Aerojet Rocketdyne Holdings, Inc.

  • In our opinion, Aerojet Rocketdyne (NYSE: AJRD) – formerly Gencorp (NYSE: GY) – is facing fundamental pressures, masked by complicated and aggressive accounting, which gives investors a potentially misleading impression of stability and growth. While holding no conference calls, and having only four analysts cover the stock, we believe the market is fundamentally ignoring ~$900M of liabilities associated with the business, making the Company 5x more levered than it appears and its valuation “cheap”. Furthermore, analysts blindly pencil in 4% revenue growth in the next two years, despite hundreds of millions of dollars in revenue programs that are disappearing. We see 40% – 60% downside once investors piece the puzzle together.
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  • Aerojet’s primary rocket propulsion business has historically benefited from high barriers to entry, oligopolistic pricing and favorable cost-reimbursable contracts. In our opinion, these dynamics appear to have enabled the Company to win business and protect margins, despite many claims it lacks a culture of innovation
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  • These dynamics have shifted in recent years with the emergence of disruptive low-cost competitors driven by lionized CEOs (Blue Origin / Bezos and SpaceX / Musk ), and the impact of the Northrop’s Orbital ATK acquisition on AJRD’s missile business
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  • The winding down of various platforms (AJ-60 + RS-J8) and failure of AR1 to low cost competitor Blue Origin’s BE-4 engine for the Vulcan Rocket. We believe the loss to Blue Origin was the death blow to Aerojet by losing ULA, its only customer in space launch. ULA, a material 17% customer, is expecting to coming under pressure: earnings are forecasted to be down 47% in 2019. Spruce Point estimates these losses eliminate $300m of expected revenues in the near and long-term
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  • Revenues from RS-25 for the SLS program (14% of 2018 revenues), are set to decline from the Sept 2018 completion of a $2.0bn contract, and the run-off from the 2015 $1.5bn contract to be completed by 2023. Longer-term challenges remain with NASA’s over-budget Space Launch Systems (SLS) program dubbed the “rocket to nowhere”, and a recent change of tone at NASA suggest it is taking steps to find cheaper commercial alternatives to the RS-25.
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  • In 2018, Aerojet benefitted from boosts in missile orders from key programs which are set to decline by 5% and 11% in 2019/2020, respectively, according to the recent March 2019 DoD budget request. We estimate that Aerojet’s revenues increased $117m in 2018 from the growth in just two key programs: Standard Missile and THAAD. These two key programs are budgeted to decline by 2% and 35% in 2019 and 2020, respectively
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  • Management And The Board Have Little At Risk Owning Just 3.0% Of The Company (1.9% ex: Chairman Lichtenstein’s Ownership). Years Ago, The Employee Savings Plan Was A Material Owner >10%, Now It’s Effectively 0%. Short-Term Incentive Bonus Definitions Becoming Much More Subjective, Conveniently Allowing The Board To Lavish Management With Credit For Maximum Cash Compensation
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  • Upon Hiring, The CFO’s Bio Claimed He Was A CPA, Yet His Bio Now States He “Completed Exam Requirements”. General McPeak was the Lead Director at Miller Energy Resources (NYSE: MILL), a bona-fide accounting fraud that went to zero. The SEC charged management with securities violations and even fined the auditor. Perry was CFO and Treasurer of United Industrial Corp during a period the SEC blasted it for fraud concerning foreign corruption and stated the Company “lacked meaningful controls to prevent illicit payments.
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  • By applying a discounted multiple range to our adjusted enterprise value and financial results, we derive a price target of $13.00 – $20.00 (40% – 60% downside) including entitled land value. Follow the money: Many long-term owners are consistently selling stock and reducing ownership. Aside from passive investor Vanguard, Aerojet has attracted only one new fundamental investor of size in recent years
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