Before the scribing of the English-Klingonese dictionary, before the United Federation of Planets was a franchised marketing behemoth, I was a proud Trekkie. Even so, I've been peeved at the Star Trek universe since the fourth movie, when Cap -- I mean, Admiral -- Kirk revealed that money won't exist in the 23rd century. Since then, the franchise has exhibited an oft-revisited anti-capitalist bent. (Just run a Google search on "Ferengi.")
Well, I'm betting that history in this universe will record that stodgy, old capitalism eventually transformed earthlings into a space-faring species. A small but growing R&D company may profit from this in a big way.
Out of this world?
SpaceDev (OTC BB: SPDV), previously profiled by Fools Tim Beyers, Seth Jayson, and (long ago) Bill Mann, designs and builds microsatellite and hybrid rocket propulsion systems. The company has a penchant for reducing costs by utilizing off-the-shelf components rather than custom manufacturing. SpaceDev earned some laurels during the summer of 2004, when its hybrid motor (fueled by a mixture of laughing gas and rubber) propelled SpaceShipOne to win the $10 million Ansari X Prize as the first nongovernmental-crewed vehicle to reach space, land, and then return to the heavens within 14 days.
The company is amassing a catalog of (relatively) low-cost applied technologies as it develops solutions to fill government contracts. The business plan depends on growing private-sector space utilization and travel. Will it succeed as a one-stop-shop for space mission discount components? Shares of JDSUniphase (NASDAQ:JDSU), the one-time one-stop-shop for the optics market, have languished for four years, waiting for a revival of its sector.
On Oct. 26, SpaceDev announced its intent to acquire Starsys Research. Starsys provides various mechanical systems, structures, and mechanisms that open, close, release, and move components on spacecraft. Starsys also sells space-rated components to Lockheed Martin (NYSE:LMT), Boeing (NYSE:BA), Northrop Grumman (NYSE:NOC), and Swales. SpaceDev is complementing its propulsion and electronic control systems with Starsys' mechanical systems. This brings SpaceDev somewhere between a small step and a giant leap forward in providing complete solutions for some satellite and extraterrestrial applications.
Details of the deal
SpaceDev will pay Starsys owners approximately $9 million: $1.5 million in cash and $7.5 million in SpaceDev common stock. SpaceDev will forgive its own $1.2 million loan to Starsys and pay off $4.6 million of Starsys debt. On top of that, on Dec. 31, 2005, 2006, and 2007, depending on company performance, Starsys shareholders may receive bonuses of up to $1 million in cash and $18 million in SpaceDev common stock. The immediate drain on SpaceDev cash reserves and shareholder dilution is $6.1 million in cash and $7.5 million in stock; further income growth will be partially offset by additional share dilution and bonuses.
SpaceDev shareholders are hoping that the synergies between these two organizations will be nothing short of stellar, as the total potential effect is a dilution of about 50% of the pre-deal share count. Starsys has three times as many employees and has earned three times SpaceDev's revenues over the past six quarters. In the process, however, Starsys has hemorrhaged money. According to SpaceDev's S-4 report on the merger proposal, the Starsys board of directors believed that, because of drains on its liquidity, Starsys would not have been able to continue as a going concern. SpaceDev is one little fish that will have to swim even faster after swallowing a much bigger fish. Great management and execution can make that happen. Of course, it also helps if the market for commercial space projects grows.
Prior to the merger, SpaceDev succeeded in making a few bucks on its Buck Rogers. Over each of the first three quarters of 2005, SpaceDev reported net profits and positive operating cash flows. EBITDA was positive for the first two quarters of 2005, with a second-quarter run rate of $350,000. SpaceDev beat its own guidance of $3.5 million in sales for the first half of 2005 by $200,000 (5.7%). Despite this very encouraging progress, investors should read the fine print of the quarterly reports. Last March, Tim Beyers pointed out that 90% of the contract revenue backlog depended on a single $43 million long-term contract that runs out in March 2009. Since last March, SpaceDev has won new contracts, but none have been anywhere near as lucrative as that single contract.
Height restrictions
Does SpaceDev twinkle like a gem? It's small and growing. It isn't on the radar of major analysts (despite its popularity among us Trekkies, jedis, sci-fi junkies, and stargazers). It's fallen on hard times in the past few years -- the company was delisted from the Nasdaq when its stock price fell below $1 per stub, though it has since recovered to above $1.50.
SpaceDev CEO Jim Benson, whose motivation impressed Tim Beyers last February, has succeeded in the challenging task of making a small space company profitable. Though not a "top dog" in overall aerospace, SpaceDev might be among a current handful of companies to capture the high ground of profitable, affordable space "consumerism."
But capitalized at just $35 million, it is far too small to get the nod as a formal recommendation in Motley Fool Hidden Gems, the Fool's small-cap newsletter service. There's also the risk of the imminent dilution of SpaceDev share value following the Starsys acquisition.
Foolish final thoughts
As an investor with a passion for space exploration, I've put SpaceDev on my personal watch list. Over the coming quarters, I'll be paying close attention to the progress of its new Starsys subsidiary, along with its revenues, contract awards, and cash flow. I'll also be following the launch of Falcon 1, the first rocket produced by SpaceX as part of its effort to significantly reduce the cost of space payload delivery.
SpaceDev is too small to make the cut of the Hidden Gems newsletter, led by analysts Tom Gardner and Bill Mann. You can, however, see all of Tom and Bill's picks for free with a 30-day trial. All you have to do is click here to learn more.
Michael Jaffe owns shares of JDS Uniphase and thinks a ride on a Virgin Galactic shuttle might cure his mild claustrophobia. The Motley Fool has a strict disclosure policy.
