My, how time flies!
It's been 15 years already since NASA played midwife to the commercial space industry in America, hiring SpaceX and Orbital Sciences, now part of Northrop Grumman(NYSE: NOC), to build their own spaceships and deliver supplies to the International Space Station as NASA contractors. Without those $3.5 billion in initial awards, it's arguable the recent explosion of new space companies joining America's public stock markets would never have happened.
Eight years later, in 2016, NASA subsidized the creation of one more spaceship, built by one more space company, when it expanded its Commercial Resupply Services contract to include Sierra Nevada Corporation. NASA further extended this contract, now known as CRS-2, through 2026 last year.
Of course, now we know that ISS will remain in orbit past 2026 -- perhaps even until 2030. After that, one or more privately built-and-operated space stations may take over ISS's mission. But in the meantime ... we're going to need to keep shipping supplies to ISS for a few more years.
That's great news for investors in SpaceX, Northrop, and Sierra.
The writing's on the wall for ISS, you see. With CRS-2 unlikely to be extended past 2030, no one's very interested in investing the money it would cost to design new spaceships to compete for a contract that will last only three years with no chance of further extension. So while NASA is keeping the door open against the faint chance someone does want to do this, it's more likely -- reports SpaceNews -- that each of the CRS-2 contracts already awarded to SpaceX, Northrop, and Sierra, will be automatically renewed through 2030.
What it means for Northrop Grumman
Of the three companies, Northrop Grumman is obviously of greatest interest to investors -- it's the only CRS-2 participant that is a publicly traded stock, rather than privately owned. So what does this apparent automatic win for Northrop mean for investors?
A bit of calculator work tells us that if the original 2016 CRS-2 award was worth a maximum of $14 billion, divided among three companies and extending over a period of 10 years, then each year the contract is extended should be worth an additional $1.4 billion -- also divided three ways. Thus a four-year extension of CRS-2 should mean approximately $1.9 billion more money -- $1.4 billion times four divided by three -- for Northrop.
That's a nice chunk of change, although it won't move the needle a lot for the aerospace and defense giant, which generated nearly $12.3 billion in space systems revenue in 2022 alone -- and $36.6 billion across its four major divisions, which include aerospace, defense, and mission systems in addition to space. Investors should also be aware that, according to data from S&P Global Market Intelligence, space is Northrop's least profitable business segment, generating an operating profit margin of only 9.4%, versus 11.6% for Northrop as a whole.
The bigger picture
Of perhaps more significance is what NASA's CRS-2 contract extension means for Northrop post-2030. It's here that I think we'll find a larger opportunity.
Assume Northrop wins a piece of the CRS-2 extension, as SpaceNews suggests it will. This will mean that, from CRS's beginning in 2008 to CRS-2's ending in 2030, Northrop will have had more than two full decades to perfect, and prove its expertise in building space transport vessels and conducting space station supply operations. And by the time ISS is retired in 2030, as many as four private space stations could be in orbit requiring such supply services:
- Orbital Reef, built by Boeing(NYSE: BA), Sierra Nevada, and Blue Origin.
- Starlab, built by Lockheed Martin(NYSE: LMT) and Nanoracks.
- A yet-to-be-named station built by private company Axiom Space.
- A fourth "commercial space station" built by... Northrop Grumman itself.
It's pretty easy to guess which company's spacecraft will be conducting supply runs to the fourth station on this list. We can also probably guess that Boeing, Sierra Nevada, or both will be tapped to keep Orbital Reef stocked with beans and butter. As for Starlab and Axiom Space, however, those two contracts may be up for grabs.
Lockheed Martin, while it currently owns a stake in United Launch Alliance, no longer builds its own rockets, nor does it have a spacecraft certified for carrying cargo into orbit. Nor does Axiom. And while Axiom is closely allied with SpaceX at present, it might want to hire a second contractor so as to preserve its ability to negotiate pricing with SpaceX.
Thus, even after ISS goes away, I don't think Northrop's space station supply business will vanish. It has at least one, and potentially as many as three, future customers it can market its services to post-2030. And sure, space may not be the biggest, most profitable, or most important part of Northrop's business at present.
Knowing that it's still got a future, though, is still one more piece of the puzzle, and one more reason an investor can conclude that, at a lowly 14 times earnings currently, Northrop stock is probably undervalued.
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