Redwire (RDW 4.51%) has had an interesting month in August. Shares of the satellite parts and space infrastructure company tumbled after the company reported earnings on Aug. 7.
On the one hand, second-quarter revenue grew nicely, up 30% year over year and came in nearly $10 million above analyst estimates. On the other hand, Redwire reported a loss 4 times as big as Wall Street had anticipated ($0.42 per share), and free cash flow -- which had been positive for the space company -- flipped to negative $11.2 million, removing one of the biggest attractions of the stock for investors.
Ouch.
Over the next several days, Redwire lost as much as 13% of its pre-earnings share price. But then, a miracle happened: Redwire found a way to buy itself some profits.
NYSE: RDW
Key Data Points
Redwire buys Hera
Or more precisely, to buy itself a profitable subsidiary.
The news broke on Aug. 14, exactly one week after Redwire's mixed earnings report: For an undisclosed sum, Redwire will acquire Hera Systems, a spacecraft developer focusing on military sales.
Hera is not a large company. In 2023, the company's revenue topped out at just $15 million -- versus $244 million for Redwire. That being said, Redwire was quick to point out that Hera has "experienced profitable topline growth." (In contrast, S&P Global Market Intelligence data show Redwire losing $27 million last year.) Going forward, Redwire expects Hera "to add meaningfully to future growth and profitability" for its new parent company.
In fact, updating guidance to take account of the acquisition, Redwire noted that if it succeeds in closing this acquisition in Q3 as planned, Hera could add as much as $10 million to its 2024 revenue. Considering there are only about four months left in the year, this implies that Hera may already have doubled its annual revenue. Ten million dollars in four months implies Hera's sales might be $30 million in the 12 months of 2024 -- so twice 2023 revenue.
Should Redwire have bought Hera?
Now, it remains to be seen precisely how profitable all this extra revenue will be. Almost certainly, it won't be profitable enough to erase, on its own, the $26 million in losses Redwire has already racked up this year. But any improvement would be better than none. More importantly, the purchase price for this acquisition -- apparently $15 million for $30 million in revenue -- implies a price-to-sales ratio of just 0.5 that Redwire is paying.
That's a bargain price to pay for any space stock, let alone a profitable one. And it's a price Hera can afford.
Balance sheet data shows that Redwire has only $31 million in cash against $111 million in debt, which isn't great. It is, however, more than enough to fund the acquisition easily. And Redwire says that's exactly what it intends to do, paying with "balance sheet liquidity" rather than taking on additional debt or issuing shares in payment for Hera.
What's next for Redwire (and Hera)?
Redwire seems to be planning to leverage its Hera acquisition to enter the nascent market for spacecraft that can service other spacecraft in orbit -- so-called "space tugs." As Redwire explains, Hera is "developing a new class of high-performance spacecraft to support the evolving requirements for national security missions operating in contested space," and is contracted to build three satellites for an "on-orbit servicing demonstration" for Orion Space Solutions under a U.S. Space Force contract.
In-orbit services is quickly becoming a competitive market, with rival space companies such as Rocket Lab, Firefly Aerospace, and Northrop Grumman all having introduced spacecraft that can perform certain in-orbit services. But if Redwire isn't in first place, at least buying Hera puts it in the race -- and better late than never.
Redwire is (or was until just recently) one of just a handful of free-cash-flow-positive companies in space. While not expected to turn consistently "profitable" before 2027, analysts on average forecast a return to positive free cash flow as early as next year -- and strong double-digit sales growth through 2027 and beyond.
While last quarter's performance was a disappointment, I'm still overall bullish on Redwire stock.
