AJRD - Aerojet Rocketdyne: Just A Hold

2023-05-05 16:54:11 ET

Summary

• Aerojet Rocketdyne Holdings' results were not exciting and impacted by one-off items.
• The Aerojet stock price will move little on earnings pending finalization of the takeover offer by L3Harris Technologies.
• Aerojet Rocketdyne Holdings offers 3% upside from current price levels, and to some, that might be attractive to get paid while parking your money isolated from the market turmoil.

I've been following Aerojet Rocketdyne Holdings, Inc. ( AJRD ) for some time. In August 2022, I put a buy rating on the stock, which has paid off with a 37% return so far. After I tipped it as an acquisition target, L3Harris Technologies, Inc. ( LHX ) announced it would be acquiring the rocket motor specialist.

There is some resistance against merger & acquisition from lawmakers, but most of it I consider to be an unhealthy resistance rather than informed and fact-driven resistance. Some lawmakers simply want to appear as politicians standing up against big corporations to the benefit of consumers and taxpayers while their case for doing so is not always strong.

While I don't see a good reason for the acquisition to be blocked, it makes it even more interesting to keep following the quarterly results for Aerojet Rocketdyne as a stand-alone company, which I will do in this report.

Aerojet Rocketdyne: Top Line Beat, Bottom Line Miss

What I find somewhat unfortunate is that since the acquisition news, Aerojet is no longer hosting earnings calls, while those usually contain a lot of information about the business. Either way, year-over-year, net sales grew by 11% driven by higher Next Generation Interceptor sales as well as higher RL10 sales, which is the liquid-fuel cryogenic rocket fuel engine used on the Space Launch System and higher PAC-3 missile sales. With a concurrent uptick in demand for missile and rocket motors driven by defense and space, it is a good time to be in this business. This growth was offset by $6 million in out-of-period adjustments and total net sales adjustments of $15.5 million.

Cost of sales increased by $62.7 million, driven by higher costs on the Guided Multiple Launch Rocket System program as well as a $0.5 cost headwind associated with the out-of-period adjustment. If we strip the other expenses which include merger costs of $20 million in the quarter as well as $1.2 million in other costs and adjust for the $19.2 million in legal and litigation costs last year and terminated merger costs, the other expenses increased by $0.9 million. So, the operating income was $9.4 million lower, but even if we adjust for certain cost items the adjusted operating profit still dropped year-over-year driven by net unfavorable adjustments of $16.5 million on EBIT levels compared to net unfavorable adjustments of $2.7 million last year.

However, the net income was flat year-over-year as Aerojet Rocketdyne had $2.4 million in retirement benefits and interest income due to returns on the cash and cash equivalents and lower tax provisions partially offset by higher interest expenses. Excluding adjustments, the net profits would have been $11.6 million higher. This pushed the earnings down by $0.17 per share. So, the earnings miss can be fully attributed to negative catch-up adjustments.

What Are The Risks For Aerojet Rocketdyne?

The Q1 earnings are not extremely exciting. Revenue grew, but costs grew harder due to one-off items. Adjusted for this, EBITDAP was in line with last year and the backlog remained stable at $6.8 billion. So, while there is increased demand for rocket and missile motors, we're not seeing a huge increase in the backlog, and top line growth has not translated into income expansion, but none of that is a risk to the stock price at present.

With an acquisition by L3Harris on the table, the only major risk right now is of the merger being blocked or terminated by either party.

Conclusion: Keep Your Money Parked Or Deploy Elsewhere

L3Harris Technologies, Inc. stock won't move much on earnings news. The stock is now trading at $56.36, with a $58 per share offer from L3Harris Technologies. That gap will likely not close until the acquisition is approved. So, you have a choice here: Keep the money parked for the 3% upside that remains this year or deploy it elsewhere.

I know what I would do: deploy it elsewhere, because the 3% upside for waiting for probably weeks or months is something that I could earn somewhere else, and most likely faster as well. In fact, I could already have earned it back on Bombardier Inc. (BDRBF), for which I have a buy rating and is up 3% today alone. The advantage Aerojet Rocketdyne Holdings, Inc. offers is that even with the current market turmoil due to problems in the banking sector, its stock price remains unfazed.

For further details see: