Space. The final frontier.
Pretty much the only place left where capitalism has not raced in to grab the reins of development and expansion from other governments.
OK, enough poetry. Sometimes you choose to follow a company not because you like the company's growth or cash flow, but because you just find the basic business to be "neat." Such is the case for me with satellite and rocket maker Orbital Sciences
Long a vendor of various satellite systems and launch vehicles to government and private organizations, Orbital Sciences is also a player in advanced military programs like ballistic missile defense and next-generation, anti-ship missile defense. Left for dead in 2001 as the commercial satellite business collapsed, these shares have rebounded largely on the back of President Bush's call for missile defense.
Sales for the fourth quarter were up 11%, and the company's firm backlog grew to $1.17 billion. Earnings were hurt by a sharp decline in gross margins and fell two cents per share from the prior year's fourth quarter. While the commercial satellite business was surprisingly strong (up almost 50%), the launch vehicle market hit an air pocket and was down about 10%.
Looking ahead into 2005, management was not as optimistic as some investors may have hoped. With only modest increases in defense and government spending expected, and a recovery in the commercial satellite market still in its early stages, the company is projecting revenue growth in the mid-to-high single digits.
That highlights a key challenge for Orbital Sciences as a business: Its products and services are very expensive and subject to long lead times. What's more, economic downturns and/or political negotiations, to say nothing of design or engineering failures, can lead to order cancellations. In other words, there aren't a lot of customers to begin with, and if one drops out, that revenue can't be replaced quickly or easily.
Over the coming years, though, Orbital Sciences should see some good growth. At present, the U.S. remains committed to a ballistic missile defense system and Orbital Sciences has a key role in producing both interceptors and target vehicles.
On the commercial side, much of the existing satellite fleet is quite old, and operators can't stretch out the aging equipment much longer. When they finally bite the bullet and decide to buy new satellites, Orbital should be in line to reap some of that business.
Though Orbital Sciences faces some very large competitors -- including Boeing
Valuation on these shares appears reasonable on an absolute basis and pretty cheap on a relative basis. Compared with other aerospace and defense companies trading at 20 or more times trailing earnings, these shares do have some appeal. The stock trades for less than 15 times its trailing earnings, and the EV-to-FCF ratio based on the company's low-end estimate for next year is only 14.
Whether or not other investors decide these shares are right for them, I'll still be following this little space cadet and its role in the eventual commercialization of space.
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Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.