Today we have a moderately speculative idea.: take shares in defense contractor Aerojet Rocketdyne Holdings (NYSE: AJRD) in anticipation of the acquisition of the company.
Growth potential and validity: 18,5% during 14 Months; 8% per annum during 10 years.
Why stocks can go up: the company should be bought, and we can make money on it.
How do we act: take now 43,14 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
AJRD designs and develops launch systems for both the military, and for space purposes.
A company's annual report is useless for determining the segmentation of its business.: all of its military sales are counted by one segment. Maybe, should be mentioned, what 0,15% She earns from real estate transactions..
The company receives revenue from the US government - 96% - and other clients - 4%.
Composition of revenue, received from the US government
| NASA | 25% |
| US Missile Defense Agency | 23% |
| US Army | 19% |
| BBC USA | 12% |
| US Navy | 10% |
| Other government departments | 7% |
25%
Arguments in favor of the company
"Who sells? We are selling!» Company by price 51 $ per share to buy defense giant Lockheed Martin (LMT). It's almost +18,5% to the current price of the company. Truth, this whole story has been going on since 2020, and recently antitrust regulators delayed a vote on the issue for a few weeks, As a result, the company's shares fell 51 $.
The probability of, that the transaction will be approved and take place, very large. In this case, we will earn 18,5%. But there is also the possibility, that regulators will not approve the deal and AJRD will not buy.
Basically, nothing bad will happen. The company is now worth about the same, how and when she received an offer to sell. So in the event of a breakdown in the sale of LMT, there are no rational reasons for a strong fall in the quotes of the independent AJRD. This is a stable and reliable business, and his performance over the past year and a half has not deteriorated. well, anyway, so, how reliable and stable the American military business can be.
If AJRD remains an independent company, then it may well introduce dividends for its shareholders in the area 1,3 $ per share per year - approx. 75% from her profit for the year, - what will give 3% per annum. May be, the management of the company will take this step independently, maybe, this will be preceded by an attack by an activist investor.
Inexpensive. It is also relatively inexpensive in absolute terms.: its capitalization now stands at $3.46 billion. In relative numbers, it is also inexpensive.: P / E she has 25, a P / S in general 1,3. So investors may well run into stocks, tired of losing startups and just risky investments.
AJRD in the context of recent stock exchange and political turmoil does not look like the most senseless option to “park money” for a conservative investor. After all, the main end consumer of AJRD products is the US government., what, maybe, not so reliable, like some US Treasury bonds, but much more reliable than most of the "civilian" issuers. Still, governments and armies are more constant in their consumer activity, than peaceful buyers.
Strong and independent. The outlook for an independent AJDR looks pretty good.. And if a new more or less major war happens, then AJRD shares will rise strongly along with the volume of orders for the company. She works in the aerospace industry, which is key to US military power., hegemony in which allows the Americans to dictate terms on the battlefield to almost any enemy.
It is also possible to buy AJRD by some industrial conglomerate. Think, if AJRD becomes part of some civilian business, then the regulators will not interfere much with this. I would expect the sale price to another buyer at about the same level, same as LMT: this is a fair assessment of the AJRD business.
What can get in the way
Once is not absorption. If the takeover does not take place, then companies under certain circumstances, maybe, will have to pay LMT $150 million in compensation. Dubious, that she would be forced to pay this amount if, if the deal is canceled by the decision of the regulator, but you should still keep this in mind.
Customer concentration. The company receives most of its revenue as a subcontractor in the service of recipients of major contracts from the US government.. According to the annual report, its revenue is concentrated on two contractors: LMT — 34% и Raytheon — 17%.
If AJDR is bought, then it won't matter. But if it remains an independent company, then it is possible to review its relationship with these clients, which could adversely affect its reporting.
Concentration of programs. The main revenue of the company comes from participation in four large programs:
- RS-25 — 18%.
- Standard Missile — 13%.
- THAAD— 11%.
- PAC-3 — 10%.
There is a similar situation. If AJRD becomes part of LMT, then it won't be our problem. But if AJRD stays independent, then there will be room for trouble, associated with the cancellation of funding for some of these programs by the US government or a simple audit of their spending. It can be objected to, that “well, the Americans will not cut funding for programs, who developed so long and hard?». But I wouldn't be so sure. So these risks should be kept in mind..
Calm before the storm. If the company remains independent, its stability will also depend on the situation with the financing of the US armed forces as a whole. Who knows, may be, tomorrow the US government will cut funding for the army by 99% and the money saved will be sent for reparations to the descendants of slaves. Or cut NASA funding, which will also have a painful effect on AJRD. It's me, certainly, thickening the colors, but in general, the risks of reducing military spending in the United States are much more serious, than many people think.
Accounting. Concluding a conversation about problems, which will not matter to us if, if AJRD someone buys, - her bookkeeping. The company has 1.962 billion dollars of debt, of which 808.9 million must be repaid during the year.
She doesn't have much money.: 627,9 million on accounts plus 85.2 million debts of counterparties. I do not think, that she will have trouble getting loans. But on the other hand, such a large debt somewhat reduces the possibility of the company introducing dividends in a sufficient amount.. Also, a large debt will scare away some investors due to higher rates and more expensive loans..
Wrong turn. If the LMT deal fails, then, in theory, an excessively strong drop in these shares is possible, which disappointed investors will arrange. There are no rational reasons for such a fall., but most investors are irrational in their actions, so I wouldn't count on their prudence.
What's the bottom line?
Shares can be taken now by 43,14 $. And then there are two options.:
- ideal. LMT buys the company for 51 $. We don't have to do anything in this case., The deal will close in the next 14 Months. Well, or the stock will immediately rise to 51 $, and you can sell them, without waiting for the deal to close;
- imperfect. In this case, LMT will not be able to buy the company and it will remain independent. But, how we figured it out, there is nothing wrong with that: just get ready to keep these promotions next 10 years based on 8% per annum during this period.
Very likely, that during this time there will be a war, which will have a positive impact on business, as well as on company quotes. Even more likely, that during this time someone will buy it, except LMT, at the same price, as LMT.
