.

Guidance
Orbital expects to generate about $1.1 billion in revenues this year, so it essentially is flat against 2007. However, the company also expects to improve operating margins by perhaps 50 basis points over this year's 8%, and if so, operating profits should get a nice boost. But let me add two caveats to this generally bullish prognosis:

  • Orbital predicted that free cash flow will decline to between $75 million and $80 million in 2008.
  • Or lower. Work on a new "Taurus II" medium-capacity rocket could cut this year's free cash flow in half (and subtract perhaps $0.14 per share from net profit).

Free cash flow declining, and perhaps by half? I don't know about you, but that's not exactly what I look for in a growth stock.


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