Is now the time to be buying space stocks?

As SpaceX prepare its biggest launch yet, Gordon Best takes a look at whether now is the time he should be thinking about investing in space.

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The space industry is rapidly growing, and investors are starting to take notice. With a growing number of space stocks, it can be difficult to determine whether any are worth investing in. I’m taking a closer look at three of my favourites.

Northrop Grumman Corporation

Northrop Grumman‘s (NYSE:NOC) Space Systems segment develops satellites, launch systems, and launch vehicles. The company has partnerships with NASA and other government agencies, providing a steady stream of revenue.

Like many space stocks, the company is well-positioned to benefit from growing demand for satellites, particularly for national security purposes. The company’s recent acquisition of Orbital ATK, a provider of rocket and missile systems, is also expected to provide significant revenue opportunities.

Unlike many space stocks, the company has a reasonable price-to-earnings (P/E) ratio of 14.9 times. This is considerably below the industry average of 31.6 times. By considering the discounted cash flow of Northrop Grumman, fair value of the stock at $547.34 is 12.4% above the current share price of $479.47.

Profits in the sector are fairly conservative, with Northrop Grumman expecting a decline in profits next year. Debt levels of 67% are also fairly high, but there is potential if solid fundamentals can develop over time.

Lockheed Martin (NYSE:LMT)

Lockheed Martin (NYSE:LMT) operates a Space segment developing satellites, space transportation systems, and various other classified systems and services.

The P/E ratio of the company is 22.4 times. This is slightly below the sector average, but now close to fair value based on a discounted cash flow calculation. One metric that may interest investors is a return on equity (ROE) of 73%. This indicates efficiency in use of investment, considerably higher than the sector average of 10.2%.

As can be the case with speculative areas such as space stocks, there has been a large amount of shareholder dilution in recent years. This means that investors hold increasingly less value. Debt to equity levels are high at 136.4%, indicating that the company heavily relies on debt rather than investment. However, with dividends growing steadily over the last decade, this strategy seems sustainable.

Raytheon Technologies (NYSE:RTX)

Raytheon Technologies (NYSE:RTX) operates an Intelligence & Space segment developing integrated space, communication, and sensor systems to government and commercial customers.

As with the companies mentioned previously, Raytheon Technologies recently acquired a provider of small satellite technology. This acquisition will diversify the product range.

The company has a higher P/E ratio than the previous two mentioned at 29.3 times. However, with a discounted cash flow calculation, the current price of $104.66 may be as much as 19.3% undervalued. The earnings growth forecast of 13.5% is higher than the industry average of 10.6%, but is still well below the overall market at 14.1%. ROE is also notably lower than competitors at 13.3%. The company clearly has steady growth, but is ineffective with use of investment.

Am I buying?

Space stocks will be an exciting area in the future. Commercial travel, exploration, and defence will be opportunities for investors. However, I will be staying clear until I see reduced debt and steady income across a range of sectors.

Hype and potential are always dangerous words for investors. Therefore, I don’t mind waiting for the right time to buy these companies at a better price.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has recommended Lockheed Martin. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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