How good was Aerojet Rocketdyne's (AJRD) earnings report last week? I suppose the best way to put it might be: "It could have been worse -- but it also could have been a lot better." Wall Street seems to agree.

In the 10 days or so since the defense contractor and rocket engine specialist reported its third-quarter results, investors have bid up the value of its stock by less than 3%. Not great. Not horrible. Really, the reaction was about what you'd expect after the company just barely beat analyst projections for adjusted earnings ($0.45 per share instead of the expected $0.44) at the same time as it missed revenue projections (reporting $549.8 million instead of the $558.3 million that Wall Street wanted).  

Aerojet by the numbers

Aerojet's $550 million in third-quarter sales edged up less than 1% from the numbers it put up a year ago, in Q3 2021. At the same time, the company's earnings plunged 67% year over year, to just $0.17 per share on a GAAP basis.  

While it's true that management noted its adjusted earnings declined only 22.5%, that's not exactly a good result -- profits falling even as sales were rising. And Aerojet's free cash flow declined 68% to $22.3 million -- a figure much closer to the company's GAAP results than the adjusted results that Wall Street is so often focused on.

Long story short, I'm afraid the numbers really were as bad as they looked.

This wasn't a blip on earnings, either. Fact is, Aerojet Rocketdyne's numbers have looked pretty weak all year long, with sales down about half a percent so far this year, earnings down 46%, and free cash flow turned negative. Management has blamed a whole series of hopefully one-time items for the declines, ranging from legal costs to proxy costs to the same supply chain disruptions that have bedeviled industrial companies all across the sector all year long.

But the truth is that I fear Aerojet Rocketdyne has more serious problems than the average industrial company is facing. Most notably, it invested years in developing a new AR1 rocket engine to power the new Vulcan series of space rockets being built by United Launch Alliance (ULA). Ultimately, though, ULA decided to buy a different engine from private space company Blue Origin, and in the absence of interest from other parties, Aerojet looks a bit like a company with a product but no customers at this point.

Sales growth at the company has averaged a modest 3% over the past five years, and while earnings growth looked strong initially, it has since reversed. Over the past three years, Aerojet's earnings growth has reversed to a depressing negative 11.6% annualized rate of growth, according to data from S&P Global Market Intelligence.

The upshot for investors

Will this change in time to turn Aerojet back again into a profitable investment? The weak sales growth we've seen in Q1 -- and the negative sales growth we've seen so far this year -- suggests any turnaround probably is still a ways away.

Indeed, even Q3's flattish sales growth might start to look pretty good to Aerojet investors pretty soon. According to the company's latest estimate of its contracted work to be done, backlog has shrunk since the start of this year. All else being equal, this would appear to foreshadow more declines in sales -- and presumably, in profits -- going forward.

Now that the prospect of Lockheed Martin buying Aerojet, and bailing investors out of a bad investment, has gone up in smoke, I simply don't see a whole lot to like in this space stock. Considering its valuation of more than 42 times earnings (and a negative ratio when valued on free cash flow), a weak record of recent growth, and the potential for growth slowing even further -- or even reversing -- in the near future, space investors are probably best advised to look elsewhere.