How much would you pay a financial advisor with a success rate of 100% on their stock picks? How much would you pay to own a space stock with a 100% success rate on space launches?
Don't worry. You don't actually have to answer either of those questions. (And the first question was a trick question. There's no such thing as a financial advisor with a 100% success rate.) But if you are a space agency like NASA or the U.S. Space Force, and in the business of sending multimillion-dollar (sometimes multibillion-dollar) satellites into orbit, there's certainly an incentive to hire the space launch contractor with the best record of success.
Image source: Getty Images.
ULA's crown jewel
Indeed, in the case of United Launch Alliance -- the space launch joint venture formed by Boeing (BA +1.11%) and Lockheed Martin (LMT 0.77%) in 2006 -- "success" has been a selling point, a marketing tool, and a big reason why ULA was (for a time) able to charge the U.S. government as much as $400 million for a single rocket launch.
Since its formation, ULA has racked up a record of 148 straight space launches without a single launch failure (as its CEO regularly reminds us).
148
-- Tory Bruno (@torybruno) January 22, 2022
By the way, most of those launches used the venerable Atlas V rocket. Designed and introduced by Lockheed Martin in 2002 (prior to the formation of ULA, in fact), Atlas V has flown 91 times without a single mission failure and helped ULA to maintain its 100% mission-success record.
SpaceX contends for the crown
Sometime later this year, ULA intends to field a replacement rocket to take Atlas V's place and, hopefully, begin a new string of successes: the Vulcan Centaur launch vehicle. When that happens, a new rocket, SpaceX's Falcon 9, will bear the title of "world's most reliable rocket" -- in fact, it appears Falcon 9 has already taken the top spot.
It turns out that sometime around the middle of last year, Atlas V ceded its crown as the nation's most reliable launch vehicle to SpaceX and its workhorse, Falcon 9. As our friends at Ars Technica pointed out earlier this month, the Falcon 9 "may now be the safest rocket ever launched," having completed a winning streak of 111 straight successful launches through early February.
I admit: SpaceX started launching so frequently last year that this news kind of snuck up on me. In 2022, the company has already recorded a half-dozen Falcon launches. And considering SpaceX launched 15 times from June to December last year (about twice per month), Falcon 9 probably surpassed Atlas V's record in June 2021.
What does this mean for investors?
As recently as 2019, ULA CEO Tory Bruno was able to honestly state that Atlas V "is the most reliable rocket flying."
Atlas is the most reliable rocket flying. I know our crew personally. Their safety is foremost in my mind, as it is for everyone on our team.
-- Tory Bruno (@torybruno) January 21, 2019
This being the case, he could also reasonably argue that NASA should pay a premium for flights aboard Atlas V whenever a satellite absolutely, positively had to reach orbit overnight. Indeed, this argument was common knowledge in the space community.
What's crazy is, that up to a couple years ago, the main argument against SpaceX was "Well sure SpaceX is cheaper, because you're paying for reliability with ULA!".
-- Paul Korney (@PaulKorney) February 3, 2022
Does that mean Vulcan will be the cheapest rocket since it's unproven?😏
But what does it mean now that the argument is no longer true?
Well, for one thing, it's going to put ULA's defenders in Congress and at NASA in a pickle the next time they want to pay ULA a premium on any contracts for which SpaceX is bidding a Falcon 9 to do the job. The justification for that premium has vanished.
Going forward, either SpaceX will be able to charge higher prices and collect fatter profit margins for its record of superior reliability, or ULA will have to roll back its reliability premium and cut its prices. And if ULA does cut prices, that will necessarily impact the profit margins of the company's two owners, Boeing and Lockheed Martin.
Of the two defense stocks, Boeing appears likely to suffer worst when this happens. With its commercial airplanes division still struggling, Boeing has relied heavily upon its defense, space, and security division for profits of late. However, with a mere 5.7% operating profit margin, according to S&P Global Market Intelligence, it's a weak reed with which to support Boeing's $124 billion market capitalization -- a reed that could snap if margins fall any lower.
Lockheed Martin, in contrast, earns higher margins from space (about 9.4%) and has three larger and more profitable businesses in aeronautics, missiles, and mission systems to fall back on if space margins begin to erode. Of the two publicly traded defense stocks that make up ULA, Lockheed is most likely to survive the shock of Falcon 9 becoming the world's most reliable rocket.
