Orbital Sciences (US: ORB) makes spacecraft for Nasa and rockets used as target practice for the Pentagon's missile defence system. Satellites are a big money-spinner, too. But it's Orbital's Antares rocket that is creating a buzz and it is just days away from its inaugural launch. If all goes well, it could soon be delivering supplies to the International Space Station and stellar returns to shareholders.
- New rocket launch imminent
- US beefing up missile defences
- Profits guidance conservative
- Analysts say share price could double
- US spending cuts
- Risk of operational delays
Nasa selected Orbital for the space station contract in 2008 after deciding to retire the Space Shuttle. As a result, Orbital developed Antares and the Cygnus capsule and, under a $1.9bn (£1.3bn) resupply contract, plans to carry tonnes of food, fuel and equipment on eight missions to the space station by 2017.
Analysts at FBR Capital predict this will be a "needle-mover" for both sales and profits, given the fat profit margins on offer. The resupply contract could chip in $425m of revenue this year and annualised EPS of 65¢-70¢, they say. Still, completing the so-called "hot fire" test of Antares in February confirms the rocket's systems and procedures work. That clears the way for a first test flight this month. Of course, there's still a risk of delays. However, if a summer demonstration mission goes well, the project will shift quickly into production and the space station will receive two visits by the year-end.
That would be great for Orbital's free cash flow. A quarter of its fees are held back until successful launch, and unbilled receivables for the resupply contract doubled last year to $277m. Orbital's bosses expect to generate no more than $20m free cash this year, but analysts think it could be $70m in 2014 and there's still more than $900m of resupply services revenue to book. Meanwhile, development spending will drop by $40m to $75m in 2013 and keep falling.
Successful launches could trigger orders from elsewhere. Nasa and the US Air Force have already signed initial contracts for Antares rockets and Orbital's chief executive, David Thompson, thinks firm orders could come by the end of 2013. Then talks about a follow-on resupply contract will begin next year.
ORBITAL SCIENCES (US: ORB) | ||||
|---|---|---|---|---|
| ORD PRICE: | $16.45 | MARKET VALUE: | $984m | |
| TOUCH: | $16.43-16.45 | 12-MONTH HIGH: | $16.89 | LOW: $10.59 |
| DIVIDEND YIELD: | nil | PE RATIO: | 15 | |
| NET ASSET VALUE: | $11.97 | NET CASH: | $81m | |
| Year to 31 Dec | Turnover ($bn) | Pre-tax profit ($bn) | Earnings per share ($) | Dividend per share ($) |
|---|---|---|---|---|
| 2009 | 1.13 | 48.2 | 0.64 | nil |
| 2010 | 1.29 | 65.1 | 0.81 | nil |
| 2011 | 1.35 | 88.0 | 1.14 | nil |
| 2012 | 1.44 | 91.8 | 1.03 | nil |
| 2013* | 1.49 | 103.7 | 1.09 | nil |
| % change | +4 | +13 | +6 | – |
Beta: 1.6 *FBR Capital Markets forecasts £1=$1.51 | ||||
North Korea's muscle flexing and increasingly sophisticated weapons in Iran and Pakistan are also great news for Orbital. It makes both the targets that US defence systems practice shooting down and the rockets used to destroy long-range enemy missiles. It's the sole supplier for the US Missile Defense Agency's ground-based midcourse defence programme until 2018. That contract alone is worth up to $1.1bn, but could be much more.
US defence secretary Chuck Hagel announced last month an extra $1bn to beef up defences on America's west coast and politicians on the east coast want more, too. FBR analyst Patrick McCarthy reckons revenue from this business alone could top $400m within a couple of years, about 25 per cent higher than current Wall Street forecasts. That, he says, should add 9 per cent to the share price.
And Orbital's guidance for 2013's results looks conservative. Management trimmed revenue estimates by $25m on sequestration fears - understandable, as Nasa and the Pentagon account for 79 per cent of revenue. However, Mr Thompson admits that's a "reasonable worst-case" and the Nasa budget outlook is "not bad". Anyway, $2.2bn of Orbital's $5bn backlog is for firm orders, covering 80 per cent of current-year revenue and 60 per cent for 2014.
