GenCorp's Sales Rocket, but Profits Flame Out

As the company behind rocket engine specialist Aerojet Rocketdyne, GenCorp (NYSE: GY  ) is a bona fide "rocket stock." Sadly, its profits just went up in flames.

GenCorp reported its fiscal second-quarter 2014 earnings results yesterday after the close of trading. To wit, revenue leapt 40% year over year, boosted by new revenue streams from the company's acquisition of Rocketdyne from United Technologies (NYSE: UTX  ) . Profit, however, was nonexistent. Thanks largely to a steep increase in the cost of goods sold, along with a $46 million accounting "loss" on debt that the company has repurchased and retired, GenCorp's $0.87 per-share quarterly loss more than quadrupled the loss booked in last year's second quarter.

Meanwhile, operating cash flow contracted by 75%, to just $3 million. An increase in capital spending left the company with negative $6.2 million in free cash flow -- 10 times worse than last year's $0.6 million cash burn.

So you could say the news was not great. And yet, the company is not without hope.

Space is the future
The big hope for GenCorp investors is that past performance is not indicative of future results. That new spending by the government and by other contractors working on government programs -- on Terminal High-Altitude Area Defense, on the United Launch Alliance's Atlas V rockets, and on other engines to power new space launch rockets -- will ultimately return GenCorp to profitability.

These hopes are not entirely without basis.

GenCorp's funded backlog at the end of the quarter hit $2 billion, after all. Add in the backlog for which Congress has not yet appropriated funds (unfunded backlog), and GenCorp's total contract backlog number topped $3 billion.

With GenCorp generating about $1.5 billion in revenue over the past year, this means the company has about two years' worth of business "in the bag." And this solid book of business lends some confidence to analysts' belief that the company will produce 20% profit growth annually over the next five years.

On the other hand, this quarter's loss raises some questions as to exactly what "profits" analysts expect to see growing at that 20% rate. For the time being, the stock has to be viewed as a "trust but verify" proposition. As one of the nation's premier rocket producers, GenCorp provides an essential service to the U.S. government. But the company's spotty record on generally accepted accounting principles profitability, and its recent plunge into free cash flow negativity, suggest investors should view this stock with caution.

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