by James Brumley | September 20, 2013 10:40 am
Score another one for the privatization of federal jobs.
To date, that debate seems to have honed in on the U.S. Postal Service’s now-habitual fiscal problems, with many observers suggesting outfits like FedEx (FDX) or United Parcel Service (UPS) would be better suited to take on that responsibility. It would be years until such a transition could actually be made, however, and even then the move would be a contentious one.
But don’t assume the privatization of roles traditionally held by the government is out of reach. In one area, privatization has already become the norm — and has created real opportunity for investors as a result.
On Wednesday, a company called Orbital Sciences (ORB) launched a rocket that will resupply the International Space Station with clothes, food and whatever else its inhabitants use on a daily basis. This mission is just the first of eight resupply runs that NASA has contracted Orbital Sciences to perform for the ISS.
As cool as that is, Orbital Sciences isn’t the first private company to do ferry work for the International Space Station. That honor belongs to SpaceX, founded and led by Tesla (TSLA) CEO Elon Musk. SpaceX made a cargo run for the space station in May of last year — the first of 12 missions the privately held company will earn $1.8 billion for completing.
When SpaceX became the first organization to make a contracted resupply run, it was a well-watched (though not necessarily highly regarded) event. Oh, it was certainly great publicity for NASA as well as the company, but not exactly seen as the new model for government agencies getting things done.
Now though, with two companies contracted to do the same thing several times each, the debate regarding the privatization of government tasks has taken center stage again. And it should — there’s real money to be made by investors as at least one government agency realizes it wasn’t being cost-effective by doing things on its own.
It just so happens that the one in focus this week is one of the top ways to capitalize on this privatization movement within a surprisingly large market.
While the eight-mission deal is worth a total of $1.9 billion in revenue to Orbital Sciences, at least some investors have to be worried about the stability of NASA as a paying customer. See, against a backdrop of the government’s ever-worsening budget battles, there’s no real assurance that NASA is going to be able to afford to renew such a contract after the next seven payloads are ferried.
What those investors might want to understand, however, is that a $1.9 billion government contract spread out over a few years isn’t really a game-changer for the company.
Orbital Sciences generated $1.4 billion in revenue last year alone, logging the third year of consecutive sales growth. Earnings growth has been similarly consistent, up from $36.1 million in 2009 to $60.7 million in 2012. Margins are woefully thin, at only about 5% for the past 12 months, but what it lacks in profitability, the company more than makes up for in consistency.
So where’d all the revenue come from? As it turns out, privately launching, building and managing satellites is roughly a $190 billion business, annually … a good-sized market for a $1.3 billion company. A joint venture between Lockheed Martin (LMT) and Boeing (BA) called the United Launch Alliance had been handling the bulk of the United States’ launching needs. But with newcomers like SpaceX and smaller players like Orbital edging out two of the government’s traditionally favorite contractors, it’s tough to say there’s not a paradigm shift unfurling.
And make no mistake … Orbital Sciences is now one of the top-of-mind names that government agencies and corporations look for concerning privatized launch solutions — and that demand is built to last.
While plenty of government programs are on the chopping block, the needs that Orbital Sciences addresses aren’t on the list of services that would be easy for the government or corporations to axe from its spending plans.
For instance, ORB makes missile defense systems that have become the norm on the modern battlefield, launch systems that carry private communication satellite systems used by cable TV companies, and of course, payload-ferrying rockets that keep the International Space Station up and running. Those are relatively well-entrenched needs, with few viable alternative ways of having them met. Orbital isn’t facing any great risk of waning demand anytime soon. Indeed, demand for such privately managed services is projected to keep growing, as cost-effectiveness of private launches improves and the need for more digital communication and monitoring capacity swells.
The bottom line is — and this is more than a little ironic — Orbital Sciences is actually a consumer staples name, in a sense, and as such would be a decent addition to most portfolios even without the ISS supply contract. The fact that the company garnered a little extra notoriety this week simply gives the organization a little more marketing firepower for other space-launch opportunities.
For investors who like obscure but surprisingly fruitful ideas, privatized payload management is now one worth considering.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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