RDW - Redwire Is On Track To Become Profitable
2023-05-26 06:33:43 ET
Summary
- Redwire's profitability could be achieved with further positive business development in the next few years.
- Debt, interest charges, and SBCs are not excessively high.
- The company has only $11M cash left, which means new shares will soon be issued or new debt will probably be raised.
- I will continue to observe the stock, but not yet buy.
Investment thesis
Redwire (RDW) is an exciting space sector company whose revenue and cost development suggest that it could reach profitability within the next few years. However, the company will soon run out of money, and already in the past, there was a slow dilution in the outstanding shares. In addition, the stock is very volatile; therefore, I continue to watch it for now, as I am currently very cautious with unprofitable companies.
Short space overview
Redwire Corporation is an innovative player in the rapidly growing space infrastructure sector. This includes solar power generation, space-based biotechnology, and other essential technologies needed for missions in space. In recent years, private companies have increasingly participated in the industry due to technological advances and evolving regulatory frameworks. This new wave of private participation signals the industry's growth trajectory, but it also intensifies competition and places emphasis on innovation and cost efficiency.
The developing division of the world into East and West will not stop at space. The more Russia, China, and other nations build up here, the more the West will have to do likewise. Space, including satellites, are essential for the defense of a country; probably we will see a new space race in the following decades.
But not only for this but also for science and new technologies, space is becoming increasingly important. There are some materials that can only be produced in this environment of lower gravity. In addition, research is already being conducted on plants that are adapted to the environment and can therefore be grown outside the Earth. Another possibility is to produce solar energy in space and send it back to Earth by a concentrated beam. Sounds like science fiction, but much of what used to sound like that is now reality.
Results & financials
In the following section, I would like to look at the company's development and ask whether the company is on a good path to achieving profitability. To do this, we will look at various graphs. First, a short overview of the general sales and cost development, and the net income of the trailing twelve months.
The following overview refers to the last 12 months compared to the 12 months before. Here we can see several interesting things. Firstly, it is positive that revenue has increased by 33%, but the cost of revenue has increased by almost the same percentage, resulting in a rather low gross profit margin overall. However, the company has reduced its operating costs by 24%, which is quite a lot for only one year. I was surprised by the rather low costs for research and development.
Furthermore, the operating income would be only slightly negative, but the net income suddenly stands at a $120M loss. What happened here? On the cash flow statement , we find the cause, namely that there were significant costs for depreciation and restructuring in mid-2022.
If we look at the same graph as above, but this time per quarter and not for the trailing twelve months, we see that net income has been developing positively for several quarters.
When is profitability reached?
The following chart shows positive developments: the revenue per share is increasing, and the EPS tends to get less negative.
In the Q1 2023 results, the word profitability appears once, but unspecifically. I assume it will take several more years of good business development before the company becomes sustainably profitable. Of course, this depends on many factors, such as the future order intake and how quickly the company manages to process it, i.e., whether the company can find and retain the necessary staff.
We have started 2023 off with both record revenue and positive Adjusted EBITDA," stated Peter Cannito, Chairman and Chief Executive Officer of Redwire. "Our strategy of providing proven space heritage products in the present combined with technical innovation for the future is on track for achieving profitability and delivering significant momentum as we continue to execute our 2023 plan.
However, the company sees itself on a good path and describes Q1 2023 in the Investor Presentation as the most successful quarter ever.
Valuation
The company is currently valued at an enterprise value of $320 million. The market cap is $161 million, and the total debt is $94 million. The question of valuation is always tricky with unprofitable companies. The market capitalization seems low, considering this year's sales of about $250M. If the company reaches profitability in the next few years, the current debt should not be a problem. However, it should be noted that the company has only $11M cash left, which means new shares will soon be issued or new debt will probably be raised. The interest burden was about $8M in the last 12 months, which is relatively low, given the revenue.
Risks
Investing in Redwire involves several risks. First and foremost, the space industry is inherently high-risk due to the complexities of space missions, regulatory hurdles, and the capital required for research and development.
I also noticed that the order backlog is $287M, but at the end of the last quarter, it was $313M. So overall, the company depends on these external orders, which have little to do with the general economic development but are probably cyclical in their own way. Also, emerging competition is possible, which would lower margins.
Another risk is the fact that several of the company's orders were related to the International Space Station ((ISS)). However, the ISS is scheduled to reach the end of its life in 2031, and as far as I know, no successor has yet been announced. However, until then, there is still some time, and the fact that China now operates its own space station will tempt the Western world not to remain inactive here.
Share dilution and insider selling
In September 2021 was the IPO. Since then, there has been a slight increase of about 1.5M shares. SBCs are rather small compared to many other companies.
These are all insider trades since the beginning of December 2022. The most recent sales all occurred after the publication of the Q1 figures, but overall nothing spectacular.
Conclusion
Overall, the company seems to be on a good track. Profitability could be achieved with further positive business development in the next few years. Debt, interest charges, and SBCs are not excessively high. And without stating concrete numbers, I think we can say that space and its economic development could become one of the big topics of this century. Of course, one must be careful here. The share is highly volatile and has been trading sideways for some time. I will continue to observe the share, but not yet buy. However, it always depends on the own composition of the portfolio, that is, a healthy mix of risk values and value. At the moment, I am rather cautious about risk. Suppose the company becomes a long-term winner and profitable. In that case, there will still be many entry opportunities, even if one then does not buy at the low point; but to buy during an upward movement is something I prefer anyway.
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Redwire Is On Track To Become Profitable