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In typically surprise fashion, Aerojet Rocketdyne (AJRD) reported its numbers with on Tuesday after the close.
Much like Iridium Communications (IRDM), AJRD is a very solid business with high levels of revenue visibility and management cost control, which nonetheless has a very volatile stock. The stock has trended up nicely over the five years in which the current CEO has held the job, and we think medium term that will continue to be the case. But the stock is also short-term volatile meaning it presents trading opportunities from time to time. This is a happy combination in our view. Again, echoes of IRDM there. (We explore the same solid-company-volatile-stock theme at IRDM in a recent note here).
The quarter showed some weakness on the revenue line which flowed through to earnings and cashflow. Commercial Crew (Boeing) revenue was weak and there were headwinds from the ending of a couple of rocket motor projects that were live in Q1 19 but already finished prior to Q1 20. The ending of these programs was not new news, but they impacted the financials nonetheless.
Backlog on the other hand showed excellent growth year on year – +37% since Q1 19. Backlog, as we noted in our earnings preview linked above, is the best guide to the company’s future revenue – and that’s all we can consider from this company which gives no guidance and does not host traditional earnings calls.
In its backlog analysis the company says $2bn will flow to revenue in the next 12 months. We think there’s some Covid-19 risk to that number, although probably not a huge amount assuming current or better lockdown conditions prevail. As usual, that revenue from backlog is before any new sales, at least some of which ought to make it into revenue for the year.
Here’s the numbers. Revenue a little weak, earnings and cashflow too. But note the big improvement in net debt since Q1 last year. The company is building its cash pile well, which will serve it well should the economy stay locked down longer than expected.
In keeping with most stocks right now it’s fair to say there is more risk in Q2 and Q3 than there was in Q1. AJRD showed no material problems in Q1 numbers that could be attributed solely to Covid-19 – we expect that in line with most companies they will experience more difficulties in Q2 simply because that’s when the bulk of the lockdown days have fallen so far. Now, the market knows that across all stocks and it’s moving up anyway – thanks to our friends in DC who just yesterday committed to keeping the market funding spigot open throughout this crisis and slightly beyond.
We were at Buy going into earnings and we’re still at Buy.
Firstly, the fundamental valuation of the company is modest, at 1.5x TTM revenue and 10.0x TTM EBITDA
Source: Company SEC Filings, YCharts.com, Cestrian Analysis
Secondly, the stock is in the middle of the lower range of its 5-year upward-sloping trading channel, and that usually means an upward move for the stock. We estimate a $3-4/share upward move in the short term, a healthy % gain should it take place, taking the stock to just beneath that middle parallel we’ve sketched out below.
Source: TradingView, Cestrian Analysis
As to the long term, we see no particular reason why AJRD ought not to trade nearer the 2x revenues commanded elsewhere in the sector, particularly given the strong cash generation and balance sheet position. That means about 30% upside in the next, say, 1-2 years. Remember there is always the possibility of this company being acquired by its adjacent defense giants. It is the sole merchant provider of solid rocket motors and that is a worthwhile market position to own.
We remain at Buy as a result.
Cestrian Capital Research, Inc – 30 April 2020.
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Disclosure: I am/we are long AJRD, IRDM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: We are long AJRD and IRDM on a personal account basis.