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.

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