Bearish (10/21/22)

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In today's newsletter:🐻 The bear case for space🏛️ LM Space 2050 dispatch📖 Weekend content recs

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Credit Suisse Initiates A&D Coverage

Credit Suisse has initiated coverage of the aerospace & defense (A&D) industry. In an analyst note issued on Oct. 11 and seen by Payload, the bank writes that the two should not be viewed in the same light, and that “A” and “D” are a zero-sum game.

“From 1940 to 2017, these two sectors worked cooperatively, creating positive-sum outcomes across several layers of engagement,” CS analysts write. “This included shared innovation and a shared industrial base, whereby progress from one fueled the strength of the other.”

Today, the industries face similar challenges, from Covid-induced supply shocks to labor shortages, as well as similar opportunities. But now, the bank argues, a schism is developing between the “A” and the “D.”

• D, or defense, has the short-term tailwind of war in Eastern Europe and longer-term growth prospects driven by mounting US-China tensions. Credit Suisse sees defense as a growth industry for the rest of the decade, delivering 7.9% CAGR for the next eight years.

• A, or aerospace, includes both the commercial aviation sector and space. For our purposes and obvious reasons, we’ll focus on space.

Ouch: Credit Suisse has broadly bearish views on space, saying it’s a capital-intensive, highly competitive sector “with challenged unit economics, high technical and operational risks, unsupportive base rates, and little demonstrated ability to earn its cost of capital.” The bank is particularly bearish on launchers—more on that below.

Breaking out space: In an accompanying deck to its coverage initiation note, Credit Suisse says that the only proven “space” companies are in fact pure-play defense contractors or niche component suppliers.

• The space sector overstates revenue potential while soft-pedaling costs, the deck notes. (For further reading on the matter, see the forward-looking revenue estimates in space SPACs’ investor decks.)

• The industry is headed toward a speculative bubble, reminiscent of one that took place in the 1990s. (For further reading, check out Eccentric Orbits.)

• SpaceX—the poster child of “new space”—has the best shot at commanding most of the industry’s remaining upside, while other promising players have been snapped up by defense primes through M&A and industry consolidation.

• 11 newly public space companies tracked by Credit Suisse reported $1.3B in operating expenses last year against $335M in sales. High burn rates, shortening runway, and a recessionary environment don’t help the sector’s top- or bottom-line financial prospects.

The conclusion? “In this context, an investment in one industry is an implicit short on the other,” analysts write. “Given the state of the world today, we prefer defense.” The bank has initiated coverage of 15 A&D stocks:

• Outperform: Northrop Grumman ($NOC), L3Harris Technologies ($LHX), BWX Technologies ($BWXT), TransDigm Group ($TDG), HEICO Corp. ($HEI), Mynaric ($MYNA), and BlackSky ($BKSY)

• Neutral: Raytheon ($RTX), General Dynamics ($GD), Huntington Ingalls Industries ($HII), and Spire ($SPIR)

• Underperform: Boeing ($BA), Lockheed Martin ($LMT), Rocket Lab ($RKLB), and Virgin Orbit ($VORB)

Lockheed's Long-Term Space Vision

Advanced tech can only do as much as the policies that regulate it allow, Lockheed Martin’s space chief said Thursday at an event to sell Washington officials on the moon habitats, in-space manufacturing, and smart cities that the company predicts will be commonplace by 2050.

“The goal really is to start a dialogue and think about not just technology,” Robert Lightfoot, the head of Lockheed’s space portfolio, told a small group of reporters. “We did it here [in DC] because we’re going to have a lot of the policymakers come in…and they can tell us, ‘If you’re going to do that, these are the policies we need to be thinking about now.’”

The vibe: For the Destination: Space 2050 event, Lockheed filled an industrial event space near the Capitol with interactive exhibits, including a video game-esque opportunity to drive the lunar lander and the chance to build a moon colony based on your top priorities. The event, which included a Mars-themed mocktail and branded space pens as swag, felt a little more unbuttoned than those typically hosted in the company’s Arlington-based Global Vision Center.

No company is an island: It won’t be just Lockheed engineers designing and building all the tech to achieve these big goals by themselves. The aerospace giant will partner with non-traditional companies or smaller space startups to capitalize on capabilities that already exist and bring capabilities to market faster.

“I would love to do this organically inside of Lockheed Martin, but to get the missions done that I need, especially the near-term ones, I may not have time, and these folks are already ahead of me,” Lightfoot said, adding that one-third of capital from Lockheed’s corporate VC arm is going to space startups.

The customer is always right: Lockheed will launch a demo mission in early 2023 to prove out its LM 400 satellite bus. Lightfoot, who led NASA temporarily for a whopping 406 days at the start of the Trump administration, said the company is planning yearly self-funded demo flights as government customers increasingly expect companies to shoulder more risk and fund more development.

“I’m a former NASA guy, a former customer. What’s really different here is we are doing the investment to retire risk before a program of record,” he said. “I believe [customers] are looking for that maturity.”

“Fail fast, fail forward”: On changing culture at the legacy company, Lightfoot said it’s “a real issue” to convince engineers that it’s okay for demo missions to fail. One example: Lightfoot saw the Pony Express nanosatellite demo mission, which was only supposed to last six weeks, as a huge success after it lasted six months. But engineers saw it as a failure because they wanted it to last two years. “Our team’s bar is so high,” he said. “How do I get them to understand that was awesome?”

Why 2050? Looking 28 years out is really just one generation, Lightfoot said. “It’s far enough out that we’ve got time to get the technology in place, but not so far out that it’s science fiction.”

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In Other News

• A 10-year SpaceX veteran was left in a months-long coma after an error during a pressure valve test of the Raptor engine in January, Semafor reports.

• Turkey and Kazakhstan inked a deal to co-produce satellites and space subsystems.

• Moriba Jah on why eliminating single-use sats in orbit is as important as eliminating single-use plastics on Earth. If only there were space turtles to be the face of the cause.

• The UK Defense Committee has called for the appointment of a space minister.

• CMSA shared a raft of new photos of Earth captured aboard the Chinese space station.

• NASA has ordered three more Orion spacecraft from Lockheed Martin ($LMT) for the Artemis VI–VIII missions for nearly $2B.

The View from Space