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May 3, 2021

Space Stocks Preparing For Lift-Off SPACs And Startups Suited Only For Speculators

by Richard Morrison
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Over the past few months, global enthusiasm for space exploration has been reinvigorated. In February 2021, NASA’s Perseverance rover landed on Mars and began taking pictures. Later that month, François-Philippe Champagne, Canada’s Minister of Innovation, Science and Industry, announced a deal with NASA that will send a Canadian astronaut to the moon in 2023. In March, NASA invited private-sector companies to bid on construction contracts for commercial Low Earth Orbit (LEO) space stations when the International Space Station is retired, possibly as early as 2024.

In his popular science book, The Future of Humanity, physicist Michio Kaku predicts that in a decade or so, private-sector companies will be setting up hotels on the moon, mining the asteroid belt and offering helicopter tours on Mars. If his predictions come true, the industry will be a bonanza for investors.

The obvious way to participate in the commercialization of space would be through shares in Elon Musk’s Space X. The company, a clear leader in the sector, began space taxi missions for NASA in November when it carried four astronauts to orbit then returned for a landing in the Atlantic Ocean. Unfortunately for investors, Space X remains a private company, and Mr. Musk says he has no plans to take it public. Along with Mr. Musk, billionaire entrepreneurs such as Jeff Bezos, Richard Branson, Paul Allen, and Sergei Brin have also set their sights on space exploration.

Most pure space exploration companies remain private. As the industry matures, however, there may be initial public offerings (IPO) from companies such as launch vehicle startup Astra, space station module maker Bigelow Aerospace, Jeff Bezos’s space vehicle maker Blue Origin, Texas-based launch vehicle maker Firefly Aerospace, Los Angeles aerospace manufacturer Relativity Space and The Spaceship Company, which turns out craft for Virgin Galactic.

Shareholders of publicly traded U.S. defence contractors also have exposure to space. Defence giants such as Northrop Grumman Corp. (NOC), Lockheed Martin Corp. (LMT), General Dynamics (G.D.) and Raytheon Technologies Corp. (RTX) all make components used in space exploration. Companies such as L3Harris Technologies Inc. (LHX), HEICO Corp. (HEI) and CACI International (CACI) produce space equipment along with equipment used in aircraft, medical applications, and surveillance. Aircraft makers such as The Boeing Co. (BA-NYSE) and Airbus S.E. (EADY-NYSE) also have space subsidiaries.

Space companies whose parents don’t already make missiles, satellites or aircraft are by necessity startups with high expenses, little or no revenue and no earnings. Some have reached agreements with venture capitalists or have been acquired via special purpose acquisition companies (SPACs) or “blank cheque” companies, whose only purpose is to acquire an existing company and take it public. SPACs have a poor track record and should be treated the same way as startup companies listed on the TSX Venture Exchange, in other words, only as a small part of a diversified portfolio.

Here are some ways for investors to play the commercial space race.

MDA Ltd. (MDA)

Investors can once again buy shares in MDA as the Canadian company has returned to its country of birth. Canada’s venerable MacDonald Dettwiler, later MDA/SPAR, is famous for the Canadarm used in the U.S. space shuttle program and for making components for the International Space Station and satellites used by the Canadian government. MDA had been a unit of Colorado-based Maxar Technologies until last year, when Northern Private Capital, a group of Canadian investors, bought it for C$1 billion. The investors include EdgePoint Investment Group, Fonds de solidarité FTQ, Jim Balsillie, Bulldog Capital Partners, Albion River, Nicola Wealth and Senvest Capital.

The stock began trading at $15 on April 8, 2021 and immediately took off.

Maxar Technologies (MAXR-TSX, NYSE)

Based in Colorado, the company has about 4,300 employees designing and building satellites and robots in more than 20 locations. Maxar has four active high-resolution imaging satellites, and its presentation says its robots will soon refuel, service and assemble orbiting spacecraft.

In 2020, Maxar reported a net income of US$303 million on revenue of US$1.723 billion but reported a diluted net loss from continuing operations of $46 million or US 76 cents per share.

On 17 March 2021, Maxar priced a US$400 issue at US$40 per share, with part of the proceeds used to reduce its debt.

Maxar’s TSX-listed shares have followed a parabolic trajectory, falling from a mid-2018 high of more than US$60 to below US$20 in 2019 and into 2020. In mid-2020, however, Maxar’s share price began a steady ascent until it peaked at US$70 in January 2021, although it has since slipped back.

Virgin Galactic Holdings Inc. (SPCE)

Virgin Galactic, founded by Sir Richard Branson in 2004, describes itself as a vertically integrated aerospace company that will offer space flights to paying passengers on vehicles it makes itself. Planned initial flights will offer passengers views of Earth from space and several minutes of weightlessness on craft launched from Virgin’s Spaceport America facility in New Mexico. The company says it plans to operate hundreds of flights per year from multiple locations eventually. Despite its lofty goals, Virgin Galactic has spent many years and US$1 billion trying to get off the ground.

The company went public in 2019 via a merger with a SPAC, Chamath Palihapitiya’s Social Capital Hedosophia Holdings. Mr.Palihapitiya had previously bought a 49% stake in Virgin Galactic for US$800 million. Despite Virgin Galactic’s long record of delays, the shares spiked to near US$60 in February before falling back below US$30 in March.

At the end of 2020, Virgin Galactic’s balance sheet showed total assets of US$804 million, including US$666 million in cash and cash equivalents, against total liabilities of $104 million.

For 2020, Virgin Galactic reported a huge drop revenue and a jump in losses over 2019: US$238 million revenue and a net loss of US$273 million in 2020 vs. US$3.78 billion in revenue and a net loss of US$211 million in 2019. In the third quarter of 2020, the company raised about US$440 million by issuing 23.6 million shares.

Momentus Inc. (MNTS)

Santa Clara, CA-based Momentus describes itself as a “last mile delivery” company for spacecraft and satellites. Its three models of transfer vehicles, powered by water plasma engines, are designed to deliver satellites from rockets to orbit. Last October 2020, Momentus announced it had merged with a SPAC, Stable Road Acquisition Corp. in a deal that valued Momentus at US$1.2 billion. Upon the closing of the transaction, Momentus will trade as MNTS on the Nasdaq.

Rocket Lab USA Inc. (RKLB)

Based in Long Beach CA, Rocket Lab makes aerospace equipment and provides launch services. The company was founded in New Zealand in 2006. Rocket Lab first launched its Electron rocket in 2017 and has since launched it 18 times, with 16 successes and two failures. The company’s site says it has delivered 104 satellites to orbit for 20 customers.

Like other space sector companies, Rocket Lab has merged with a SPAC, Vector Acquisition Corp. Rocket Lab’s site says the deal values the company at US$4.1 billion, or 5.4 times the company’s expected 2025 revenue of about US$750 million, and that upon closure the deal will give the company US$750 million in cash. Rocket Lab will trade as RKLB on the Nasdaq.

There are already some exchange-traded funds (ETFs) focused on space companies and more are likely. As with other specialty sectors, whenever a new fund gets announced, stocks in the industry jump as investors know the new fund will have to buy them to build its portfolio.

Procure Space ETF (UFO)

Launched in 2019, as of the end of 2020 this fund had about US$43 million allocated among 31 space companies. UFO’s unit price fluctuated between US$25 and US$27 for its first year, then plunged to US$14 during the March 2020 market selloff. Since then, the unit price has doubled to about US$29. The fund has a 0.75% management expense ratio.

SPDR S&P Kensho Final Frontiers ETF (ROKT)

This fund, launched in 2018, has US$23.7 million in assets allocated among 29 companies involved in the exploration of space and the deep sea. Many of its largest holdings have space connections only through the satellites and other equipment they make for military and surveillance applications. As of the end of February, the fund’s units had risen by 17.5% in the previous year. ROKT carries a gross expense ratio of 0.45% and pays out a distribution of 0.83%.

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post. richarddmorrison@yahoo.ca