A little more than a week ago, an Orbital Sciences (NYSE:OA) mission to resupply the International Space Station by Antares rocket ended with a fireball lighting up the skies over Wallops Island, Va.
The disaster, which appears to have originated in a failed fuel pump in the rocket's engine, spread wreckage across the lower third of the island. It cost NASA a payload of supplies for its astronauts and cost Orbital Sciences an even greater payload of credibility with investors.
So, this week, Orbital Sciences went into damage control mode.
Responding to criticism that the rocket engines that powered its Antares lift vehicle were "a joke" -- refurbished and rebranded Russian hardware that was originally built in the 1960s, and not up to snuff for modern-day space missions, Orbital Sciences promised on Wednesday to discontinue their use.
Stage 1 of Orbital's reconstruction
Instead of Russian NK33 engines, refurbished by GenCorp (NYSE:AJRD) and rebadged as "Aerojet Rocketdyne AJ26" engines, Orbital Sciences will purchase a small handful of new engines from an unidentified outside supplier as a stopgap solution. Experts posit that the provider of Orbital's new engines could be Russia's NPO Energomash (which seems unlikely, given both the political tensions ongoing with that country, and the stigma of Russia having produced the engine that just blew up), or GenCorp (offering some different engine model), or even Orbital Sciences' own archrival SpaceX.
This should allow Orbital to resume resupply runs to ISS next year.
So once it has secured an interim supplier of rocket engines, Orbital Sciences expects to resume work on its NASA Commercial Resupply Services contract (shared with SpaceX, and worth $1.9 billion to Orbital) sometime in 2015. Orbital further promises to complete its entire complement of eight resupply missions to ISS by the end of 2016.
This, however, will require the company to accelerate development of a new rocket engine that it says it has already "previously selected" to power its Antares rocket. Orbital was a bit vague on whether it's developing the replacement engine in-house, or buying from an outside supplier such as GenCorp, SpaceX, or the Russians. But the phraseology "selected" suggests the new engine will come from an outside source. In any case, this new engine should be introduced in 2016, and it will be used to complete the balance of its contracted supply runs.
It's an ambitious goal. And seeing as, to date, Orbital has only completed two such supply runs to ISS successfully, it may also be an unattainable goal -- getting all six remaining missions completed in something under two years. If unsuccessful, Orbital may need to take charges to earnings, depressing profits, because it has already recognized $1.3 billion out of the $1.9 billion value of its CRS contract with NASA. (That's right. On a contract just 25% complete, Orbital admitted in its most recent 10-K filing that it's already recognized 68% of the revenues).
Escaping the gravity well
In the best-case scenario, though, Orbital expects to be back on track and decoupled from its troubled Russian rocket engines sometime in the next two years. So, what can investors expect from Orbital Sciences stock going forward?
In the near term, you can probably expect depressed profits, or even losses, as Orbital absorbs the financial damage from its lost rocket and the costs of switching among several new engines to power its rockets going forward. Orbital made a point of saying that "financial impacts [...] are not expected to be material on an annual basis in 2015," and that "no significant adverse effects are projected in 2016 or future years." The company gave no such assurances regarding the remainder of 2014, though, which suggests management may attempt to front-load the financial damage, taking all necessary charges to earnings this year, so as to look financially healthier in future years.
That being said, management is taking the right steps to mitigate the damage. Orbital remains (for the time being at least) profitable, free-cash-flow positive, and it has a net cash balance, according to S&P Capital IQ data. And once merged with partner ATK (UNKNOWN:ATK.DL), it should have even more financial and technological firepower at its disposal to succeed in the future.
All things considered, I think the prospects for the new Orbital ATK remain strong.