LLAP - Terran Orbital: Shares Undervalued Following A Large Contract Award

2023-04-24 16:30:44 ET

Summary

• Space stocks have sunk after a modest pop around the Virgin Orbit collapse.
• I see shares of Terran Orbital as undervalued, but there's one technical price level that remains important.
• After winning a major contract in February, there's the chance of significant free cash flow generation in the years ahead.

Space stocks have retreated following the Virgin Orbit collapse a few weeks ago. While there was a near-term jump in shares of some of the industry's equities, a downtrend has resumed amid higher interest rates and a focus by many investors on strong free cash flow.

Still, I continue to see shares of Terran Orbital as a buy, but I am reducing my price target.

Space ETF Slides, Though Holding Above the March Lows

According to Bank of America Global Research, Terran Orbital Corporation ( LLAP ) is a vertically integrated provider of satellite solutions, including satellite design, production, launch planning, mission operations, and in-orbit support. The company is also building a constellation of 96 Earth Observation (EO) Satellites that will include satellites with both SAR (synthetic aperture radar) and electro-optical functionality.

The Florida-based $289 million market cap Aerospace & Defense industry company within the Industrial sector does not have positive trailing 12-month GAAP earnings and does not pay a dividend, according to The Wall Street Journal. Seeking Alpha reports that LLAP has a high short interest of 12.0%.

There has been a key development since I last reviewed and rated Terran. Back in February, the company won a significant $2.4 billion contract for 300 satellites for Rivada Networks. Shares surged to noted resistance on the chart, but have since pulled back to where it traded in January. The deal is a sign that Terran has shifted to the builder model which could lead to better long-run profitability. The award helps the firm set itself apart as a leader in producing satellites. Recall last year that Lockheed Martin joined with LLAP for it to build 42 satellites for the Space Development Agency's Tranche 1 Transport Layer.

Downside risks to my buy rating include the chance that the firm does not build out its PredaSAR constellation or if there is a weakened relationship with Lockheed. What I also do not like is that Terran issued a shelf equity offering earlier this month - the dilution led to a stock price drop. Also, a slight earnings miss on March 21 was not all that encouraging, though they beat on the top line.

On valuation, analysts at BofA see earnings turning positive in the coming quarters. While per-share profits are deeply in the red on a backward-looking basis, ample growth stemming from its transition from an owner to a builder should lead to positive operating and GAAP EPS next year. While no dividends are expected to be paid any time soon, Terran should become free cash flow positive in 2024. Overall, if we assign a modest 12x earnings multiple on $0.30 of EPS, then shares should be near $3.60, but if earnings are realized sooner and are more long-lasting, there's upside risk to that target.

Reduced consensus earnings estimates now versus earlier in the year lead to a lower price objective in my view for now. Following the big contract inked in February, there's a reasonable chance of massive free cash flow in the years ahead.

Terran: Earnings, Valuation, Free Cash Flow Forecasts

LLAP: Profitability Expected in 2024

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q1 2023 earnings date of Thursday, May 11 before the open. Before that, the firm holds its annual shareholder meeting on the first of next month. Also mark May 24 on your calendar for when the management team is slated to speak at the B. Riley Securities 23rd Annual Institutional Investor Conference.

Corporate Event Risk Calendar

The Technical Take

LLAP once again ran into resistance near $3.50 following the positive contract news in February. That spike came on massive volume, so the mid-$3s becomes even more of a key spot to monitor. Notice in the chart below that the 200-day moving average continues to trend lower, but I see green shoots in a few bottom formations.

After notching a lower low in December and to start 2023 (relative to the September-October nadir), LLAP dipped to just $1.49 - above the $1.29 all-time low from late last year. The current rebound to $2 looks more like a bear flag, admittedly, but long here with a stop under $1.40 could be a decent play. I like that the 50-day moving average may have inflected earlier this year as well. Profits should be taken near $3.50.

LLAP: Resistance At $3.50, Higher Low In Place

The Bottom Line

My valuation and technical opinion both point to a stock price that could reach $3.50 again. It is a volatile name, so keeping your position size small is a solid risk management technique. I look forward to tracking LLAP as the year progresses to see if the technical level is breached or if earnings turn accretive sooner than expected.

For further details see: