Earlier in the week, I crunched some numbers and attempted to estimate a price tag for the Boeing (BA 1.09%) and Lockheed Martin (LMT 1.64%) joint venture United Launch Alliance, which is reported to be up for sale this year. To come up with this number, I laid out the prices that a few other space companies have paid for mergers and acquisitions in the space industry recently.
At first glance, this may not seem relevant. ULA is a private company, after all. Even knowing the price, we as individual investors wouldn't be able to buy it. And yet, there are a lot of struggling space stocks on the market today, and some of them may soon be for sale as bigger, better-financed aerospace and defense companies snap them up and take them private.
Indeed, this could happen sooner than later.
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Key Data Points
A target-rich environment
Consider: 2021 saw a veritable explosion of new space companies coming public in the form of SPAC IPO transactions. Barely a year later, however, a lot of these companies are starting to flame out, losing 70%, 80%, and even 90% of their market capitalization as prospects for near-term profitability dim.
Just last week, investors saw space launch company Virgin Orbit announce furloughs for its workforce and an "operational pause" as its money starts to run out. It wasn't the first new-space company to encounter such difficulties, and it won't be the last. Over the next few months, multiple other space SPACs may face hardships. Some will fail entirely.
But others will get bought out.
Space sales price list
Our first task as investors is, of course, to pick the space companies that will survive and thrive. But a secondary consideration may be seeking out space companies that could be acquired. If we can determine the right price to pay before that happens, there's the potential to earn a lot of profit when they're bought out.
So how do we do that? Start with the valuations we discussed last week:
- When L3Harris (LHX 1.22%) bid $4.7 billion to acquire rocket engine specialist Aerojet Rocketdyne (AJRD +0.00%) last year, the valuation worked out to 2.1 times trailing revenues.
- When private equity shop Advent International offered to take satellite operator Maxar Technologies (MAXR +0.00%) private for $6.4 billion, that was a 4 times sales valuation.
- And, of course, when Aerojet Rocketdyne offered to buy ULA itself eight years ago, it also offered to pay 4 times sales.
Conversely, consider the case of Virgin Orbit -- new-space's most recent flame-out. On Monday, CNBC reported that Virgin Orbit has been shopping itself around and seeking to be acquired. At last report, up to two different parties might be interested, although at least one of them has reportedly "balked" at Virgin Orbit's offer to sell itself for $200 million.
No wonder. Divided by Virgin Orbit's $33.2 million in trailing 12-month sales, that works out to a price-to-sales ratio of 6.0 -- 50% more than a buyer expecting to pay 4 times may have anticipated, and 3 times the price of anyone hoping to buy a space stock for 2 times sales.
On the hunt for deep space value
Thus we have our first clue that "six times sales" may be too rich a price to pay for an unprofitable space stock like Virgin Orbit. Unless something changes between the time I'm typing this, and the time it publishes, it seems Virgin Orbit may need to lower its expectations if it wants to find a buyer -- but how low would it have go? Would 4 times sales suffice? What about less than 3 times sales -- or even 2 times sales?
As it turns out, thanks to the abundance of SPAC IPO transactions in 2021, and the dramatic declines in valuation since, there are several space stocks that might look attractive at valuations below 6 times sales.
Consider satellite manufacturer Terran Orbital (LLAP +0.00%), for example. At $289 million in market capitalization, it sells for just 4 times sales today -- and if analysts are right in their projections, as little as 1.2 times next year's sales. (Analysts polled by S&P Global Market Intelligence estimate 2023 sales of $247 million.) Lunar lander-maker Intuitive Machines (LUNR +7.28%), at $283 million, carries a similar 4.1 times valuation on its $69.4 million in trailing sales.
True, I have serious reservations about both these stocks -- but after zooming to unsustainable levels last month, both Terran Orbital and Intuitive Machines have come down in price dramatically. If share prices stay this low, they may soon be worth another look.
Space infrastructure company Redwire (RDW +0.76%) and satellite data company Spire Global are even more interesting. Priced at just 1.4 times and 1.6 times sales, respectively, they already sell toward the low end of previous space mergers and acquisitions valuations. But Redwire in particular is expected to achieve GAAP profitability as early as 2024 -- and may not stay this cheap for long.
To be clear: I'm not saying any of these stocks are worth buying. Early investors in the new space industry have been badly burned already, and none of these small space companies are yet profitable. If they continue to struggle, yes, they may get bought out and deliver investors a windfall -- but they may also go out of business before that happens.
So caveat investor. If you do decide to buy any of them, remember to bet small, in order to lose small.
