This morning, shares of Aerojet tumbled more than 10% in early trading, and remained down 4.3% as of 11:15 a.m. EDT, in response to a strong-sell rating assigned to the stock by Spruce Point.
Spruce Point's attitude toward Aerojet Rocketdyne stock is not too surprising. After all, Barron's calls Spruce Point a noted short-seller. Urging investors to sell particular stocks is pretty much what Spruce Point does for a living. But while not all of Spruce Point's sell recommendations have merit, this particular one might.
In a research note mostly devoid of hyperbole, Spruce Point sticks to the facts. While noting that "Aerojet's primary rocket propulsion business has historically benefited from high barriers to entry, oligopolistic pricing and favorable cost-reimbursable contracts," Spruce Point adds that this business model is endangered after Aerojet lost a competition to equip the United Launch Alliance's newest rocket with its AR1 engines. (Jeff Bezos' Blue Origin won the contract instead.) At the same time, revenue from the sale of Aerojet RS-25 engines for NASA's Space Launch System (SLS) is at risk from mounting Congressional criticism of the SLS program's cost.
With current revenue at risk, and future revenue streams hard to come by, Spruce Point warns that "hundreds of millions of dollars in revenue programs ... are disappearing," and Aerojet is unlikely to enjoy the 4% revenue growth that Wall Street analysts have "blindly" forecast for the stock. Spruce Point believes Aerojet Rocketdyne stock is headed for a 40% to 60% decline in value, and gives it a target price ranging from only $20 to as little as $13.
No wonder investors are panicking.