Aerojet Rocketdyne Holdings (AJRD, Financial) is in the business of manufacturing, designing and selling aerospace and defense products and systems in the United States. The company, with current market capitalization of $1.1 billion, holds immense potential in the long term.
Global geopolitical tensions have been increasing, and governments seem likely to increase their defense spending in the coming years. This is likely to be positive for all companies catering to the defense sector. While I am bullish on Lockheed Martin (LMT, Financial) among large companies, I am bullish on Aerojet Rocketdyne among companies that are at an early growth stage.
From a company-specific perspective, the first reason to be bullish on Aerojet Rocketdyne is the production restart for RS-25 engine. On Nov. 23, the company was awarded a contract by NASA to restart production of the RS-25 engine for the space launch system. The contract is worth $1.6 billion and runs through Sept. 30, 2024. The contract not only adds to the company’s order backlog but also underscores the company’s manufacturing capability credentials.
Further, on Nov. 23, Aerojet Rocketdyne also signed a $200 million contract with Boeing (BA, Financial) to support renewed human space flight to the International Space Station. Again, the association with Boeing underscores the company’s hardware capabilities.
In other recent news, Raytheon (RTN, Financial) was awarded $543.3 million contract to deliver Standard Missile SM-3 interceptors to the Missile Defense Agency. With Aerojet Rocketdyne being a provider of launch engines, the contract for Raytheon is also positive for Aerojet and demand for more contracts in the missile-defense segment as geopolitical reasons is likely.
Besides being an emerging player in the defense space, Aerojet Rocketdyne owns approximately 12,200 acres of land in the Sacramento, California metropolitan area. While the land was acquired in the 1950s for Aerojet Rocketdyne's testing and manufacturing operations, changes in technology and relocation of the company’s operation make the land free for other uses. The company plans to develop housing, office, retail and recreational space in the land, and this factor will be an additional value creator over the next three to five years.
Coming back to the defense segment, Aerojet Rocketdyne had an order backlog of $2.6 billion as of Aug. 31. With $1.8 billion in new contracts, the company’s current order backlog stands at $4.4 billion. This provides strong revenue visibility, and the order backlog probably will accelerate in the coming quarters. Considering the company’s order backlog and cash position of $243 million as of Aug. 31, balance sheet debt of approximately $660 million is not a concern and financial flexibility remains high. In addition, the company’s operating cash flow for the first nine months was robust at $70 million, and steady cash flows are expected as the order backlog strengthens.
Aerojet Rocketdyne's earnings and EBITDA are likely to accelerate in the coming quarters, and the company’s order backlog should swell. For YTD15, the stock has been sideways to lower, and this is an opportunity to accumulate the stock with an investment horizon of three to five years. The company’s real estate asset can provide additional cash flow in the coming years that can support a higher order backlog execution in the defense segment.
Disclosure: No positions in the stock.
