The Economics of Space

Maxxwell A.R. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The media’s never-ending infatuation with the botched Facebook IPO last week overshadowed one of the greatest moments in spaceflight history. Space Exploration Technologies Corporation, or SpaceX, became the first private company to successfully launch and then dock a vehicle to the International Space Station (ISS). It’s not exactly walking on the moon, but it does highlight a shift in space transportation. In the very near future public companies will be able to profit from ferrying humans and cargo to low-earth orbit at a fraction of the cost of government sponsored programs.

Of course, when SpaceX officially goes public in 2013 the media will flock to Elon Musk, talk about missions to Mars, and act like they are genuinely interested. But for investors an eventual SpaceX IPO is bigger than just a three week media storm. The opportunity to catch the huge future of commercial space transportation and resupply in its infancy could lead to great returns for long-term investors. To gear up for a publicly traded SpaceX let’s compare the company to other starry-eyed hopefuls.

<img src="/media/images/user_6293/dragonbertsiss_large.jpg" />

The ISS successfully “catches a Dragon by the tail” in what will surely become a historic picture in the history of spaceflight. Source: NASA

NASA is still fostering innovation

Investors should get familiar with companies currently partnered with NASA for commercial spaceflight. Five companies are sponsored under the $320 million Commercial Crew Development (CCDev) program, which is for companies that are a little further out in development of launch vehicles and systems. In stark contrast, the Commercial Orbital Transportation Services (COTS) program has awarded nearly $4 billion to SpaceX ($1.6 billion) and Orbital Sciences Corp. (NYSE: ORB) ($1.9 billion) alone. Both companies have unrelated contracts worth several billion more. 

Here’s a look at expected launch dates from several contracted NASA partners:

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Space vehicle/rocket</strong></p> </td> <td> <p><strong>First expected launch</strong></p> </td> </tr> <tr> <td> <p>SpaceX</p> </td> <td> <p>Dragon/Falcon</p> </td> <td> <p>May 22<sup>nd</sup>, 2012</p> </td> </tr> <tr> <td> <p>Orbital Sciences</p> </td> <td> <p>Cygnus/Antares</p> </td> <td> <p>November 2012*</p> </td> </tr> <tr> <td> <p><strong>Lockheed Martin </strong><span class="ticker" data-id="204339">(NYSE: <a href="">LMT</a>)</span></p> </td> <td> <p>Orion</p> </td> <td> <p>2014**</p> </td> </tr> <tr> <td> <p><strong>Boeing </strong><span class="ticker" data-id="202905">(NYSE: <a href="">BA</a>)</span> & Bigelow Aerospace</p> </td> <td> <p>CST-100</p> </td> <td> <p>2015</p> </td> </tr> <tr> <td> <p><strong>Alliant Techsystems, Inc.</strong> <span class="ticker" data-id="202867">(NYSE: <a href="">ATK</a>)</span> & Astrium</p> </td> <td> <p>Liberty***</p> </td> <td> <p>2015 (2016 for NASA)</p> </td> </tr> <tr> <td> <p>Sierra Nevada Corp.</p> </td> <td> <p>Dream Chaser</p> </td> <td> <p>2016-2017</p> </td> </tr> <tr> <td> <p>Blue Origin</p> </td> <td> <p>New Sheppard</p> </td> <td> <p>?</p> </td> </tr> </tbody> </table>

*First trip to ISS. **First manned crew not until 2020. ***Not contracted by NASA for spaceflight, but will be crew-ready for ISS resupply missions by 2016. Source: NASA

Too dependent on government contracts?

Spaceflight companies are heavily dependent on NASA contracts, but that isn’t a bad thing. Investors shouldn’t make the mistake of likening a NASA contract for R&D with a NASA contract for critical and necessary resupply missions. Successful spaceflight companies will be able to land long-term services contracts – from NASA and other governmental space agencies – just like any other services company. Besides, Lockheed derived 82% of its 2011 sales from U.S. government customers and is doing just fine.  If you provide a service that is needed, you will always find customers.

Furthermore, revenue can also be generated from defense contracts, commercial satellite launches, scientific research (the point of the ISS), and possibly even low-orbit space tourism to private space stations (the biggest question mark). Orbital is still cash-flow negative, but the company’s latest quarterly results provide a great first-look for future companies that focus solely on commercial space flight.

<table> <tbody> <tr> <td> <p><strong>Segment</strong></p> </td> <td> <p><strong>1Q12 revenue</strong></p> </td> <td> <p><strong>% of total</strong></p> </td> <td> <p><strong>YOY growth</strong></p> </td> </tr> <tr> <td> <p>Launch vehicles</p> </td> <td> <p>$126.1 million</p> </td> <td> <p>35.8%</p> </td> <td> <p>20%</p> </td> </tr> <tr> <td> <p>Satellites and space systems</p> </td> <td> <p>$111.3 million</p> </td> <td> <p>31.6%</p> </td> <td> <p>(27%)</p> </td> </tr> <tr> <td> <p>Advanced space programs</p> </td> <td> <p>$115.0 million</p> </td> <td> <p>32.6%</p> </td> <td> <p>24%</p> </td> </tr> </tbody> </table>

Not to be confused with NASA resupply services (advanced space programs segment); the company’s launch vehicle segment is used for planting small payloads into orbit and has conducted over 40 missions since 1990.

Space is profitable

Orbital, Alliant, Boeing, and Lockheed standout from the numerous startups on the list for commercial spaceflight. Each has a long history designing spacecrafts, satellites, interplanetary orbiters and landers, and rocket propulsion systems for NASA. Boeing has, after all, built every U.S. component of the ISS. Alliant operated rockets for the former space shuttle fleet while Lockheed supplied every external fuel tank.

Below is a table comparing the profitability of each company’s space segment in 2011, which shows that space is profitable even today. Imagine how much more profitable it can become once technology improves.

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Aerospace sales</strong></p> </td> <td> <p><strong>Aerospace net income</strong></p> </td> <td> <p><strong>% of total income</strong></p> </td> <td> <p><strong>Operating margin</strong></p> </td> </tr> <tr> <td> <p>Alliant</p> </td> <td> <p>$1.348 billion</p> </td> <td> <p>$143.8 million</p> </td> <td> <p>29.0%</p> </td> <td> <p>10.7%</p> </td> </tr> <tr> <td> <p>Boeing</p> </td> <td> <p>$8.673 billion</p> </td> <td> <p>$690 million</p> </td> <td> <p>21.8%</p> </td> <td> <p>7.95%</p> </td> </tr> <tr> <td> <p>Lockheed</p> </td> <td> <p>$8.100 billion</p> </td> <td> <p>$989 million</p> </td> <td> <p>24.8%</p> </td> <td> <p>12.2%</p> </td> </tr> <tr> <td> <p>Orbital</p> </td> <td> <p>$1.346 billion</p> </td> <td> <p>$67.4 million</p> </td> <td> <p>100%</p> </td> <td> <p>5.0%</p> </td> </tr> </tbody> </table>


Although the profit numbers are not astronomical, keep in mind that space is a capital intense endeavor. With that in mind it is quite impressive to have an average margin of 9%. The industry will become much more profitable with the development of reusable rockets, such as SpaceX’s Falcon 9 and Orbital’s Antares. Consider this: each SpaceX mission currently costs about $65 million, but the fuel, oxidizer, and pressurant for the Falcon 9 rocket accounts for about only $200,000. That’s because the company must make a new rocket for each launch. As SpaceX and Orbital develop their reusable rockets in the next two to three years, look for mission costs to drop dramatically and lift profit margins to more appreciable levels.

Foolish bottom line

The future of near Earth space transportation for humans and cargo has the potential to be an amazing opportunity for investors. Yes, the industry will remain largely dependent on government contracts, but they are services contracts. The share of income generated from government customers will gradually fall as space opens up to more and more commercial and private uses with the coming age of reusable rockets. In the meantime, keep a close eye on developments from SpaceX (11 more missions under COTS contract) and Orbital (8 more missions under COTS contract, first visit to ISS in November).

Did you enjoy this article? Follow me on Twitter to keep up with my future posts on value opportunities, energy, and sustainable chemicals @BlacknGoldFool.

Make better investments with science.

BlacknGold has no positions in the stocks mentioned above. The Motley Fool owns shares of Lockheed Martin. Motley Fool newsletter services recommend Orbital Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus