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Aerojet Rocketdyne: Surviving in a Competitive Space Economy

Aerojet Rocketdyne Holdings Inc. (NYSE:AJRD), a venerable rocket propulsion systems manufacturer, has enjoyed the fruits of an expanding space economy. As we discussed in a recent research note, the company has seen its star rise thanks to both its impressive cost-cutting measures and the growing market enthusiasm for space-related companies.


Some critics, however, worry that Aerojet Rocketdyne may struggle in the coming years as new entrants muscle in on its turf.

New kids on the block

The space industry, like the broader aerospace sector, has traditionally been dominated by a few big players. High capital costs, long research and development cycles and a limited pool of lucrative government contracts served to keep the industry relatively restricted. This state of affairs has been challenged over the course of the last decade thanks to a host of new entrants to the industry. Well-funded private space and rocketry enterprises have gained increasing traction, as UBS Group AG (NYSE:UBS) reported in May 2019:


"The number of investments in space has increased from eight in 2000-2004 to an average of 93 in the last five years, with the reported involvement of at least 16 of the world's richest billionaires...Because space investment is still in its early stages, we foresee rising private investment as costs/entry barriers decline and new public listings of private space ventures increase. Many new private space ventures are likely to become profitable in the coming years, and we would be surprised to not see some of these new start-ups IPO given their capital intensity."



Among the top players in this new private space sector are Elon Musk's Space Exploration Technologies (better known as SpaceX) and Amazon.com Inc. (AMZN) CEO Jeff Bezos' Blue Origin. SpaceX has raised billions of dollars from private investors, while Blue Origin has been funded largely from the pocket of its ultra-wealthy founder.

Benefits of experience

The prospect of deep-pocketed private upstarts threatening Aerojet Rocketdyne's business worries some investors. The space economy is all about the future, and zippy, agile private companies may well garner more attention than the lumbering giants of the established industry.

Aerojet Rocketdyne, however, has been in the jet propulsion business since World War II and has been an important player in spaceflight since the earliest days of the National Aeronautics and Space Administration. As The Wall Street Journal reported in August, that experience and institutional knowledge is a source of positive competitive differentiation for the company:


"It also has an edge that many of the new entrants don't: It can pitch its products as offering lower risk, thanks to nearly 80 years of accumulated expertise and intellectual property. As the company's Chief Financial Officer Paul Lundstrom puts it: 'It is rocket science, and we've been here from the beginning.'"



While new may be sexy, experience and know-how is what gets the job done. For companies and governments in need of rocket propulsion systems, Aerojet Rocketdyne is a tried and tested name. Indeed, even some of the newcomers to the industry appreciate its experience and skill. For example, Blue Origin relied on Aerojet Rocketdyne to build its New Shepard Crew Capsule Escape Solid Rocket Motor.

Yet, while it remains a strong player in the field of rocket propulsion, Aerojet Rocketdyne cannot afford to rest on its laurels and reputation.

Competition is real

The real threat of the emerging competition was hammered home in September 2018, when the United Launch Alliance, a consortium of major aerospace and defense companies, chose Blue Origin to supply the engines for its next-generation rocket program. As CNBC reported at the time, the startup's victory came at Aerojet Rocketdyne's expense:


"The company's BE-4 engine, the thunderous staple of Blue Origin's propulsion business, will power ULA's Vulcan rocket: a new heavy lift vehicle being built to compete with SpaceX for lucrative commercial and military contracts...Blue Origin has long been the front-runner in a race against Aerojet Rocketdyne, which has been developing its AR1 engine. While AR1 was still technically in the running until now...Aerojet was behind in the development, while Blue Origin had already completed multiple tests, firing the BE-4 engine for long durations. Aerojet has not completely lost, even if AR1 ends up with no part in Vulcan. ULA announced in May it picked the Aerojet's smaller RL10 engine to power the upper-stage of Vulcan -- the part of the rocket that places spacecraft into their intended orbits after a launch. ULA currently uses the RL10 for its Atlas V and Delta IV rockets."



The space economy is growing rapidly, but it is also becoming more competitive. Aerojet Rocketdyne must contend with these new competitive pressures if it hopes to sustain and grow its business -- and maintain its soaring valuation.

Investing in space

While Aerojet Rocketdyne must contend with increasingly fearsome competition, it is also benefiting from the increased market attention and enthusiasm that has resulted from the emergence of new space economy companies. While many investors may want to own a piece of SpaceX or Blue Origin, few can actually do so. As private companies, they are restricted to a small group of wealthy individuals and investment funds. According to UBS, investors interested in gaining exposure to the booming space economy should look to the stock market:


"Investors can gain exposure to space via public stocks already engaged in rocket development and launch services, satellite manufacturing, satellite services and communications...Due to considerable consolidation in the satellite launch asset market, leading players often share exposure to the same asset...Investment exposure at this early stage is best gained via existing listed companies in aerospace, satellite and communications segments."



As a critical player in the rocket propulsion field, Aerojet Rocketdyne offers a compelling opportunity for investors who want to get in on the next space race.

Verdict

Aerojet Rocketdyne recognizes that, in order to survive and thrive in an increasingly competitive rocket propulsion industry, it needs to invest heavily in its own capabilities. Thus far, the company has been doing just that. In June, Aerojet Rocketdyne marked the grand opening of a new state-of-the-art rocket propulsion facility in Huntsville, Alabama.

By investing in its future and building upon its strong foundation of institutional knowledge, Aerojet Rocketdyne has every reason to anticipate a bright future. Moreover, organic growth in the space economy should serve as a tailwind for the company, even in the face of mounting competition.

Aerojet Rocketdyne has played an important part in the rocket propulsion industry since the time of the first space race. With another space race in the offing, this seasoned company looks ready to reprise its role.

Disclosure: No positions.

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This article first appeared on GuruFocus.