Please ensure Javascript is enabled for purposes of website accessibility

Is This the Biggest News in Space This Century?

By Rich Smith - Sep 13, 2015 at 8:13AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

What happens when the nation's biggest rocket maker eats the nation's biggest rocket launcher?

For nearly a decade, one company has dominated the business of sending satellites into space in the U.S. Now, that company may be for sale.

Today, Russia's RD-180 rocket engine powers the liftoff of America's biggest space rockets. But perhaps not for much longer. Image source: Wikimedia Commons.

Created in 2005 as a joint venture between aerospace giants Boeing (BA -1.25%) and Lockheed Martin (LMT 2.64%), the United Launch Alliance has grown into a $492 million-a-year behemoth. According to Bloomberg, ULA ranks among NASA's top 10 contractors, winning $298 million in NASA contracts in 2013 alone.

And now, one of ULA's key suppliers wants to buy it.

The deal
As reported this week by The Wall Street Journal, rocket maker Aerojet Rocketdyne (AJRD 1.50%) has put in a bid to buy ULA from Boeing and Lockheed Martin. The bid, reportedly set at $2 billion, will be made in cash. If it succeeds, it will unite America's premier rocket-launch company with the country's premier manufacturer of the engines that power those rockets.

It would also, incidentally, be very bad news for one space-tech upstart.

What it means for Boeing and Lockheed Martin
The $492 million that Boeing and Lockheed took in last year sounds like a lot of money. There are, however, a couple of caveats that may make you rethink the ULA success story. For one thing, much of that money comes from ULA's monopoly over launching America's biggest and most secretive government and spy satellites. Yet ULA has struggled to make sales in the commercial space launch market, which it sees as its greatest prospect for growing sales.

In contrast, ULA European rival Arianespace was last clocked doing $1.4 billion in annual business by financial data aggregator S&P Capital IQ -- nearly three times' ULA's annual revenue stream. And at the same time as Arianespace outmaneuvers ULA abroad, local rival SpaceX is rushing to steal sales from ULA here at home.

Elon Musk's space-launch upstart has already underpriced ULA's rockets and is in the process of outperforming them technically. In what could well be a deathblow to ULA's monopoly over government launches, SpaceX also recently won certification to compete with the space giant on U.S. Air Force and "Category 2" NASA launches.

So, goodbye, ULA space launch monopoly.

What it means for Aerojet Rocketdyne
All of these developments argue in favor of Boeing and Lockheed Martin making a calculated exit, stage left, from the space launch market -- before business gets any worse. But what could possibly explain Aerojet Rocketdyne's desire to pay $2 billion for ULA?

$2 billion is, after all, more than four times ULA's annual revenues -- revenues that seem destined to shrink as SpaceX horns in on the space business. And to put that in perspective, Lockheed Martin stock sells for just 1.4 times sales, while Boeing and Aerojet Rocketdyne shares both sell for less than 1.0 times sales.

I've got a theory -- and you may not like it.

Scale model of the new BE-4 engine. Image source: Blue Origin video still.

Rocket-blocking Jeff Bezos
Last year, as you may have heard, United Launch Alliance announced a project to replace the Russian RD-180 engines currently used to power its Atlas V rockets with a new, cheaper, fuel-efficient engine-to-be-named-later. At last report, the BE-4 engine built by CEO Jeff Bezos' Blue Origin was the odds-on favorite to win this rocket contract. But just in case the BE-4 didn't perform to spec, ULA was keeping its options open and considering Aerojet Rocketdyne's AR-1 engine as a backup option.

A merger between Aerojet Rocketdyne and ULA, however, would obviously shift the calculus on the latter's decision to favor Blue Origin's engine. Regardless of capability, price, or performance, a merged AR/ULA would almost certainly choose to install AR-1 engines on its rockets instead.

And with billions of dollars of engine contracts on the line over the coming decades, that makes for a very strong argument in favor of Aerojet Rocketdyne buying ULA today.

ULA's new Vulcan rocket. Soon to be brought to you by... Aerojet Rocketdyne? Image source: United Launch Alliance.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Boeing Company Stock Quote
The Boeing Company
$136.72 (-1.25%) $-1.73
Lockheed Martin Corporation Stock Quote
Lockheed Martin Corporation
$429.96 (2.64%) $11.07
Aerojet Rocketdyne Holdings, Inc. Stock Quote
Aerojet Rocketdyne Holdings, Inc.
$40.60 (1.50%) $0.60

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.