Aerospace & Defense
America has been at the forefront of aerospace technology from the beginning. The only nation to land humans on a body outside of the earth. The only nation to develop a reusable space shuttle. Worldwide leader in interplanetary research and study.
While it was deeply disturbing when the president of the United States made the decision to cancel manned space flights, private enterprise (as is always the case) began stepping in to fill the void. Privately held companies such as Elon Musk's SpaceX and publicly-traded firms such as Orbital Sciences are working at breakneck speed to return America to its natural leadership role in this industry.
American global leadership will encompass the 21st century, and the aerospace & defense industry will be one of the areas responsible for our growth over the next hundred years. As is typical, private enterprise will lead, despite the drag and hindrance of a lumbering and inept government.
While it was deeply disturbing when the president of the United States made the decision to cancel manned space flights, private enterprise (as is always the case) began stepping in to fill the void. Privately held companies such as Elon Musk's SpaceX and publicly-traded firms such as Orbital Sciences are working at breakneck speed to return America to its natural leadership role in this industry.
American global leadership will encompass the 21st century, and the aerospace & defense industry will be one of the areas responsible for our growth over the next hundred years. As is typical, private enterprise will lead, despite the drag and hindrance of a lumbering and inept government.
Visit our Space Sciences & Exploration page for dedicated news regarding new space technologies and developments...
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BA $174
26 Aug 2024 |
NASA makes a stunning announcement with respect to Boeing Starliner astronauts
It was supposed to be an eight-day mission, and a chance for Boeing (BA $174) to show it finally had its act together—at least on the space side of its business. When veteran NASA astronauts and former test pilots Suni Williams and Butch Wilmore were launched aboard the Boeing Starliner back in early June, it was following years of embarrassing setbacks for the program; a period which saw massive successes for SpaceX's own crewed space program. Now, nearly three months after the launch, the astronauts remain in space and NASA has made a stunning announcement. Problems for the Starliner capsule began early after the craft entered orbit. It remains parked at the International Space Station with malfunctioning thrusters and leaking helium among other glitches. All Boeing had to do was complete this mission successfully to get certified by the space agency for crewed transport—a feat SpaceX accomplished four years ago. Now, NASA has made the decision to let the Starliner return to Earth empty, and has tasked a SpaceX Dragon capsule to bring the astronauts back home next February. A brief, eight-day mission has turned into a nine-month ordeal and another humiliation for Boeing. Following years of tragic incidents involving Boeing aircraft, the company has finally hired a CEO with real-world aerospace experience. Kelly Ortberg, who replaced outgoing CEO Dave Calhoun, joined Rockwell Collins in 1987, working his way up to the top job at that company in 2013. After overseeing the United Technologies (now part of Raytheon) acquisition of Rockwell, Ortberg retired in 2021, but Boeing's highly qualified board chair, former Qualcomm CEO Steve Mollenkopf, convinced him to come out of retirement to lead the turnaround effort. Considering the myriad of problems plaguing the aerospace giant, from labor union issues to serious quality control deficiencies, the spry 64-year-old may end up regretting that decision. At $173 per share (down from a high of $446/sh), investors may want to jump into a BA position based on the new CEO. We believe the stock is a value trap, however. Even if Ortberg lives up to expectations, it will take years for the company to get back in the good graces of regulators, customers, and the flying public. If the stock price looks enticing, investors should take a sober look at the company's current debt load and consider the fact that it hasn't turned a profit since 2018. |
AVAV $172
29 Jul 2024 |
US State Department approves sale of over 1,000 loitering munitions to Taiwan
Drawing the usual response of outrage from Beijing, the US Department of State has approved the sale of over 1,000 loitering munitions to Taiwan as the island nation (yes, nation) faces growingly belligerent behavior from mainland China. The munitions are made by publicly traded defense contractor AeroVironment (AVAV $172) and privately held Unduril Industries—an American defense technology firm. Under the Taiwan Relations Act of 1979, which was Jimmy Carter's watered-down version of the 1955 Mutual Defense Treaty between the United States and the Republic of China (Taiwan), the US is obligated to help the island defend itself from its communist neighbor some 100 miles to its northwest. In addition to the loitering munitions, which are designed to fly around a target area then attack the target by crashing into it, Taiwan also has a US Patriot surface-to-air missile system deployed, and approximately 150 F-16 General Dynamics (GD $290) Fighting Falcons. The most recent sale of defensive weapons to Taiwan, worth about $360 million, comes on the heels of valuable lessons gleaned from the Ukranian battlefield. Both the AeroVironment Switchblade® 300 and the larger Unduril Altius 600M, which can carry multiple seeker and warhead options, have been used effectively in that conflict, both for attack and reconnaissance purposes. These armaments are part of a much larger cache of weapons which have been approved for sale but are still awaiting delivery to the island. Total value of the weapons the Taiwanese military waits for? $20 billion. The wheels of justice—and apparently defense—turn slowly. AeroVironment is an interesting mid-cap ($5 billion) industrials play. While its forward P/E of 50 is a bit rich, it turns a profit and has virtually no debt on its books. As for privately held Unduril, the only way to buy in would be through a private equity fund like those available within the Penn strategies. |
BA $188
EADSY $46 26 Mar 2024 |
Better late than never: Boeing brooms CEO and two other senior execs
So overdue. In the four years since Boeing's (BA $188) chairman of the board at the time, Dave Calhoun (who has a degree in finance, not engineering), anointed himself as the only guy who could fix the ailing aerospace giant, he has—or will have by the time he is gone—made around $80 million in total compensation. Since he took the helm, the company has lost $71 billion in market cap—or about 40% of its value. Over the same time period the company's only major airframe competitor, Airbus (EADSY $46), has grown by $27 billion—or 23%. Over Calhoun's tenure, multiple safety incidents involving Boeing aircraft have occurred, major aircraft orders have been cancelled out of frustration, and the FAA began an unprecedented oversight program. Now, after backroom pleas to the board by airline CEOs, Calhoun is gone, along with Chairman Larry Kellner and commercial airplanes head Stan Deal. Sadly, Calhoun will remain in his position through the end of the year. Besides brooming these three, there was another move at the company we love: former Qualcomm CEO and all-around brilliant business mind Steve Mollenkopf was appointed as the new chairman of the board. Not only did he masterfully run the semiconductor firm, he holds a bachelor's degree in electrical engineering from Virginia Tech and a master's in electrical engineering from the University of Michigan. Someone with engineering credentials as chairman of a massive industrial firm—what a concept. While Mollenkopf essentially ruled himself out as the next CEO (too bad the former chairman didn't have such humility), he will lead the search committee for Calhoun's replacement. One name at the top of that list is Patrick Shanahan, the current CEO of Spirit AeroSystems (SPR $35) and a former US Secretary of Defense. Boeing recently announced its intent to purchase Spirit—a company it spun off back in 2005. Shanahan has a Bachelor of Science degree in mechanical engineering from the University of Washington, a Master of Science degree in mechanical engineering from MIT, and an MBA from the MIT Sloan School of Management. While he may technically be considered an insider, we believe Shanahan would be an excellent choice to lead the company back to its former benchmark position in the industry. Larry Culp, who took over a similar situation at General Electric (GE $174) after the Calhoun-like Jeffrey Immelt was "retired," has also been named as a potential replacement, but he is slated to lead GE Aerospace when it becomes a standalone company next month. No matter who takes the helm, at least three problematic senior execs are gone. With shares sitting just $12 above their 52-week low, is it too early to buy back into the company? We actually don't think so. Yes, we don't know the replacement yet; and yes, the debt load carried by the firm is now massive, but we believe it will stage a massive comeback over the next five years. It may be difficult to get in near this price once the pieces begin falling into place. (No, we are not ready to add Boeing back into the Global Leaders Club just yet.) |
BA $229
SPR $28 09 Jan 2024 |
Yet another reason to avoid Boeing until management is broomed
There is no leadership team in place at Boeing (BA $229); only a chief manager by the name of Dave Calhoun, walking behind each subsequent mishap with a giant shovel. Sort of like the guy who walks behind the elephants at a circus parade. We keep waiting for someone to do something about the situation, but who will that be? Will Calhoun suddenly admit that he is not up for the task? Will his sycophantic board ask him to step aside? Neither of these two scenarios are likely, leaving it up to the major shareholders to take action. The top three shareholders are: The Vanguard Group, The Boeing Company Employee Savings Plans Master Trust, and BlackRock. We have close to zero confidence in any of these entities to take action. As long as Boeing is checking its ESG boxes, Larry Fink's BlackRock is happy. We are all familiar with the latest nightmare for air passengers—the door plug which blew out of the fuselage of a Boeing 737 Max 9 in mid air. A door plug is, in essence, a panel with a window in it which takes the place of an emergency exit on jets configured to hold less than the max 220 passengers. The panel was found in the backyard of a school teacher in Portland. Since the subsequent grounding of Max 9s, both United Airlines (UAL $43) and Alaska Airlines (ALK $38), the two US carriers which fly this version, have discovered loose bolts on a number of door plugs within their respective fleets. SpiritAeroSystems (SPR $28) makes the assemblies and assists in the installation, but it is ultimately up to Boeing to assure its aircraft are safe to fly. The Max 9 is a more recent version than the 737 Max 8s which were involved in two horrifically deadly crashes in 2018 and 2019. The Max 9 involved in the incident was virtually fresh off the assembly line. Furthermore, pilots aboard this very same jet reported three pressurization warnings from the cockpit between 07 December and 04 January, with at least one occurring in-flight. This incident never should have occurred. Does anyone trust Calhoun and the board to prevent another incident on yet another system in the near future? Investors certainly shouldn't. Boeing has negative shareholder equity, which means its assets are insufficient to cover its liabilities. The company hasn't turned a profit since 2018. It is a sad state of affairs that the American half of the global aircraft duopoly continues to muddle through safety crises. China would love for this condition to continue, as it boasts its own nascent effort in the industry via the Commercial Aircraft Corp of China, Ltd (Comac, a state-owned enterprise). With every subsequent mishap, Comac's future viability grows. David Calhoun's total compensation package for 2022 was $22.48 million. The average compensation for CEOs of similar size companies in the US market is $12 million per year. |
SpaceX
01 Dec 2023 |
SpaceX news: A South Korean spy satellite and strange bedfellows
On Friday morning, out of Vandenberg Space Force Base, California, a SpaceX Falcon 9 rocket carrying South Korea’s first domestically made spy satellite in its capsule’s cargo bay completed a picture-perfect launch. For security purposes, the company ended its webcast before the satellite was deployed, but all signs indicate it is in orbit and will soon be operational. The launch comes shortly after North Korean dictator Kim Jong Un’s claim of its own spy satellite launch. The difference in technological prowess between the two Koreas is stark, making Un’s claims of viewing images of the White House from that country’s craft rather dubious. Earlier this year, North Korea failed at an attempt to launch a satellite into orbit, with the debris being salvaged by South Korea. Their conclusion: the craft’s abilities would have been somewhere on the spectrum between useless to “rudimentary at best.” As for its own program, South Korea expects Friday’s launch to be the first in a series, with the goal of having five operational spy satellites in orbit within the next two years. In other SpaceX news, something extraordinary has occurred: Amazon (AMZN $147) has inked a deal for at least three launches of its satellite constellation aboard the Falcon 9. Bezos and Musk aren’t exactly friendly rivals in the field of space, with both dishing out some harsh words for each other’s programs (Bezos owns Blue Origin) over the past several years. Up until this point, Amazon’s founder had planned to rely primarily on United Launch Alliance (ULA) craft to send its Project Kuiper satellites into orbit (only two have been launched thus far). Project Kuiper is designed to be a direct competitor to Musk’s Starlink program. That program just notched its first profitable quarter, and the company may be spun off as an IPO soon. The fact that Bezos would sign a contract with SpaceX speaks volumes of Boeing’s (BA $234) ULA program, which has been plagued with problems for years. He is obviously feeling some of the same frustration that NASA has experienced; the agency continues to rely heavily on the Falcon series of rockets, which have proven to be remarkably efficient at launching both hardware and humans into space. While SpaceX has declined to publicly comment on the Kuiper deal, Musk did tweet the following on Friday: “SpaceX launches competitor satellite systems without favor to its own satellites. Fair and square.” As of November, there were some 5,500 Starlink satellites in orbit, accounting for more than 50% of all active satellites in space. Amazon is a member of the Penn Global Leaders Club. Will we pick up Starlink shares when the company goes public? Hard to say, as it depends on how they are priced and where they begin trading. As for SpaceX, a privately held firm, clients own it within the Private Shares Fund, a private-equity-like instrument which invests in firms poised to go public in the near future. |
RTX $73
13 Oct 2023 |
US sends first resupply of missiles to Israel for its Iron Dome system
The Iron Dome system deployed in Israel has a remarkable success rate of over 90% in intercepting incoming missiles; nonetheless, when a terrorist organization launches some 5,000 rockets in a coordinated assault, even a 10% failure rate can be disastrous. That is precisely what happened when Hamas attacked Israel last weekend. To assure the system has enough ammo to continually defend against the threat, the United States announced that it has shipped the first resupply of Tamir missiles (known in the US as SkyHunter) to Israel, with more to come. The Iron Dome system is a joint venture between US aerospace and defense firm RTX Corp (RTX $73, formerly Raytheon and United Technologies) and Israel’s Rafael Advanced Defense Systems. Roughly 55% of the system is built by Raytheon, primarily at its Space Systems Operations facility (aka the “Space Factory”) in the outskirts of Tucson, Arizona. The US-owned system is deployed in approximately ten locations throughout Israel, with each battery of three to four launchers able to defend sixty square miles of land. Each launcher can hold up to 20 Tamir missiles, with each missile costing between $40,000 and $50,000. Separately, both the US Army and United States Marine Corps have been deploying Iron Dome batteries within this country. The Army has taken delivery of over 300 SkyHunter missiles, while the USMC has announced its intent to buy some 1,800 missiles and 44 launchers. With bad actors like Iran and North Korea on the world stage, receiving at least tacit backing from Russia and China, air defense systems—both domestically and amongst our allies in Europe and the Middle East—will come to the forefront in a manner not seen since the most heated days of the Cold War. RTX is a product of the merger between Raytheon and United Technologies, and the subsequent spinoff of its Otis (elevators) and Carrier (HVAC) divisions. The firm now has a roughly equal balance between its civilian aerospace units and its defense business. Its lines include Collins Aerospace, Pratt & Whitney engines, Raytheon Intelligence & Space, and Raytheon Missile & Defense. |
LMT $411
28 Sep 2023 |
Lockheed Martin lands two big F-35 deals with Romania, Czech Republic
Two former Warsaw Pact nations, now both staunch US allies and members of NATO, have signed agreements to purchase advanced Lockheed Martin (LMT $411) F-35 Lightning II aircraft in an overhaul of their respect air forces. Romania will purchase 32 of the fifth-generation fighters for $6.5 billion, while the Czech Republic has approved the purchase of 24 F-35s for around $4.5 billion. Romanian Defense Minister Angel Tîlvăr said the purchase will give the Romanian Air Force state-of-the-art capabilities “in the security architecture on NATO’s eastern flank and in the Black Sea region.” Following the purchase of these two 16-aircraft squadrons, the country also said it may pursue an acquisition of a third squadron. As for the Czech Republic, the deal was a bit more controversial. The Czech Air Force’s top fighter is currently the Gripen, which it leases from Swedish aerospace and defense firm Saab AB (SAABY $27). After months of lobbying by the defense ministry, the government of Petr Pavel agreed to ditch renewing the lease—set to expire in 2027—in favor of the purchase, which will include simulators, pilot training, and a weapons package. Prime Minister Petr Fiala said the deal “is an effective solution” which will “solve the future of our tactical air force for decades to come, in contrast to (continuing to lease) older generations of fighter aircraft.” Prague is planning to rebuild its Caslav Air Base to accommodate the new fleet. The F-35 is rapidly becoming the cutting-edge fighter of choice among Eastern European countries, with production of a previous order from Poland ramping up this year at Lockheed’s Fort Worth, Texas assembly lines. We believe Lockheed Martin is the strongest player in the global aerospace and defense industry, not just within the United States. Boeing (BA $193) continues to prove it never should have been allowed to buy McDonnell Douglas, a fierce competitor in the space until the acquisition, as the company can’t seem to stop mucking up its military and civilian operations on both the aircraft and space sides of its business. We also believe that investors are underestimating Lockheed’s leadership role in the industry going forward. We would place a fair value on LMT shares at $550. Consider the recurring income stream from maintaining all of those F-35s around the world over the next several decades, and then consider that this is just one component of the company’s massive array of space and defense products and services. |
SPR $27
23 Jun 2023 |
When your company is a perennial money loser, is it wise to go on strike?
That is a rhetorical question. Spirit AeroSystems (SPR $27), which was spun out of Boeing (BA $203) in 2005, designs and manufactures aerostructures—primarily fuselages—for commercial and military aircraft. Boeing and Airbus (EADSY $34) are the company’s two primary customers, with the former generating 80% of the firm’s revenue. In fact, the supplier is responsible for a majority of the Boeing 737’s airframe. The company lost $761 million over the trailing twelve months, $539 million in 2022, $555 million in 2021, and $1.1 billion in 2020. Unionized workers at Spirit just voted overwhelmingly to reject the company’s “best and final offer” and go on strike. Analysts had considered the company’s last offer “steep but necessary,” as the industry faces mounting challenges even without a strike threat on the table. Spirit offered a 16% pay hike over four years, a $7,500 signing bonus, cost of living adjustments, and annual bonuses—adding up to an aggregate 34% increase over four years. An offer so generous that the the International Association of Machinists and Aerospace Workers (IAM) representatives at the bargaining table recommended its acceptance. At the vote, 79% of union workers rejected the offer, and 85% formally voted to go on strike. Spirit immediately told the organized workers not to report back to work for their shifts on the 22nd of June. Shares of Spirit and Boeing fell sharply on the rejection, while Airbus shares remained largely unaffected. Spirit has been losing money for three straight years; this type of manufacturing environment is ready-made for automation and a robotic workforce. The actions belie logic. As for Boeing, we wouldn’t consider touching the shares until their inept CEO, David Calhoun, and most of the board are shown the door. |
LHX $208
AJRD $55 |
L3Harris wants to buy Aerojet Rocketdyne, but will the FTC’s Darth Vader kill the deal?
Recall back in February of this year that the FTC’s very own Darth Vader, the highly unqualified Lina Khan, killed Lockheed Martin’s (LMT $482) deal to buy rocket maker Aerojet Rocketdyne (AJRD $55) for $4.4 billion (we own both LMT and AJRD in Penn strategies). Now, US defense contractor L3Harris Technologies (LHX $208) has announced its own agreement to buy the company. L3 has offered $58 per share, or roughly $4.7 billion, to buy the El Segundo-based firm, with the firm’s CEO, Chris Kubasik, outlining a plan to become an alternative supplier to the Pentagon. Just a few months ago, L3 acquired Viasat’s military communications unit, creating the 6th-largest US defense contractor in the process. While Khan probably would have wished for a foreign entity to buy this American jewel, she is going to have a tough time stopping this acquisition. Her FTC has already lost an inordinate number of battles in the courtroom (she received her law degree just five years ago), and she would have a tenuous argument that the merger would quell competition—though we still expect her to sue. As for the deal itself, we love it. As much as we wanted Lockheed to buy the company, Aerojet would be a great compliment to L3’s existing defense units. While we don’t own L3Harris outright, it is the seventh-largest holding in our Invesco Aerospace & Defense ETF (PPA $77). With its 16 forward P/E and strong position in the military communications business, it would be a sold addition to a portfolio short on industrials. As could be expected, it is trading slightly down on the acquisition news. |
BA $135
28 Oct 2022 |
Boeing, led by its inept management team, fumbled yet another quarter away
The once-great American aerospace giant Boeing (BA $135), led by bumbling CEO Dave Calhoun, has announced yet another lousy quarter. Against expectations for $17.8 billion in sales, the company brought in just $16 billion; from that $16 billion, the company managed to lose $3.275 billion along the way. Put another way, the Street was expecting earnings per share of $0.10, instead it delivered a $5.49 per share loss. While the bottom-line net income still would have been negative, the enormous loss was overwhelmingly a result of a $2.76 billion hit the company took on the aggregate of five fixed-price development programs, to include the (nightmarish) KC-46 tanker program and the (long delayed) Commercial Crew program. The KC-46 USAF tanker program alone accounted for a $1.17 billion loss. Are you ready for the “leader’s” response? CEO Dave Calhoun said the charges were driven by macroeconomic forces beyond Boing’s control. Way to take ownership, Dave. The concept of the learning curve with respect to huge companies building complex systems states that costs go down with the repetition of a smooth-running assembly line. Calhoun said, “We don’t have any baked-in learning curves anymore.” True, you obviously don’t. What you didn’t say was that it is all management’s fault. It is hard to BS your way through the publicly traded landscape: Boeing has lost 70% of its value since 01 March 2019. How about an apples-to-apples comparison: Boeing’s disastrous finances are reflected in its -3.25 debt/equity ratio; Airbus (EADSY $26) has a debt/equity ratio of 1.32. We suppose the “macroeconomic environment” is rosier in Europe? There is a fiefdom at Boeing, with Calhoun having anointed himself king and the jesters on the board facing little pushback from the poor citizens (shareholders). Until the autocratic regime is overthrown, there is no reason to own shares of this once-great company. |
BA $158
04 Aug 2022 |
Boeing workers plan to strike; wait till you see what they deem as “inadequate”
(Update: Workers at the three Boeing plants in question approved a sweetened deal by the company, averting the strike) Pretty much every aspect of Boeing (BA $158) makes us uncomfortable right now. This critical American aerospace company, which never should have been allowed to knock out rival McDonnell Douglas, has a completely inept management team. The disgusting way in which two deadly 737-MAX crashes were handled is inexcusable. The chairman, who announced his wholehearted support for the former CEO right before the latter was fired, decided that he was the only person who could fix the company. Um, weren’t you the chairman of the board when the crashes occurred? Seemingly nothing is going right for the company, on either the aircraft or space side of the business. The company tells us that manned spaceflight is tough, and they can’t cut corners. Meanwhile, SpaceX is proving that the job isn’t too tough to get done. It is a Boeing problem. Now, amidst all the self-inflicted problems at the firm, let’s throw in one for which we don’t really blame the company. Workers at three St. Louis plants, some 2,500 members of the machinists’ union, plan to go on strike in August. The tired old union arguments are really hard to swallow in this case—even more so than normal. They first feigned outrage that Boeing no longer has a pension plan. Who does these days?! They then complained about the “inadequate compensation” to the employees’ 401(k) retirement plans. This is where it gets comical. Right now, Boeing offers a 75% match on the first eight percent that a worker puts into his or her 401(k). Inadequate? That sounds like a gold-plated plan to us. But it gets better. In the negotiations, the company said it would increase the company match to dollar for dollar on the first ten percent. The response? A flat refusal, with the union stating that “the company continues to make billions of dollars each year off the backs of our hardworking members.” Take a trip to nearly any corner of the world and read that statement to workers making a fraction of what Boeing workers make and gauge the response. As for the silly “billions of dollars” comment, the union had better check the company’s financials: Boeing lost $4.2 billion in 2021, $12 billion in 2020, and $636 million in 2019. For the better part of 25 years Boeing was a staple holding for our clients. Now, until a complete board overhaul takes place, we couldn’t imagine owning the company. Sad. As we say, virtually every aspect of the company’s business model makes us uncomfortable right now. |
ERJ $9
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With shares trading around $9, Embraer looks tempting on heels of new aircraft order
(19 Jul 2022) Back in a 2017 article within The Penn Wealth Report, we wrote a rather glowing commentary on Brazilian aircraft maker Embraer (ERJ $9). Purchasing the company within the Intrepid Trading Platform for $20.50 per share at the time, we took a fat short-term profit (the nature of the ITP) just two months later when Boeing (BA $155) agreed to buy the $3.777 billion small-cap industrial. Since then, Boeing has pulled out of the deal and Embraer’s share price has dropped from a five-year high of $27.50 to a recent low of $8. The company, which has been around since 1969, manufactures regional and business jets as well as a host of defense and security products. Through its services and support division, the company generates a solid stream of recurring revenue. This week, Canada’s Porter Airlines announced that it would be buying an additional 20 E195-E2 aircraft from Embraer on top of the 30 it has already ordered. The carrier also purchased the rights to buy another 50 as needed. Somewhat a slap in the face to Canada’s own business jet manufacturer, Bombardier (BDRAF $20). So, with the shares trading below $10, is it time to buy back into this now $1.645 billion foreign aerospace player? It is tempting. We have no doubt that Embraer will continue to be a viable player in the industry for decades, and it is trading almost 85% below its all-time high share price. Alas, it was a review of the income statement that kept us from pulling the trigger. While several issues jumped out, the fact that the company has not turned a profit since 2017 is certainly one of the biggest red flags. For a riskier portion of an investment portfolio, however, the potential reward might just be worth the risk. If we did purchase Embraer, we would do so with a tight stop loss in place—probably around $8 per share—to minimize potential losses. It should be noted that every year for the past decade ERJ shares have reached the $20s to $30s range. |
BWXT $54
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BWX Technologies wins DoD contract to build first advanced microreactor in US
(09 Jun 2022) Aerospace & Defense firm BWX Technologies (BWXT $54) has been awarded a contract by the United States Department of Defense to build a first-of-its-kind advanced nuclear microreactor. Under codename Project Pele, these reactors, which can be transported by modules aboard trucks, trains, aircraft, or ship, are designed to be assembled on-site and operational within 72 hours. The reactors can provide a resilient power source for a variety of operational needs, eliminating the need for fossil fuels delivered by often extensive supply lines. The possibilities are endless, from immediate power needs at remote locations, to disaster response and recovery around the world. The prototype will be built under a contract valued at around $300 million and should be completed and delivered by 2024 for multiyear testing at the Idaho National Laboratory. As we move away from fossil fuels, these advanced concepts are going to come to fruition, and the industry is full of potential going forward. A lack of understanding and a fear of the word “nuclear” may slow the process, but the safety attributes of these devices will eventually allow them to become embraced by politicians and the general population. BWX Technologies is a $5 billion specialty manufacturer and service provider of nuclear components. Additionally, the Lynchburg, Virginia-based firm provides uranium processing, environmental site restoration services, and other solutions to the nuclear power industry. With average annual revenues around $2 billion, the company is perennially profitable. |
BA $127
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Ryanair’s fiery Irish CEO loves Boeing, but “management is a group of headless chickens”
(16 May 2022) We love CEOs who are true leaders, are interesting characters in their own right, and who don’t feel the need to insert themselves into the political arena to score sycophantic points with super-sensitive stakeholders. Irish low-cost carrier Ryanair’s (RYAAY $81) fiery CEO, Michael “Mick” O’Leary, easily checks all three boxes. When Boeing’s (BA $126) hapless CEO, David Calhoun, is on one of the business networks, we mute the TV to avoid hearing the canned hot air delivered with a strained jumpiness; when we see O’Leary’s face, we always listen with rapt attention. A little background on Ryanair’s history with Boeing: the company has always been one of the aircraft maker’s most loyal customers. A European airliner with a fleet of 471 Boeing aircraft, 145 more on order, and just 29 Airbus (European) aircraft. That made us applaud all the louder when, during a Ryanair earnings call, O’Leary blasted Boeing’s management team and its inability to make good on orders. Saying they need to “bloody well improve on what they’ve been doing…,” he added that, “At the moment, we think the Boeing management (team) is running around like headless chickens.” Hey, that’s just what we have been saying ever since Calhoun anointed himself—with the Board’s blessing—CEO! Hear, hear! How refreshing to have a leader who tells it like it is. We could quickly list a dozen major US companies which could use someone like O’Leary at the helm. Our minuscule impact on Boeing is limited to not owning it in any of the Penn strategies. We have to believe that the words of a Boeing cheerleader and major customer would have some major sway in the industry. Then again, Boeing has proven itself to be quite tone deaf since Jim McNerney left the firm in 2015, so who knows. It is probably the customer’s fault, right? |
BA $152
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David Calhoun will never run out of excuses for Boeing's problems; will shareholders ever run out of patience with him?
(27 Apr 2022) It was yet another disastrous quarter for formerly-great American aerospace giant Boeing (BA $152). Against underwhelming expectations for $15.9 billion in sales and a $0.15 per share loss, the company brought in just $14 billion in revenue (a 12% decline from the same quarter last year) and had a loss of $2.75 per share (an 80% larger loss than the same quarter last year). Boeing shares proceeded to drop some 14%, to their lowest level since October of 2020, giving the company a smaller market cap than European rival Airbus (EADSY $27) for the first time ever. Even the cash burn was worse than expected, with Boeing blowing through some $3.6 billion versus expectations for a $3 billion cash burn. The company has now missed analysts’ expectations in nine out of the last twelve quarters. Watching hapless CEO David Calhoun being interviewed by CNBC’s Phil LeBeau was painful. With an unsure, shaky voice, he blamed the quarter on everything but the management team—even citing the company’s last Air Force One deal as a reason for the horrible quarter. (If it were so bad, why did you make it?) We knew Calhoun, who was Chairman during the company’s two ill-fated 737-MAX crashes, was the wrong selection for CEO from the start. But he placed himself in the position shortly after telling us how much confidence the board had in then-CEO Dennis Muilenburg. He gave himself the role as the other board members nodded their sycophantic approval like Governor William J. LePetomane’s staff in Blazing Saddles. It should be noted that Calhoun’s compensation last year was $21 million, while the company lost some $4 billion over that time frame. With serious failures on both the aircraft and spacecraft side of the business, when will the madness end? We sold our BA shares shortly after the second MAX crash—after holding them in one of the Penn portfolios for over a decade. With all the activist investors out there, often going after good management teams, where is the shareholder uprising at Boeing? |
LMT $430
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Lockheed Martin scores two big wins in one month as both Canada and Germany select the company's fighters
(29 Mar 2022) Aerospace giant Lockheed Martin (LMT $430) remains one of our strongest conviction holdings for a number of reasons: leadership, geopolitical tensions, style profile, product mix, and growth potential just to name a few. This month we received a couple of other reasons to appreciate this undervalued gem. A few weeks ago Germany, under new Chancellor Olaf Scholz, announced it would be purchasing 35 of the company's F-35 Lightning II "Panther" fighter aircraft to replace its aging fleet of Tornado combat aircraft—a European-built fighter which has been in service since the early 1980s. This was a slap in the face to France, which had argued for a next-generation, European-built fighter to be the focus of the continent's air defenses. This past week, Lockheed beat out yet another European aerospace company as Canada announced it would buy 88 F-35s instead of Saab's (Sweden) Gripen fighters. Boeing had previously been knocked out of the competition. There is some humor in this story, as Saab had complained about a "politically influenced" decision by Finland to buy 64 F-35s, with the company "looking forward to an impartial Canada (to select the Gripen over the Panther)." The Canadian deal alone could equate to an additional $1 billion per year in sales for Lockheed beginning in 2025. The company should consider sending Putin a thank you card for awakening the Western world to the real and present danger of an aggressive Russia and its communist neighbor to the south. While Boeing flounders under the arrogant leadership of David Calhoun, Lockheed CEO (and former Air Force pilot) Jim Taiclet pushes quietly forward, gaining market share and building bridges to our NATO allies. Leadership matters. |
AJRD $38
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Now that the heavy hand of the government has come down on the deal, what happens to Aerojet Rocketdyne?
(03 Feb 2022) We are invested in this story, literally. Lockheed Martin (LMT $387) is a longstanding member of the Penn Global Leaders Club and one of our top picks for 2022; Aerojet Rocketdyne (AJRD $38) is a member of the Penn New Frontier Fund and a key US supplier of aerospace and defense systems—to include highly-advanced hypersonic propulsion technology. In a move that made brilliant sense, the former agreed to buy the latter back in December of 2020 for the equivalent of $56 per share, or $4.4 billion. Now, the Darth Vader of American business, the Federal Trade Commission's Lina Khan, is suing to block the deal. (Well, the FTC is suing, but this was obviously spearheaded by the anti-business—in our opinion—new chair of the Commission). Khan, who received her J.D. from Yale just five years ago and was a law professor at Columbia University before accepting the FTC position, has clearly signaled her disdain for large American corporations. The FTC claims that Lockheed would use its control of Aerojet to hurt its rivals, but can the purchase of one small-cap rocket maker really put the industry in tumult? Of course not. Furthermore, it is highly likely that a European firm would swoop in and buy AJRD without the FTC lifting a finger. If Lockheed's ownership of the company would affect the competitive landscape for the defense industry, wouldn't foreign ownership be even worse? We knew Khan would do her best to wreak havoc on the American business landscape; consider this the first shot of many more to come. We would like to say that the combination of Aerojet Rocketdyne's critical technology and recent share price plummet equates to a unique opportunity for investors, but something else is going on within the company which concerns us. There is a battle forming between the company's innovative leadership team, led by CEO Eileen Drake, and an activist movement spearheaded by private equity investor and Executive Chairman Warren Lichtenstein. We believe that Drake, a distinguished graduate of the US Army Aviation Officer School, is intent on maintaining industry leadership for a standalone Aerojet, while Lichtenstein, true to his nature, is intent on engineering a takeover of the firm by another player. Our hopes are that Drake prevails, but the internecine battle could cause further damage to the share price. |
NOC $361
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Successful test of scramjet hypersonic missile is just one more reason to take a new look at Northrop Grumman
(01 Oct 2021) Northrop Grumman (NOC $361), maker of the remarkably effective B-2 Spirit bomber and RQ-4 Global Hawk unmanned aircraft system (UAS), has been in a funk for the past few years. Providing a supporting role in newer systems such as Lockheed Martin's (LMT $348) F-35 Lightning II and F-22 Raptor, the company could no longer be considered a prime contractor for US air defense systems. We believe that is about to change. In 2018, management shook up the firm's space division with the brilliant acquisition of one of our favorite companies, Orbital ATK. More recently, the company—in a joint venture with Raytheon (RTX $88)—successfully tested a scramjet-powered hypersonic cruise missile on course to become a key component of America's strategic defense network. The Northrop Grumman B-21 Raider, a long-range stealth strategic bomber capable of carrying a heavy payload of conventional and thermonuclear bombs, is scheduled to enter service within the next five years, complimenting and ultimately replacing the B-1 Lancer, B-2 Spirit, and B-52 Stratofortress. Of these new programs, we are most bullish on the company's efforts in the UAV arena. The United States Air Force has a strategic plan built around five new technologies, collectively known as the Next-Generation Air Dominance (NGAD) programs. It is fair to say that unmanned aerial vehicles will be a major focal point of this plan, leaving Northrop Grumman in an excellent position to regain its prime supplier role. The national defense threat posed by an economically growing and increasingly-aggressive Communist China and its allies in North Korea, Russia, and Iran makes it abundantly clear that the aerospace and defense industry should be an important part of an investor's portfolio. While we currently hold Raytheon and Lockheed Martin in the Global Leaders Club, and Aerojet Rocketdyne (AJRD) and Astronics (ATRO) in the New Frontier Fund, we are impressed by Northrop Grumman's efforts to regain a leadership role in the industry. We fully expect the company's shares to experience impressive growth over the next few years, perhaps hitting the $500 range in the not-too-distant future. The company's low multiple and pipeline of projects support that thesis. |
BA $218
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The last major aviation market refusing to lift ban on 737 MAX should come as no surprise
(26 Aug 2021) We have certainly given aircraft maker Boeing (BA $218) a lot of grief over the past two years, but this is a story more about politics than aviation prowess. Most other major aviation markets lifted the ban on the Boeing 737 MAX late last year or early in 2021, with two notable exceptions: India and China. This week, India's Directorate General of Civil Aviation announced that the model has received the green light to resume operations in that country, leaving only China's ban in place. Boeing's management team clearly believes the Chinese market is crucial for the company's growth story going forward, with one-fifth of the firm's aircraft deliveries since 2017 heading to the communist nation. But the trade war, the pandemic, and China's own economic ambitions have strongly constricted sales, leaving primarily Airbus (EADSY $34) to pick up the slack. China wants that situation to change as well, touting its own manufacturer, the Commercial Aircraft Corporation of China, or Comac. The company's nascent efforts, the ARJ21 and the C919—the latter of which it hopes can go head to head with the 737 MAX and the Airbus A320, have been riddled with defects and delays. The problems have kept would-be buyers at bay, despite the C919 selling for about half as much ($50 million) as the Airbus A320neo. Nonetheless, China, through its Belt and Road infrastructure initiative, will pump as much money as needed into Comac until it shows signs of life. As for the MAX, China would love to have Comac's C919 step in to fill the void, but it is unlikely that will happen anytime soon. Expect a lift on the ban to come—out of pure necessity—by the end of the year. Boeing is facing a host of serious problems; a new competitor in the form of a state-sponsored Chinese aircraft manufacturer is one we haven't even touched on before. CEO David Calhoun is actively pushing the Biden administration to urge China to lift its ban on the MAX, but what really needs to be taking place is more activism in the ranks of BA shareholders to force an overhaul of Boeing's board of directors—including its president and CEO—Calhoun. |
BA $233
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Brain drain at Boeing: engineers and technicians are leaving the firm at an alarming rate
(29 Jul 2021) Bloomberg recently published an interesting and rather in-depth story on the flight of disillusioned engineers and technicians out of the exits at Boeing (BA $233). Certainly, the dual tragedies of recent 737 MAX crashes have impacted morale at the firm, but the problem has more to do with a management team wandering aimlessly in search of a strategic mission than it does with any specific events. When a former Boeing CEO announced, "no more 'moon shots,' it might as well have become the new company slogan. For young engineers, the excitement which once swirled around working for the world's largest aerospace and defense company has been replaced by, "well, at least it will look good on my résumé." Those workers have been taking their résumés to competing firms in droves as of late. And the recipients of this talent pool are not just the usual suspects such as SpaceX, Blue Origin, and Virgin Galactic. Since the beginning of last year, over 3,200 engineers and technicians have bolted from the firm—a figure which accounts for nearly one-fifth of the 18,000 Boeing workers represented by the Society of Professional Engineering Employees in Aerospace (SPEEA) union. While many have been attracted to SpaceX's stunning recent successes and Elon Musk's bold vision for the future of humanity in space, Amazon has also been a major destination for these skilled workers. The idea of remaining in the Seattle area with a nice pay bump has been the major selling point for the latter. Amazon employs these specialists to increase the efficiency at their warehouses, much like they did with the Boeing factory floors. The airliner catastrophes and a lack of a new generation passenger aircraft on the drawing boards at Boeing have not been the only forces driving workers away. On the space side of the equation, the company's recent Starliner failures stand in stark comparison to the stunning SpaceX successes. The company will have another chance to prove itself with the upcoming crew capsule test slated for this weekend, but even with a glaring success the firm has a long way to go. Meanwhile, European nemesis Airbus is increasingly outpacing Boeing with respect to both orders and deliveries. In the first quarter of 2021, Boeing delivered 77 aircraft versus 125 jets for Airbus—a 62% differential. By the end of Q1, Airbus reported a backlog of nearly 6,000 jets, while Boeing's backlog amounted to just shy of 5,000 aircraft. Furthermore, with no exciting new designs to show potential buyers, we are not sure what will be the catalyst for a comeback. In our opinion, there is a horrendous vacuum leadership at Boeing, and the company's great turnaround cannot occur until a nearly clean sweep is made at the top. Unfortunately, the entire leadership team would disagree with that assessment. It will take major activist investor push to force the change required, but there hasn't been much action on that front either. At least we have SpaceX around to spearhead America's great return to manned spaceflight. |
NOC $371
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Northrop Grumman just successfully launched a US Space Force satellite into orbit aboard its Pegasus XL launch vehicle
(16 Jun 2021) At 1:11 in the morning, a Northrop Grumman (NOC $371) L-1011 "Stargazer" took off from the newly renamed Vandenberg Space Force Base in California. After achieving 40,000 feet over the Pacific Ocean, its special cargo launched from the underbelly: a solid fuel Pegasus XL rocket carrying a secretive United States Space Force satellite. Last Sunday's launch represented the 45th deployment for the Pegasus, which Northrop Grumman was able to design, integrate, test, and place into service within a whirlwind four month period following the contract award. The rocket, which was built under the USSF's tactically responsive launch concept, is the world's first privately-developed commercial space launch vehicle. It has the ability to launch payloads from virtually anywhere on Earth at a moment's notice and with minimal ground support. The rocket is quickly becoming a favorite tool of the nascent US Space Force. While Lockheed Martin (LMT $390) is the primary defense contractor within our Penn Global Leaders Club, Northrop Grumman is high on our list of the most respected industry players—easily ahead of Boeing. The $60 billion company (what a great size—well poised to become a $100 billion firm) netted a $3.2 billion profit on $37 billion in revenues last year. |
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The weekend engine failure points to Raytheon's Pratt & Whitney unit, but we still point a finger at Boeing
(22 Feb 2021) It was the last thing Boeing (BA $212) needed (how many times have we said that over the past three years?): A Boeing 777, leaving Denver for Hawaii, had one of its two engines suffer an "uncontained failure," with fire and smoke visible to passengers, and with debris dropping down on a Denver suburb. Thankfully, the aircraft was able to make it back to the airport on one good engine and with no passenger injuries—unlike a very similar incident in 2018 which involved the death of a passenger following engine debris striking a window. That incident occurred just two months after a United Airlines 777 suffered engine failure, with a cracked fan blade forcing the aircraft to make an emergency landing in Honolulu. This is an extremely disturbing trend, and one which certainly places Raytheon's (RTX $73) Pratt & Whitney unit in the hot seat. But aircraft maker Boeing shares some blame, as problems continue to mount for the Chicago-based firm. First there were the deadly 737 crashes which grounded the fleet for the better part of two years. Then came the 787 Dreamliner "design flaws" and canceled orders. Now the 777 faces grounding in the US—and probably around the world. And the situation isn't looking much better on the space side of the business, with the company's problem-laden Starliner capsule and its high profile recent failures. In each case, Boeing can point fingers at suppliers or partners, but there is a point at which all fingers will point back to them. A sad state of affairs for a formerly-great American company. The entire Boeing board of directors, along with its C-suite executives, should be broomed. The company needs a clean sweep if it has any chance of returning to its position of aerospace and defense dominance. Unfortunately, the very individuals which need to be fired are all part of the mutual admiration society which controls the decisions on leadership. If ever a company needed an aggressive activist investor to come along and force change, it is right now, and it is at Boeing. Even then, the company's downward flight path may be too steep to pull out of. |
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Just as the 737-MAX flies again, Boeing must contend with its trouble-laden space business
(20 Jan 2021) If it weren't for SpaceX's remarkable recent accomplishments, Boeing (BA $211) might have been able to quietly get away with its problem-plagued Space Launch System (SLS). Alas, not long after the failed test flight of its unmanned Starliner capsule, SpaceX had its own successful manned flight, with the Crew Dragon transporting astronauts into space from American soil for the first time since the final Space Shuttle launch in 2011. This past weekend, Boeing had a chance to redeem itself just a bit with the test firing of the engines on the SLS's core stage. The powerful engines were to remain ignited for eight minutes; instead, they shut down shortly after one minute. It's too early to tell what caused the malfunction, and it could certainly be a simple component failure, but for a program that is already far behind schedule and billions of dollars over budget, it is yet another black eye. Assuming the test had been successful, the core stage would have been prepped for delivery to the Kennedy Space Center for final assembly with the Lockheed Martin (LMT $342) Orion spacecraft, followed by another test flight to make up for the failed, December 2019 mission. Instead, Boeing faces more delays and more costly test firings. In normal times, we would say that Boeing is a huge bargain at $211 per share, down from its March, 2019 high of $441 per share. Instead, the company seems fairly valued right where the shares sit. Investors can't even collect dividends while the company figures out its future—payouts were halted "until further notice" in the middle of last year. The investment is about as exciting as the Boeing management team is dynamic. |
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Two Penn Members Merging: Lockheed Martin will Buy Aerojet Rocketdyne for $4.4 billion
(28 Dec 2020) We purchased mid-cap rocket engine maker Aerojet Rocketdyne (AJRD $53) in the Penn New Frontier Fund as a pure play on the burgeoning private space movement. We own aerospace and defense giant Lockheed Martin (LMT $355) in the Penn Global Leaders Club due to its dominance in that industry—and our negative opinion of Boeing's (BA $219) hapless management team. In a move that illustrates the savvy of Lockheed's own leadership, that company announced it will acquire Aerojet for the equivalent of $56 per share, or $4.4 billion. Just over one-third of Aerojet's revenue comes from Lockheed, meaning the $100 billion Maryland-based firm will now own a key supplier. As a major defense supplier to the United States government, one cutting-edge arena that certainly hastened the purchase was hypersonic technology. With Putin bragging about Russia's new generation of hypersonic weapons and China making similar claims, it is imperative for the United States to remain in the lead with respect to these weapon systems. Hypersonic weapons can travel five times the speed of sound, and Aerojet is the world leader in the engine technology which makes these speeds possible. The all-cash deal should close in the first quarter of 2021. While we don't like losing a pure-play space investment, Lockheed looks even more undervalued after announcement of the deal. With a 15 PE ratio, solid financials, and a growing revenue stream, investors seem to be ignoring a very compelling growth story. |
SpaceX
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Sorry Bezos: SpaceX, United Launch Alliance win big Pentagon deal
(11 Aug 2020) We've mentioned it before, but Amazon (AMZN) CEO Jeff Bezos showed his child-like petulance when he sent out a tweet following the first successful landing of SpaceX's first-stage boosters. The tweet said simply, "Congratulations...welcome to the club." (Bezos' Blue Origin had previously landed its New Shepard rocket in a similar fashion.) We thought of that tweet once again after hearing the news that the Pentagon has awarded billions in rocket contracts to SpaceX and United Launch Alliance (Boeing and Lockheed) to launch national security missions for a five-year period, while rejecting the Blue Origin and Northrop Grumman (NOC $342) bids. The contracts call for nearly three dozen launches over that period, valued at around $1 billion per year. SpaceX has its proven Falcon 9 and Falcon Heavy, while ULA is building the new Vulcan rocket to replace its decades-old Atlas fleet—which now relies on Russian rockets for propulsion. Blue Origin said it will continue to build its New Glenn rocket, despite the lack of any buyers thus far. Northrop Grumman's OmegA rocket's future is definitely in doubt after losing the bid. |
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American Airlines to Boeing: Help us secure financing or else...
(13 Jul 2020) It wasn't exactly a tacit threat—it was more like a promise. American Airlines (AAL $8-$12-$35), which has been scrambling to find financing for the seventeen Boeing (BA $89-$178-$391) 737-MAX jets it had previously ordered, told the aircraft maker that it needs to help the company finance the jets or the order would be cancelled. There is a lot of irony in this request, as it was American's desire for more fuel-efficient aircraft that led to the development of the MAX in the first place. Of course, Boeing could have simply developed a completely new, more efficient craft; instead, disastrously as it would turn out, the Chicago-based firm decided to simply enhance its 55-year-old design that was the 737. Boeing, which lost $636 million last year on $77 billion in revenues, cannot afford to say no—despite its own ailing finances. (The company has $32 billion in long-term assets and $58 billion in long-term liabilities.) Then again, what's another seventeen on top of the 400 MAX orders which have already been cancelled this year. Some may look at Boeing's share price, which is now off 60% from where it was trading in March of 2019, and see a battered gem; we look at the company's insipid management team and see a company that is, at best, fairly valued. |
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SpaceX and Boeing: two companies on very different paths
(09 Jul 2020) Talk about two space programs going in vastly different directions. Last month, SpaceX made a stunning manned launch from US soil of its Crew Dragon capsule aboard its Falcon 9 rocket, ultimately delivering the two astronauts safely to the International Space Station (ISS). Meanwhile, NASA continues to find new flaws in Boeing's (BA $180) competing Starliner craft after a failed test flight last December. While the unmanned craft was able to achieve orbit and ultimately land safely, it failed to achieve the correct orbit to hook up with the ISS—its primary objective. Now, the Starliner program is on indefinite hold after NASA Administrator Jim Bridenstine revealed that the test flight "had a lot of anomalies." In fact, at least eleven "top-priority corrective actions" will need to be taken by Boeing, but the space agency expects to find more. At least one of the issues identified could have caused "catastrophic spacecraft failure," according to the preliminary report. The bitter irony of the software problems plaguing the Starliner, which is now three years behind schedule, is that the program provided Boeing a great opportunity to juxtapose its space efforts against its 737-MAX software nightmare. Now, it is pretty hard to differentiate between the two business segments. |
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The new United Technologies/Raytheon entity begins trading with a new ticker. (03 Apr 2020) Two of our favorite industrial/aerospace and defense companies have merged into one, and the new entity began trading Friday under a fresh ticker. Raytheon (formerly RTN) and United Technologies (formerly UTX) finalized their "merger of equals" this week, creating Raytheon Technologies (RTX), selling for around $50 per share. With the new firm quickly shedding its non-defense Otis Elevator and Carrier units, Raytheon Technologies will be laser focused on what it does best: serving the military and civilian aerospace market. Not only will this firm be a dominant defense player, it also owns Pratt & Whitney, chief supplier of aircraft engines. With aggregate sales of around $75 billion per year, the size and scope of Raytheon will allow for some remarkable accomplishments. Complete systems, from propulsion to instruments to controls, can now be bundled together and packaged for customers. The synergies should begin paying off immediately. With Boeing (BA) in the gutter, RTX is the one dominant industry player to own. Despite the global costs of dealing with the virus from China, defense spending will not go down. Additionally, RTX will be the main recipient of dollars flowing in from the nascent civilian space race. Oh, and just to sweeten the deal, RTX offers a healthy—and completely secure—dividend yield of 5.8%.
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Boeing board changes better late than never, except for those who lost their lives. (26 Feb 2020) We have been excoriating Boeing (BA $303-$306-$446) for the past year, primarily because a boardroom attitude of arrogance drove a glittering jewel of the American economy off the road and into a ditch. Our disappointment turned to disgust when we took a deeper look into who was sitting on the Boeing board of directors. Take the notion of a professional corporate board, one replete with industry experience and complementary insight, and turn that concept on its head; you then get a feel for the Boeing board. The one word that came to mind was “cronyism.” Surprisingly, it now appears that some movement is underway to change that condition. The company has nominated two outsiders with extensive safety and engineering experience to join the board. Akhil Johri has been the CFO at United Technologies (UTX), and Steve Mollenkopf—one of our favorite CEOs—is at the helm of chipmaker Qualcomm (QCOM, a Penn New Frontier Fund member). While those are two welcome additions, there are still members which need to go. After the moves were announced, Chairman Larry Kellner, a former CEO of Continental Airlines (cronyism), said, “We just feel like this is the right balance...” Considering proxy advisory firm Glass Lewis recommended shareholders vote against retaining Kellner on the board last year, his sentiments ring a bit hollow. These two excellent nominees represent a step in the right direction, but it still feels as though the company doesn't fully comprehend the scope of what is going on. Keeping the MAX name is evidence of that. If you would have told us, at virtually any other time in the past 23 years, that Boeing shares were sitting at their 52-week low, we would have immediately jumped in. Right now, though that condition exists, the shares are not even on our radar.
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Canadian transport manufacturer Bombardier, with its shares sitting below $1, looks to team up with French rival Alstom on rail business. (28 Jan 2020) Just a few short years ago, Canadian aircraft and transport manufacturer Bombardier (BDRBF $1-$1-$2) had a market cap of $10 billion, a potentially lucrative market for its new A220/C-Series narrow-body commercial jets, and a strong rail division. Unfortunately, it has been all downhill for the Montreal-based firm since. The first misstep was teaming up with Europe's Airbus (EADSY), which essentially usurped the A220, taking a 50.01% stake in the line and rebranding the aircraft as the Airbus A220. Then, due to a mountain of debt stemming from its development of the A220, Bombardier was forced to sell its regional jet series (known as the CRJ) to Mitsubishi for $550 million. Now, with short-term liabilities greater than its current assets, and long-term liabilities greater than its long-term assets, the firm is looking to team up with yet another rival—France's Alstom SA (AOMFF)—on its rail business. We expect Alstom to take control of the rail unit the way Airbus did with the C-Series program. With increased competition in the rail industry coming from China, Bombardier had first tried to team up with Germany's Siemens AG (SMAWF), but that company ultimately rebuffed the firm to pursue its own deal with Alstom (a deal which the EU ultimately shot down). And the bad news continues: not only is the rail deal facing antitrust scrutiny, Bombardier just shook investors by warning of disappointing Q4 sales and saying it may exit the Airbus joint venture altogether—taking a huge writedown in the process. While the rail division accounts for over half of the company's revenues, that unit faced a humiliation several weeks ago when New York City was forced to pull 300 Bombardier subway cars from service due to malfunctioning door mechanisms. When it rains it pours. We have traded Bombardier in the past with good success, but we wouldn't touch the company right now, even with its $0.91 share price (on the B shares, the A shares are trading at $1.02). We can't imagine the Canadian government letting the company fail, but that is a weak rationale for buying in right now.
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Boeing's most disturbing internal messages to date shed more light on a corporate culture in deep trouble. (16 Jan 2020) We almost hate to bring up one of the recently-released internal messages from Boeing (BA $320-$331-$446) employees written a year before the fatal Lion Air crash in Indonesia. In a company the size of Boeing, there are always going to be some boneheaded digital conversations just waiting to be uncovered but, nonetheless, this particularly chilling message seems to point to a dangerous level of wanton arrogance at a company which claims to have a corporate culture based on safety and design excellence. Indonesia's Lion Air wanted to put its pilots through simulator (sim) training on the 737 MAX before flying the aircraft, and expressed this desire to Boeing in 2017. In response to the request, one Boeing employee wrote: "Now friggin Lion Air might need a sim to fly the MAX, and maybe because of their own stupidity. I'm scrambling trying to figure out how to unscrew this now! idiots." He apparently succeeded, as Boeing talked Lion Air out of the costly (to Boeing) simulator training. A little over a year after this internal message was written, a Lion Air 737 MAX crashed, killing all 189 people on board. The Indonesian National Transportation Safety Committee cited Boeing's failure to inform pilots of the new MCAS flight control system at the heart of the crash. To be sure, both deadly crashes involved pilot error with respect to emergency procedures, but the slew of internal memos now coming to light certainly implicates Boeing in the pilots' shortcomings. One day, Boeing will return to greatness, but that won't happen under the current CEO and board of directors.
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Despite a new CEO, steer clear of Boeing. (30 Dec 2019) About two weeks before he was canned as CEO, the now out-of-work Boeing (BA $309-$331-$446) chief Dennis Muilenburg was given high praise by the company's chairman, David Calhoun. "Dennis has done everything right," Calhoun fervently proclaimed. "We stick by him completely." Granted, that kind of talk by a board member is often a kiss of death akin to a team being featured on the cover of Sports Illustrated, but watching Calhoun speak those words we got the sense that he was being fully sincere. And, if he was being sincere, Boeing investors have much to worry about: Calhoun will be taking over as the new permanent CEO of the Chicago-based aerospace giant in January. Earlier in the month we said that Boeing needs dynamic new leadership to pull itself out of its nosedive; instead, we got a failed Starliner mission and a warmed-over board member taking the helm. And the more digging we did, the more troubling the outlook. For example, why is Caroline Kennedy one of the thirteen board members? Why are there so many board members? Why do so few have aerospace experience? Why is the median pay of the board—$346,000 per year—so high? Which leads us to the most important—and most disconcerting—question: who will hold the board accountable? For the vast majority of the past 22 years, we have held Boeing within our clients' portfolios. Presciently, we got out of the stock between the first and second 747 MAX crashes. Boeing is an integral part of the American economy, and it is almost criminal that the management team—at least in our opinion—is so woefully unprepared to lead the company back to its former greatness.
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After a nightmarish year, Boeing desperately needed a win; instead it got a failed Starliner test mission. (23 Dec 2019) It was only fitting that CEO Dennis Muilenburg was at the launch site to watch the mission unfold. The man ultimately responsible for Boeing's (BA $292-$330-$446) success or failure witnessed a spectacular launch of the Starliner, the company's answer to SpaceX's Crew Dragon capsule designed to carry US astronauts into space. But, symbolic of Boeing's 2019, it went downhill from there. The unmanned craft, which was supposed to rendezvous and dock with the International Space Station (ISS), quickly went off course, dooming the mission. The company pointed out that the software problem which caused the malfunction could have been corrected had astronauts been onboard during the test mission, but that misses the bigger point: For a company with two recent deadly aircraft crashes in its rear view mirror, both due to a software glitch, this latest failure accentuates the negatives surrounding the firm. While Boeing's competition on the aircraft side of the business, Europe's Airbus (EADSY), gained ground after the air disasters, we expect that Elon Musk's privately-held SpaceX, whose Crew Dragon successfully docked with the ISS back in March, will garner even more favor from NASA after this failed test flight. Both companies are scheduled to have manned flights in 2020, but that has become an extremely tall task for Boeing after this latest incident. More fodder in the case to jettison Muilenburg and overhaul Boeing's board of directors. We have argued that one of the worst CEOs in the airline business is United's Oscar Munoz, who is (thankfully) stepping down from his role soon. According to the Wall Street Journal, Muilenburg turned to Munoz for advice after the two air disasters. How fitting. He needs to go now, and the company needs to find a leader like former BA CEO Jim McNerney to right the ship before more damage is done.
Update: Shortly after the previous story was written, the Boeing board of directors fired CEO Dennis Muilenburg. Chairman David Calhoun will take over as the new permanent CEO of the company in early January. |
BA
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Boeing: at the intersection of massive arrogance and unfettered industry consolidation. (16 Dec 2019) At the start of the trading week, US aerospace giant Boeing (BA $292-$329-$446) was off yet another 4% following a Wall Street Journal report that the company is actually weighing suspending—or even halting— 737 MAX production. While that may be a stunning notion, it seems more reasonable considering how many orders Boeing has now lost to its European rival, Airbus (EADSY). We once held Boeing in the highest regard, considering the company a symbol of American corporate strength. Sadly, arrogance in the boardroom and runaway industry consolidation have changed our views on the firm. In early 2018, we wrote about Boeing's complaint to the US International Trade Commission over Delta's (DAL) purchase of Canadian Bombardier aircraft. In a fascinating turn of events, Delta was so incensed over Boeing's complaint that they made a large purchase of Airbus aircraft instead of the Boeing jets they were going to buy—jets known as the 737 MAX. So, because Boeing was more interested in taking legal action to stop an American air carrier from buying elsewhere than they apparently were in fielding concerns about the safety of their own jets, Delta ended up being completely free of the soon-to-be-grounded 737 MAX. Talk about poetic justice.
Boeing's board of directors said it stands fully behind CEO Dennis Muilenburg. That tells us that not only does the company have a CEO who should be broomed, it also has a board which needs to be overhauled. All the way back in 1997, we wrote of the clash of arrogant personalities on full display when Boeing acquired McDonnell Douglas, leaving one massively-big US aerospace and defense behemoth in the aftermath. Today, fortunately, companies such as privately-held SpaceX are threatening even Boeing's dominance of the US manned space program, with NASA awarding the former with billions worth of launch and supply contracts. Perhaps a little renewed competition in the industry will help retrain Boeing's focus on creating exemplary systems and away from filing legal complaints. The icing on the cake in the complaint against Delta's purchase of Bombardier jets: the US ITC threw it out, finding the argument without merit. Until Muilenburg is gone and BA shows signs of changing its ways, we wouldn't touch the stock, even near its 52-week-lows. And that is sad. We expect this sort of arrogance from government-sponsored entities in Europe; we cannot stand for it in a meritocracy. |
GD
HII |
General Dynamics just landed the largest shipbuilding contract in the history of the US Navy. (03 Dec 2019) General Dynamics (GD $144-$178-$194), the $52 billion American aerospace and defense juggernaut, just won a huge prize: a $22.2 billion contract from the United States Navy—the largest it has ever awarded—to build at least nine more nuclear-powered Virginia-class submarines for the fleet. The Navy also threw in an option to buy a 10th sub, which would bring the contract value to $24 billion. As if that wasn't enough of a golden goose for the Virginia-based firm, they are also designing the next-gen nuclear sub, the Columbia-class, which is being developed to replace the Trident II-armed Ohio-class ballistic missile submarines. Construction on the Columbia-class subs will begin in 2021. General Dynamics isn't the only beneficiary of the US Navy contract—Huntington Ingalls Industries (HII $174-$250-$261) is the company's top subcontractor on the deal. Not only does General Dynamics build weapons systems for the US military via their Electric Boat subsidiary, they also own the Gulfstream line of executive jets—a line which holds a commanding position in the high-end business jet arena. The largest threat to the company would be an anti-defense-spending wave coming to Washington. We don't see that happening anytime soon. The shares are still undervalued, and the same could be said of Huntington Ingalls, which owns the renowned Newport News Shipbuilding unit.
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BA
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Boeing board clips CEO Muilenburg's wings, and rightfully so. (14 Oct 2019) It may be easy to armchair quarterback following unexpected events, but it wasn't like the world's largest aerospace firm, Boeing (BA $292-$373-$446), didn't have a previous wake-up call in the form of a 737 MAX 8 crash in Indonesia which killed 189. In our opinion, it was arrogance that led the manufacturer to write this crash off as pilot error, instead of demanding better answers. Could the Ethiopian Airlines 737 MAX 8 crash that occurred five months later have been prevented? Almost certainly, if the MCAS system was identified as the problem in the first crash. Up to the point of the second crash, we had been one of Boeing's biggest supporters. Although we didn't own the $210 billion company at the time, it had been a regular member of the Penn Global Leaders Club. The more we delved into the follow-up of both tragedies, however, the more disappointed we became. Now, the board of directors is stepping up to the plate (albeit late) and stripping CEO Dennis Muilenburg of his role as chairman of the board. This will allow him, in the words of the board, to focus on the day-to-day operations of the firm, with the new chairman serving in an oversight role. That new chairman will be former GE aerospace executive David Calhoun—a solid pick. As for Muilenburg, he said he fully supports the decision, and then used one of the most tired phrases in business, stating his team is "laser-focused" on returning the 737 MAX safely to service. Like GE, Boeing has had some incredibly talented CEOs in the past. Key word being "past." By no means is the company at risk of being dethroned as the global aerospace leader, but it has lost so much trust among airlines around the world that we are certainly not ready to jump back in yet.
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RTN
UTX |
United Technologies and Raytheon to merge, creating aerospace and defense behemoth. (10 Jun 2019) Growing up in the Cold War '70s, we remember the names of at least a dozen mega-sized aerospace and defense giants. Over the past generation, as the Cold War subsided and the cost of building new systems became prohibitive for all but a handful of players, merger mania permeated the industry, as exemplified by the 1997 deal which combined McDonnell Douglas and rival Boeing (BA). Now, a deal similar in size and scope is on the horizon: Penn Global Leaders Club member Raytheon (RTN $144-$199-$215) and former member United Technologies (UTX) have agreed to merge. The combined entity, to be called Raytheon Technologies Corp., would hold a market cap of around $120 billion, making it the second-largest aerospace and defense firm in the world—behind only Boeing. UTX shareholders would own 57% of the company, with CEO Gregory Hayes retaining that role, while Raytheon shareholders will own the other 43%, with RTN CEO Tom Kennedy becoming the new chairman. In other words, Hayes will have operational control of the company. Despite having coexisted within the same industry, the two companies have very little overlap in specific lines, making the deal all but assured. Post-merger, about 50% of revenue will come from civilian sales and 50% from the sale of military systems, which we view as a great mix. On the news, Raytheon was up around 7%, and UTX was up about half that amount. Since we don't currently own Boeing (it really mishandled the 737-MAX situation from the start), Raytheon Technologies Corp. will be the "must own" aerospace and defense name. It will be interesting to see how the two corporate cultures assimilate (the McDonnell Douglas and Boeing process saw an ugly and brutal clash of cultures), but we foresee owning this company for the long haul.
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BA
2019.03.11 |
Boeing falls double-digits after a second deadly crash of its new 737 MAX 8. Last October, a brand new Lion Air-owned Boeing (BA $292-$377-$446) 737 MAX 8 aircraft crashed after taking off from Jakarta, Indonesia, killing all 189 passengers on board. This past Sunday, a three-month-old Ethiopian Airlines-owned Boeing 737 MAX 8 crashed minutes after taking off from Addis Ababa, Ethiopia, killing all 157 on board. The two disasters prompted China and Indonesia to ground the aircraft. While the investigation of the latest crash is just getting underway, and it is dangerous to speculate (the two black boxes have just been recovered), a new software system is garnering a lot of attention from investigators.
Boeing made some adjustments to its new 737 MAX to increase efficiency; namely, moving the aircraft's more fuel-efficient engines slightly forward and higher up. This adjustment caused—albeit slightly—how the jet responds under certain circumstances: there is a tendency of the nose to pitch slightly more upward than usual. To counteract this tendency, Boeing installed the new Maneuvering Characteristics Augmentation System (MCAS) on the aircraft. The MCAS, in simplest terms, pushes the nose back down. This is done without any pilot interaction. Here's the major problem: air carrier unions are arguing that Boeing has not given clear instructions to pilots on what to do to override this new system, the actions of which can catch them off guard. As mentioned, it is too early to definitively say that the MCAS—and the pilots' response—is at the core of the latest crash, but that didn't stop the Chinese from grounding their fleet. Why is China so important to this story? By far, the country operates the most (96) 737 MAX 8s, and will be the recipient of the plurality of future orders for the aircraft. Boeing has notched orders for over 5,000 of the jet thus far. The FAA will certainly expedite the investigation of the latest crash, comparing the data from the black boxes to what was discovered during the Jakarta investigation. Boeing needs to act decisively to put the airlines and, more importantly, air travelers' minds at ease. In the US, Southwest Airlines (LUV) and American Airlines (AAL) currently fly the jet. It might seem tempting to pick up shares of Boeing after their worst daily decline in a decade, but it is too early to know the ramifications of these two disasters, or if they are even related. If passengers are asking how safe it is to fly on an aircraft (and they are), that can be a public relations disaster for the aircraft's maker. Of course, those concerns pale in comparison to how this tragic loss of life has affected the families of the passengers aboard the two doomed flights. |
Space
Sensor Layer |
The US will begin working on an advanced Space Sensor Layer to counter new threats from Russia and China. (18 Jan 2019) Over the course of the past year, both Russia and China have been boasting about a new generation of hypersonic missiles in their respective arsenals. If you listen to Putin (and the press does with bated breath), the US has no real defense for these advanced new weapons. These new non-ballistic, hypersonic vehicles travel several times the speed of sound at the edge of the atmosphere, and can move in unpredictable directions—all of which pose a problem for our current missile defense system. Now, the first US missile defense review in nine years (President George Bush commissioned the last one) has presented a solution: build an advanced Space Sensor Layer—a constellation of satellites in low- and medium-earth orbit to fill the "gaps" in our current identification and tracking system. The enemy missiles are designed to ride atop an existing, fully trackable ICBM, but they would then "break off" from those missiles and glide just atop the earth's atmosphere to evade detection. They could be used in a tactical manner to, for example, attack a carrier, or they could be tipped with a nuclear warhead for strategic combat. The new SSL would be able to identify these "rogue" objects after separation. The Department of Defense plans to fight the battle on dual fronts: they have awarded contracts for design proposals on the SSL array, and they have simultaneously commissioned design studies for hypersonic weapons to intercept and destroy any incoming threat. The United States Missile Defense Agency will spearhead and manage the program, which could be heavily funded from the 2020 defense budget. We can anticipate which companies will be at the forefront of this technology by reviewing the study contracts already awarded. Winners included Raytheon (RTN), Lockheed Martin (LMT), Northrop Grumman (NOC), and General Atomics (not yet publicly-traded). Contracts to design the weapon systems went to several of the same companies, as well as L3 Technologies (LLL) and BAE Systems PLC (BAESY). The best way for an investor to hedge their bets would be to own ITA, the iShares US Aerospace & Defense ETF. This ETF is currently a member of the Penn Dynamic Growth Strategy.
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HRS
LLL |
Harris, L3 to have "merger of equals," creating sixth-largest aerospace behemoth. (15 Oct 2018) While we haven’t traded L3 Technologies (LLL $180-$219-$219) much in the past, Harris Corp (HRS $134-$172-$171) has been one of our favorite “under-the-radar” (no pun intended) defense contractors for decades. It took us by surprise when we heard the two companies had agreed to a “merger of equals,” but the potential synergies created by a combination are palpable. Harris is a $20 billion communications equipment company which makes products for space and intelligence systems, air traffic management, energy and maritime companies, and ground network operations. LLL is a $17 billion industrials company that makes high-tech products, systems, and subsystems for the defense electronics business. The two companies would fit together like two adjacent pieces on a puzzle, with very few little overlap. While shareholders at both firms need to approve the all-stock deal, it is as good as done. In the next issue of the Penn Wealth Report we discuss the merger in further detail.
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BA
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Boeing notches another huge win over Lockheed—awarded the new US Air Force trainer contract. (28 Sep 2018) Earlier in the week, we reported that Penn Global Leaders Club member Boeing (BA $253-$367-$374) won a $2.4 billion contract to build the replacement for the aging Huey chopper fleet. Now, the company can boast a much bigger prize: it beat out Lockheed Martin (LMT) in a bid to build a new trainer for the United States Air Force. The contract, worth up to $9.2 billion, will allow Boeing's T-X program to move forward, building at least 351 jets, 46 simulators, and associated ground equipment. The T-X (yet to be numbered and named) will replace the venerable T-38 Talon fleet which has been used to train military pilots for two generations. Boeing, which is risk-sharing this project with Sweden's Saab Group (SAABF), will build the aircraft at their St. Louis, MO facilities.
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BA
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Boeing beats out Lockheed, Sierra Nevada to win Huey replacement contract. (25 Sep 2018) The Pentagon has awarded a $2.4 billion contract to Penn Global Leaders Club member Boeing (BA $251-$368-$374) to build a replacement for the aging UH-1N Iroquois choppers, affectionately known as "Hueys." Boeing, which teamed up with Italy's Leonardo SpA for the bid, will build the 84 military choppers at its facilities near Philadelphia, PA. The "MH-139" aircraft will be used to help protect America's ICBM sites around the country, as well as other critical tasks around the world. Boeing beat out privately-held Sierra Nevada and the famed Sikorsky unit of Lockheed Martin to win the Air Force deal.
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EADSY
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Airbus's nightmarish A320 delays are more good news for Penn member Boeing. (19 Sep 2018) Airbus SE (EADSY $22-$31-$32), the EU government-supported European aircraft maker, is having a turbulent year. The latest blow comes in the form of costly delays to its A320neo (new engine option) aircraft line, which the company touts as the world's most advanced and fuel efficient single-aisle aircraft (think of it as a competitor to Boeing's widely-successful 737). The company announced that it needs another year to get A320 production back on track after a series of design snags and supplier problems. In another blow to the company, Airbus's head of sales, Eric Schulz, abruptly left that post after just nine months with the firm. Schulz had been the President of Civil Aerospace at Rolls-Royce plc prior to the gig. All of this is good news for American aerospace giant (and Penn Global Leaders Club member) Boeing (BA $251-$371-$374), whose shares have been climbing back near their 52-week high.
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BA
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Pentagon awards new Air Force One contract to Boeing. Penn Global Leaders Club member Boeing (BA $209-$357-$374) announced that it has been awarded a contract by the Department of Defense to build the fleet of two new Air Force One 747-8 aircraft, replacing the current two 747-200s which have been in service for nearly three decades. The new aircraft, which won't go into operation until the end of 2024, will cost $3.9 billion to build, and will sport a new red, white, and blue color scheme. President Kennedy selected the current color scheme, which has adorned the fleet since the early 1960s. As for Boeing, we applaud the recent decision to take the lead on a joint venture with Brazilian aircraft maker Embraer (ERJ), and we place a fair value of $400/share on the company.
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SpaceX
Israel |
Israel aims to become fourth nation to land a craft on the moon, with SpaceX's help. (10 Jul 2018) Only one nation in history, of course, has ever landed humans on a body outside of earth. While everyone knows that (except the lunatic deniers), fewer know that three nations have actually made successful soft landings on the lunar surface: the United States, the former Soviet Union, and China. Israel plans on joining that stratospherically-exclusive club early in 2019 with the help of SpaceX. Musk's closely-held company will launch the Israeli-built SpaceIL craft in December of this year aboard a Falcon 9 rocket, with a landing on the lunar surface planned for February, 2019. The first major action the autonomous vehicle will make upon landing will be to plant an Israeli flag on the surface of the moon. A new golden age of space travel, with private companies leading the charge, is truly headed our way. While Cape Canaveral will be utilized as the launch site, and the Israeli government has pledged to fund 10% of the project, private companies have spearheaded and funded the lion's share of the enterprise.
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BA
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Saudi Arabia looks to buy a number of advanced Boeing 777X widebody jets. (09 Jul 2018) American relations with the Kingdom of Saudi Arabia have, quite arguably, not been this friendly in decades. That relationship may bear fruit for American aircraft maker (and Penn Global Leader company) Boeing (BA $202-$335-$374), as the Kingdom is reportedly looking to purchase a number of Boeing 777X aircraft. Saudia, Saudi's state-owned airline, would buy the jets, which have a list price of around $400 million per aircraft. Somewhat ironically, Saudi Arabia hailed the Trump decision to pull out of the Iranian nuclear accord; a decision that probably nixed Boeing's sale of 777s to IranAir. Sales of the 777X typically go up when oil prices are high, as the jet's advanced design give it unprecedented fuel efficiency.
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BA
ERJ |
Boeing and Embraer join forces to battle the Airbus/Bombardier alliance. (06 Jul 2018) Earlier this year we outlined the alliance between Europe's Airbus (EADSY) and Canada's Bombardier; a joint venture which posed a direct threat to Boeing's (BA $201-$334-$374) business strategy and was somewhat a slap in the face, as Bombardier is a Canadian company. Now, Boeing is fighting back. The $194 billion US aerospace giant finalized plans for a joint venture with Embraer (ERJ), Brazil's $5 billion aircraft maker which we sold shortly after the merger rumors made the price spike double digits. Under the terms of the strategic partnership, Boeing will hold 80% ownership and have operational control, while the remaining 20% stake will be owned by Embraer shareholders. This is an intriguing global story within the aerospace industry, and between the two alliances, we like Boeing's move over Airbus's. We outlined Embraer's strong growth trajectory last year in the Penn Wealth Report; clients and members can access the story by signing in here.
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SpaceX
BA LMT |
SpaceX just Beat Boeing to win a classified military launch contract; here are the two big reasons why. (25 Jun 2018) The SpaceX Falcon Heavy launch vehicle just beat out The United Launch Alliance's reliable Delta IV in an Air Force competition to place a highly-classified satellite in orbit. SpaceX won the contract for two major reasons. First of all, the company has proven itself in the eyes of the Department of Defense as a reliable launch delivery service—a herculean task. Secondly, the Air Force will pay $130 million for the launch. The average launch price for a satellite aboard a Delta IV is $350 million. ULA's implicit argument has always been, "sure, we are more expensive, but the reliability is worth the extra money." SpaceX has added a new dynamic into the commercial/government synergy with respect to launches and space operations, and that is a very good thing. The United Launch Alliance is a joint effort between Boeing (BA) and Lockheed Martin (LMT).
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US
Space Force |
US comes one giant step closer to having an official "space force." The third annual meeting of the National Space Council will be remembered for one, ultimately historic, event: it was the meeting at which the president of the United States instructed Chairman of the Joint Chiefs of Staff Gen. Joseph Dunford to begin establishment of a United States Space Force. Of course, this will require congressional approval, and it will be fought tooth-and-nail along the way by the president's detractors, but the inevitability of this action is clear. There were plenty of critics back in 1947 as well, when the decision was made to transition from the Army Air Corps to a separate branch known as the United States Air Force. We just assume those in levels of power have foresight and vision. That assumption is wrong more than it is right. The enemies of progress will throw landmines on the tracks, but the train has been set in motion—this country will have its Space Force. What, exactly, will that look like? The relationship between this new branch and the US Air Force will be similar to the relationship between the United States Marine Corps and the US Navy. While the Air Force currently operates the United States Space Command, the other branches also perform space ops. Some argue that a new branch will create an expensive and superfluous layer to the military. Actually, just the opposite is true. As space travel becomes more commonplace, one entity must be tasked with maintaining structure and order beyond our atmosphere—not different divisions of separate branches. In the early decades of the 20th century, Billy Mitchell faced a court-martial for proclaiming senior Army and Navy officials incompetent for their lack of understanding of air power. Today, Billy Mitchell is regarded as the "father" of the United States Air Force. Future generations will look back on President Trump as the "father" of the United States Space Force. Nobody will remember the names of his critics.
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BA
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Remember when Carl Sagan made fun of "Star Wars"? US missile defense system hit major objectives last year
(30 May 2018) I will never forget Ronald Reagan's awesome response to critics who claimed his missile defense system, pejoratively named "Star Wars" by the press, would cost billions and take decades to build. "Well," Reagan said with his famous head tilt, "then we had better get started!" Classic. I thought of that quip while reading over the Government Accountability Office's latest review of the portion of the system designed to intercept and destroy ICBMs launched from North Korea. The ground-based interceptor program, controlled by the US Missile Defense Agency (set up in 1983 by President Reagan) and currently managed by Boeing (BA), met its primary objectives in 2017, to include successfully intercepting a "dummy" ICBM target over the Pacific and placing 44 interceptors online between multiple California and Alaska sites. As for the Star Wars moniker, proponents of the system loved it. Sorry mainstream media. (Visit the US Missile Defense Agency.) |
KTOS
Dynetics General Atomics |
Dynetics beats out General Atomics to win new DARPA contract for unmanned aerial vehicle system
(03 May 2018) The famed Defense Advanced Research Projects Agency (DARPA) wants a new unmanned aerial vehicle capable of being launched and recovered from a military cargo aircraft, and it has selected Dynetics, Inc. as the primary contractor. While Dynetics is not publicly traded, its partner in the deal, Kratos Defense & Security Solutions, Inc. (KTOS $8-$10-$14), has been one of our favorite trading stocks in the aerospace and defense arena. Dynetics is the lead company for the program, but Kratos will build and supply the actual vehicles, and be integrally involved with all phases of testing. The Gremlins vehicles will be able to carry a variety of payloads and are designed to launch in waves from US Air Force cargo aircraft. Remarkably, they are also designed to be recovered in flight from these same aircraft. Dynetics beat out General Atomics Aeronautical Systems in the phase III competition for the program. |
SpaceX
OA |
NASA's planet-hunting satellite launches atop SpaceX Falcon 9
(20 Apr 2018) Exoplanet: a planet which orbits a star outside of our solar system. The first scientific discovery of an exoplanet was in 1988; to date, astronomers have confirmed 3,758 such bodies. With Wednesday's launch from Cape Canaveral of the Transiting Exoplanet Survey Satellite, or TESS, that number should become prolifically higher in short order. Launched atop the stalwart workhorse SpaceX Falcon 9, TESS will search out worlds surrounding suns nearest our own, taking over for the aging Kepler space telescope, which was launched back in 2009. The planet explorer will have an unusual orbit: after a close flyby of the moon (which is 238,900 miles from the earth), TESS will settle into its highly-elliptical orbit, traveling as close as 67,000 miles from earth, and as far away as 232,000 miles. The satellite's ultimate, strategic mission is to identify planets whose atmosphere and distance from their own star (the Goldilocks zone) indicates the potential to sustain human life. TESS was built by Penn New Frontier Fund member Orbital ATK (OA $94-$133-$135). |
NOC
|
Northrop Grumman—not SpaceX—gets blame for failure of top-secret satellite launch
(10 Apr 2018) Within days of a top-secret satellite's failure to reach orbit this past January, Elon Musk's SpaceX claimed their delivery system—the Falcon 9 rocket—performed nominally (engineering-speak for "as expected"). This week a group of industry and government investigators came to the same conclusion, blaming the satellite's manufacturer instead. Northrop Grumman (NOC $238-$347-$361) built the uber-secret satellite known as Zuma, and it appears that a highly-modified device called a payload adapter failed to uncouple the satellite from the bay once in zero-gravity. Ultimately the satellite did break free, but by that time it was too late to salvage. Despite being shrouded in secrecy, it is believed that it cost as much as $3.5 billion to develop and build the Zuma. |
RTN
|
Poland signs $4.7 billion missile deal with US
(28 Mar 2018) Poland, one of America's staunchest allies in Europe, just inked a $4.7 billion deal to buy Patriot missile systems from the US as it buttresses its defenses against the growing threat from its former master, Russia. The deal, which represents Poland's largest defense purchase in three decades, includes 16 launchers, four radar units, and the most advanced fire control system available for the Raytheon (RTN $150-$211-$223)-built air defense program. Eastern Europe has been on heightened alert ever since Russia took back Crimea from Ukraine in 2014. Poland, a former Warsaw Pact country, is now a member of that defunct pact's archenemy, NATO. |
SpaceX
BA LMT |
USAF awards SpaceX, United Launch Alliance with new satellite contracts
(15 Mar 2018) There's a real dogfight going on in the skies between Elon Musk's SpaceX and Boeing/Lockheed's United Launch Alliance, and that is a good thing. We may not have competition from the Russians anymore (Putin's comical promise of sending a rocket to Mars aside), but you can bet that Boeing didn't expect this fierce threat from an aerospace startup a few years ago. The United States Air Force just awarded a $291 million contract to SpaceX to launch a new-generation military GPS satellite aboard a Falcon 9 by March of 2020, and a $355 million contract to ULA to launch two Air Force Space Command satellites by June of 2020. As for SpaceX, the company's lower cost per launch and proven track record of performance on government contracts was cited as the rationale for the decision. |
SpaceX
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SpaceX marks 50th launch of Falcon 9 by placing bus-sized satellite into orbit
(06 Mar 2018) The launch from Complex 40 at Cape Canaveral Air Force Station was virtually flawless. Shortly after midnight, the SpaceX Falcon 9 lit up the clear night sky with its payload aboard—a Spanish-owned, US-built communications satellite the size of a bus. Ultimately, the Hispasat 30W-6 satellite will park itself in geostationary orbit, 22,000 over the equator, where it will relay video, data, and broadband signals across America and Europe for the next fifteen years or so. This marks the historic 50th successful launch for the Falcon 9, proving its reliability to private and government customers around the globe. In addition to enabling connectivity on ships and trains in the Caribbean and Mediterranean, the Hispasat 30W-6 will bring high-speed internet access to tens of thousands of people in Spain and parts of Morocco for the first time. No rest for the weary: SpaceX will launch a Falcon 9 resupply mission for the International Space Station around the first of April, followed—weather permitting—a few days later by the launch of Bangladesh's first communications satellite. At this point, it's hard to tell if Boeing (BA) and Lockheed Martin's (LMT) United Launch Alliance is looking at SpaceX through their rear-view mirror or directly out their windshield. And that is fantastic—nothing like a space race between competing American firms, especially after the disgraceful period of most of the past decade, when we were begging for rides aboard Soviet-era rockets. |
SpaceX
FCC |
FCC chairman backs SpaceX plan for broadband internet satellite system
(14 Feb 2018) Elon Musk's privately-held SpaceX has submitted regulatory filings for approval to begin deploying a space-based internet communication system, and FCC Chairman Ajit Pai is urging his committee to approve the request. The low-Earth orbit satellite constellation would provide high-speed broadband services to rural communities across America where fiber-optic lines and cell towers do not reach. SpaceX appears set to launch two of the satellites, as a test, into orbit this Saturday with the launch of its Falcon 9 rocket from Vandenberg Air Force Base. When the proposed array is approved and in service, it will ultimately have several thousand satellites working to provide high-speed internet to millions of Americans. |
SpaceX
TSLA |
SpaceX makes history with the launch of the biggest operational rocket ever created
(07 Feb 2018) History was made. The world's largest (ever) operational rocket blasted off from historic Launch Pad 39A, the site from which US astronauts began their trip to another world, and it was glorious. Elon Musk's SpaceX Falcon Heavy made its maiden voyage on Tuesday the 6th of February, 3:45 p.m. EST, ushering in a new era of manned spaceflight. This time, the Dragon capsule sitting atop the rocket didn't carry men or women—it carried a fire-red Tesla Roadster with Starman, a spacesuit-wearing mannequin, at the wheel. Starman and his set of wheels will boogie past Mars and get a fly-by of the asteroid belt before settling into a big, elliptical, long-term orbit of the sun. As for Musk and SpaceX, they are already working on a new, bigger rocket—the BFR—to launch humans back to the moon and on their first journey to Mars. The pioneering American spirit is alive and well! |
BA
EADSY DAL |
Latest in aerospace drama: US Trade Commission sides with Canada's Bombardier over Boeing
(29 Jan 2018) Last month we reported that Delta (DAL), incensed over a Boeing (BA) complaint to the US International Trade Commission about the airline's purchase of Canadian Bombardier jets, got retribution against the US aerospace giant by purchasing European Airbus (EADSY) A321neo aircraft instead of Boeing's 737 MAX, as had been expected. As if that wasn't bad enough for Boeing, the US panel just rejected the company's complaint, finding nothing wrong with Delta's purchase from Bombardier. Ironically, Bombardier fully expected to lose the case, pushing them into a joint deal with Airbus. Now, with the two teaming up, it becomes even more imperative for Boeing to forge an alliance with—or buy outright—Brazil's Embraer. Filing the complaint was a mistake. |
SpaceX
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SpaceX is about to test the engines on its Falcon Heavy, the most powerful rocket since the Saturn V
(10 Jan 2018) Within the next few days, fingers crossed, SpaceX will test the engines on its Falcon Heavy, the most powerful (and most impressive) rocket since the Saturn V—the vehicle which launched 27 American astronauts on their journey to the moon (with 12 subsequently walking the surface). If the test goes as planned, the Falcon Heavy's maiden flight could come before the end of January. Just how powerful is the SpaceX rocket? At least twice as much thrust can be generated compared to any other rocket on the planet (sorry, Putin). It has been a national disgrace that the only country to launch humans to the moon let its manned space program die after the Space Shuttle was retired (Obama mothballed the National Aerospace Plane), forcing US astronauts to hitch rides aboard Cold War-era Russian rockets. That long national nightmare is about to come to a close. |
ERJ
BA |
We immediately took profits on Embraer after reports surfaced that Boeing may be planning to buy the company
(21 Dec 2017) This past April we picked up Brazilian aircraft maker Embraer (ERJ $18-$24-$26) in the Intrepid Trading Platform. We argued that not only was the company well run, it was also selling near a 52-week low and could potentially take advantage of the fact that it operates out of an emerging market. On Thursday the 21st of December, a rumor hit the wires that Boeing (BA) was in talks to buy the company, causing it to spike 25% within minutes. We took that opportunity, before trading was halted, to sell near the peak of the spike and take our profits off the table. |
LMT
KTOS |
Air Force taps Lockheed Martin to develop next generation of autonomous cruise missiles
(21 Dec 2017) Aerospace giant Lockheed Martin (LMT $247-$318-$324) has been awarded a $110 million contract from the Air Force Research Laboratory (AFRL) to develop a prototype subsonic cruise missile known as “Gray Wolf.” The autonomous missiles would be part of a next-generation network designed to decimate an enemy’s integrated air defense system.To be considered successful (and become eligible for actual Air Force orders for the weapon), the long-range cruise missile must be able to “survive” its way through a sophisticated environment of radar, communications sites, and surface-to-air missiles before impacting its pre-designated target. The Gray Wolf’s preferred launch system will probably be Air Force bombers, such as the B-1 Lancer and B-2 Spirit. Other Air Force strike systems are being developed by Kratos Defense & Security Systems (KTOS $7-$11-$14), and privately held Dynetics and General Atomics. |
BA
DAL EADSY BDRAF |
Delta gets the last laugh on Boeing as it buys 100 Airbus jets
(13 Dec 2017) US aerospace giant Boeing (BA $153-$292-$296) had expected to land an order from Delta Airlines (DAL $44-$54-$56) for 100 of its 737 MAX aircraft. Instead, Delta shunned Boeing and announced the purchase of 100 Airbus A321neo jets from European rival Airbus (EADSY 16-$26-$26). Don't worry, 737 MAX, it wasn't your fault. Delta has been fuming ever since Boeing issued a complaint with the Trump Administration that Canada's Bombardier (BDRAF $2-$2-$3) sold Delta its narrow-body C-Series jets below market price (a typical practice) and then received "unfair" government subsidies from Canada. This may well be true, but the protracted trade dispute kept Boeing from making this $12.7 billion sale (though that price will probably be discounted from Airbus). |
BA
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Boeing's KC-46 tanker makes first flight, will be delivered to USAF next year
(06 Dec 2017) The United States Air Force's newest generation tanker just made its first flight, and will join the fleet around the middle of 2018. The Boeing (BA $151-$279-$282) KC-46 Pegasus, which was developed using the 767 airframe, made its maiden voyage on Monday, 05 December—a critical step in the program's success. More is on the line for Boeing than for the Air Force, as the branch's financial obligations are capped at $4.9 billion in the fixed-price terms of the contract. There are a few challenges with the tanker (boom tends to scrape jet being refueled, for example), but Boeing expects to have them ironed out early in the new year. |
LMT
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Details emerge on Lockheed Martin's replacement for the SR-71 spy plane
(22 Nov 2017) One of our all-time favorite aerospace firms, Lockheed Martin (LMT $246-$317-$322) is working on an advanced spy plane to replace the SR-71 Blackbird, which was retired in 1998. The SR-72 will be able to go about twice as fast as its predecessor, reaching speeds of Mach 6 (about 4,500 mph). Here's the fascinating part: as it will be able to reach any point on earth (well, above the earth) within an hour, the Air Force wants it to have the capability to strike targets as well. Placing a weapons system on a machine designed for that kind of speed will be an incredible challenge. If anyone can do it, LMT's Skunk Works is the team. Oh, and here's one more interesting tidbit: we will not be putting a pilot at risk, as it will be unmanned. |
BDRAF
EADSY |
Canada's Bombardier aligns with Airbus on its C-Series jet rather than China
(17 Oct 2017) Yesterday we reported that Canadian rail and aircraft maker Bombardier (BDRAF $1-$2-$2) was looking at China as a possible acquirer of its beleaguered aerospace division. On Tuesday morning it was reported that the $70 billion European conglomerate Airbus (EADSY $14-$23-$24) would actually take majority ownership of the company's C-Series jet program. To avoid the 300% tariff on the jets threatened by the US Department of Commerce, Airbus has agreed to assemble any of the jets ordered by American carriers at the company's Alabama manufacturing plant—a capability Bombardier did not have. The 110- to 130-seat series cost $6 billion to develop and has not obtained a new order in 18 months. |
BDRAF
BA |
After setbacks, Canada's Bombardier may sell aerospace unit to China
(16 Oct 2017) After several setbacks, including the most recent trade dispute with the US, Canadian rail and aircraft maker Bombardier (BDRAF $1-$2-$2) is said to be exploring options to sell its aerospace division. The $4 billion manufacturing firm hasn't seen a profit since 2013, despite annual revenues in the $17 billion range. After Boeing (BA) complained of illegal government subsidies to Bombardier, the US Department of Commerce proposed trade duties of 300% on the company's CSeries jets. Who would be the buyer of the aerospace division? China appears to be the leading contender. The communist country would love to get its hands on the firm's technology, though the acquisition would likely face stiff opposition from Canadian regulators. The Quebec provincial government owns a 49% stake in the aerospace unit—a condition which would never be allowed to exist in the US (thankfully). |
HON
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Honeywell reviews business model, does precisely the opposite of what activist wanted
(10 Oct 2017) More often than not, financial engineering is a joke—the supposed creation of value by rearranging the corporate deck chairs. Which is why I also hate most activist investors; bloodsuckers who didn't have a thing to do with a company's growth and success, but are there to suck millions of dollars out of a company by forcing management to create false value by rearranging operations. Take Penn Global Leaders Club member Honeywell (HON $105-$144-$144). Apparently the company's steadily-stellar stock performance wasn't good enough for Third Point's Dan Loeb. He demanded the company spinoff its most valuable asset—its aerospace business. After a strategic review, management did just the opposite. It will focus more on the aerospace and defense business and spinoff the company's home (think HVAC controls) and automotive units instead. The units will become independent, publicly-traded companies by the end of next year. Smart move. Now take a hike, Loeb. |
SpaceX
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Elon Musk outlines a revamped SpaceX rocket lineup
(29 Sep 2017) Elon Musk is re-engineering and streamlining his SpaceX rocket lineup. Instead of designing and building a number of different rockets, Musk plans to design one versatile series which could be tasked for everything from delivering satellites to orbit, a city-to-city ferry trip, or a manned mission to Mars. His BFR (you can figure out the acronym) will be ten times more powerful than the company's flagship Falcon 9 rocket and more capable than the Falcon Heavy slated to lift off for the first time later this year. Musk also set out an astoundingly-aggressive timetable for the first trip of his BFR to Mars: 2024. |
OA
NOC |
Northrop Grumman to buy Penn member Orbital ATK for $7.8 billion
(18 Sep 2017) We have held mid-cap rocket-maker Orbital ATK (OA $72-$132-$112) in various Penn strategies for years; before, in fact, Orbital and ATK merged to form their current company. Now, in a new twist, aerospace giant (at least compared to OA) Northrop Grumman (NOC $208-$266-$275) has announced that it will buy Orbital for $7.8 billion. OA popped 20% in the pre-market after the announcement. We hate to see one-less publicly traded aerospace firm to invest in, but this acquisition makes a lot of sense for Northrop. Back on the 22nd of August we reported that NOC had been awarded a contract from the US Air Force to design the next generation of intercontinental ballistic missiles—the ICBM-X series US nuclear missile system. Orbital ATK already had a number of government contracts on the books for its rocket and propulsion systems, and it certainly would have been providing assets to the new missile system. For its part, Northrop has been stuck in a bit of a rut, falling behind larger, more powerful peers Boeing (BA) and Lockheed-Martin (LMT). Another industrial giant, United Technologies (UTX), recently acquired aerospace company Rockwell Collins for about $23 billion. Stagnation is unacceptable in virtually any industry; it is a death knell in the aerospace and defense business. There are few certainties in life, but we can make two blanket statements with confidence. First, the world is a dangerous place, with new threats arising all the time. Secondly, the nascent private space business is about to blossom. Both of these certitudes portend good things ahead for the industry. As for Orbital ATK the stock, we are taking our 105% gain off the table—its current share price equals the approximate value of the deal. Reprinted from this coming Sunday's Penn Wealth Report. What did we do with our OA shares? Members can take a look at the Trading Desk. |
AVAV
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Our stock-of-the-day for Monday rockets up 20% on Wednesday
(30 Aug 2017) Two days ago, we highlighted a small aerospace & defense company called AeroVironment, Inc. (AVAV $22-$47-$47). On Wednesday, after the company reported a 21% spike in revenues this past quarter over same-quarter 2016, the company rocketed up 20%, shattering its old record highs. The company makes unmanned aircraft for the government and provides EV (electric vehicle) equipment and services to the civilian world. |
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Stock of the Day: AeroVironment, Inc.
(28 Aug 2017) AeroVironment (AVAV $22-$39-$40) is a $927 million small-cap in the aerospace and defense industry. The company supplies unmanned aircraft systems, tactical missile systems, and related services to government agencies. In addition to its numerous and ongoing government contracts, the company also electric vehicle (EV) charging products and services to business and individuals. If you’ve ever seen several of those electric charging spots outside of a Whole Foods, there is a good chance that they were produced by AVAV. The company sells about $300 million worth of products and services each year and has maintained a positive net cash flow year in and year out. Based on the external environment, the company operates in two industries with very promising futures. |
LMT
RTN |
Lockheed Martin, Raytheon will battle it out for new weapons system
(28 Aug 2017) The US Air Force wants a replacement for its aging AGM-86B Air Launch Cruise Missile fleet (produced by Boeing in the mid-1980s), and it has chosen Lockheed Martin (LMT $229-$304-$308) and Raytheon (RTN $133-$179-$181) to battle it out for the contract. The new Long Range Standoff (LRSO) missile will be capable of penetrating and surviving advanced air defense systems from a significant range to strike and destroy strategic enemy targets. LMT and RTN have both received a $900 million contract to develop the system and demonstrate its capabilities. The ultimate contract will be worth $20 billion to $30 billion for the winner. |
NOC
BA LMT |
Northrop Grumman, Boeing win nice US Air Force contracts
(22 Aug 2017) Northrop Grumman (NOC $207-$272-$275) announced that it has been awarded a $329 million contract for the design phase of the new ICBM-X series US nuclear missile system. This initial phase will be completed by 20 Aug 2020. A similar contract worth $349 million was awarded to Penn Global Leaders Club member Boeing (BA $126-$239-$246). This begs the question, what happened to Lockheed Martin (LMT $229-$304-$308), which had also thrown its hat into the ring? While no specifics were given, the Air Force simply stated that they decided to go with the NOC and BA bids. We own all three companies in the Penn Dynamic Growth Strategy holding ITA, the iShares US Aerospace & Defense ETF. |
GD
ITA |
General Dynamics wins US Navy contract; Stryker delivered to army
(16 Aug 2017) One of our core defense holdings, General Dynamics (GD $149-$200-$206), has been awarded a $10 million contract from the US Navy for sustainment of its US- and UK-based fire control system and attack weapons control system. Much of the work will take place at Cape Canaveral Air Force Station, which is quickly becoming about as exciting as it was during the height of the nascent manned space program in the US. General Dynamics has also been in the news for the latest version of its Stryker vehicle, which has been delivered to the US Army for deployment to Eastern Europe. The vehicle is equipped with a new 30mm cannon and Javelin anti-tank missiles which have the capability of decimating the latest Russian hardware on the ground. To take advantage of the rebuilding of the US military, we also use ITA, the iShares US Aerospace & Defense Fund, in the Penn Dynamic Growth Strategy. |
BA
EADSF |
(15 Aug 2017) Boeing on a roll: 737 production ramps up to 52 per month.
For decades, the perennial question in the aircraft manufacturing industry was which giant would land more orders for the year: America's Boeing (BA $126-$237-$246), or the European Union's government subsidized Airbus (EADSF $56-$84-$87). As of late, however, it really hasn't been a contest—Boeing is eating Airbus's lunch. The Everett, Washington-based company just announced that it would ramp up production of its 737 airliner from 42 to 52 per month, surpassing its previously-announced increase to 47 per month. This past May the company delivered its first 737 MAX 8 to Malaysia-based Malindo Air. With the ramped-up production, Boeing will be producing 620 model 737’s per year. That is truly astounding. Boeing is a member of the Penn Global Leaders Club. |
HON
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(21 Jul 2017) Penn member Honeywell beats estimates, raises 2017 sales guidance.
Penn Global Leaders Club member and aerospace giant Honeywell (HON $105-$135-$136) reported sales of $10.08 billion in Q2, with $1.39 billion of that figure flowing through as net income. Earnings came in at the high end of expectations—up 10% year-over-year—and the company raised its full-year sales outlook to an even $40 billion. The company is up 43% since being added to the PGLC, and up 16% year-to-date. |
LMT
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(19 Jun 2017) Lockheed Martin in final stages of massive F-35 deal. After Boeing's (BA $122-$199-$199) successful launch of its F-22 Raptor, and during an administration with a chilly opinion of defense spending, Lockheed Martin's (LMT $229-$283-$284) new attack aircraft, the F-35 Lightning, appeared to be on life support. A lot has changed in five short years, as a pro-defense administration is at the helm and the F-35's luck appears to have changed. Lockheed is about to wrap up an enormous deal to sell a record 440 F-35s to a consortium of 11 nations, including the US DoD, for over $37 billion (an average of $85 million per aircraft). The aircraft, which should really be labelled the A-35, would replace older airframes such as the A-10, F-16, F/A-18, and the AV-8B Harrier.
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ERJ
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(19 Jun 2017) Penn member Embraer rocks the Paris Air Show. When we added Brazilian aircraft maker Embraer SA (ERJ $17-$20-$25) to the Penn Global Leaders Club two months ago, we labelled it the "ignored stepchild" of the industry. Now, with its impressive showing at the Paris Air Show, more industry professionals are starting to take notice. Shares were up 6% intraday Monday as the firm showed off its military KC-390 medium transport, the new E195-E2 airliner, and its Legacy 450 business jet. President and CEO Paulo Cesar Silva has proclaimed "it is time to monetize our portfolio...." Bravo!
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HEI
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Stock of the Day. (22 May 2017) Heico's aerospace and defense business flies under the radar screen of most investors. You have probably never heard of Hollywood, Florida-based Heico Corp. (HEI $50-$74-$75), but they have been quietly turning a profit year after year...after year. The 55-year-old aerospace, defense, and industrial firm makes components for commercial airliners, business and military jets, and a variety of missile systems. With a market cap in the sweet-spot $6 billion range, the company has plenty of room to grow. The company has been skillfully acquiring businesses which operate in complementary, niche markets. Put it on your "industrials" watch list.
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(16 May 2017) SpaceX launches its largest payload to date. It's only the middle of May, and Elon Musk's privately-held SpaceX has quietly just launched its sixth, yes sixth, successful mission of the year. This time around, the Falcon 9 rocket carried a payload about the size of a really fat school bus into orbit for communications satellite company Inmarsat. The satellite, part of a larger network, will provide high-bandwidth broadband Internet access around the world, to include 35,000 feet in the air aboard a commercial airliner.
(15 May 2017) Embraer's Super Tocano to participate in USAF demo this summer. Penn Intrepid Trading Platform member Embraer SA (ERJ $17-$20-$25) has received word that the United States Air Force will review the company's A-29 Super Tocano at its light attack aircraft demo this summer. If it performs as well as we expect, the demo could lead to a procurement of the aircraft, which already holds a USAF military-type certificate (the only light air support aircraft in the world which can boast that rating). If a deal does happen, the aircraft would be produced at Embraer's Jacksonville, Florida production facility.
(Photo: A Tacano and two Warthogs)
(Photo: A Tacano and two Warthogs)
(01 May 2017) SpaceX successfully launches top-secret spy satellite. Elon Musk's closely-held SpaceX just notched another victory. Early morning Monday, the unmanned Falcon 9 rocket lifted off from NASA's Kennedy Space Center with the top-secret satellite for the National Reconnaissance Office. Several minutes after liftoff, the booster stage of the rocket stuck a controlled landing at Cape Canaveral Air Force Station. Another successful US government-contracted mission completed. How many government contracts does your Blue Origin plaything have again, Bezos?
(18 Apr 2017) Stock of the Day. Is Embraer flying under the radar? With peers like Boeing and Airbus stealing all of the industry headlines, Brazilian aircraft manufacturer Embraer SA (ERJ $17-$20-$25) tends to be an ignored stepchild. That may be a mistake for investors. Finding a great company with consistent revenue, a positive net income, and an undervalued share price can be like stumbling upon a jewel in a dust heap. With a market cap in the sweet mid-cap range of just below $4 billion and a new line of aircraft coming to the international market, this company is worth considering. See our full report in this Sunday's Penn Wealth Report. Click Here: Vol. 5, Issue 02.
(02 Apr 2017) SpaceX makes history with recycled booster stage launch. Elon Musk's privately-held SpaceX made history this week when it launched a Falcon 9 rocket from storied Pad 39A at the Kennedy Space Center. The big news had nothing to do with the launch site, or even the payload—a telecom satellite which will serve Latin America. The history being made revolved around the first (booster) stage of the enormous Falcon 9. This particular booster stage had already been launched on a previous mission, after which it performed a controlled landing at Cape Canaveral's Landing Zone 1. The ability to refurbish and re-use a rocket's first stage will bring down the per-launch costs dramatically.
(27 Feb 2017) SpaceX to send paying customers beyond the moon in 2018. In a stunning announcement, both in scope and time horizon, Elon Musk's closely-held Space Explorations Technologies (SpaceX) said it will launch a crewed mission beyond the moon in 2018. This will be the first time since Apollo 17 in 1971 that humans will go into deep space, and it will be the furthest out from planet earth that any human being has yet to travel.
Musk said that the company was approached by two "paying customers" with respect to the mission. He went on to say that such trips could, at some point in the not-too-distant future, account for 10-20 percent of SpaceX revenues. The trip would take place after a planned manned mission to the International Space Station with NASA astronauts aboard the Dragon 2 spacecraft. The SpaceX Falcon Heavy rocket, which will launch the capsule into orbit, is scheduled to make its maiden launch this summer.
Memories of Ray Bradbury's The Martian Chronicles, whose first chapter is titled Rocket Summer, come flooding back to mind. Companies like to bandy the term "moon launch" around these days. This is, quite literally, the real thing.
Musk said that the company was approached by two "paying customers" with respect to the mission. He went on to say that such trips could, at some point in the not-too-distant future, account for 10-20 percent of SpaceX revenues. The trip would take place after a planned manned mission to the International Space Station with NASA astronauts aboard the Dragon 2 spacecraft. The SpaceX Falcon Heavy rocket, which will launch the capsule into orbit, is scheduled to make its maiden launch this summer.
Memories of Ray Bradbury's The Martian Chronicles, whose first chapter is titled Rocket Summer, come flooding back to mind. Companies like to bandy the term "moon launch" around these days. This is, quite literally, the real thing.
(05 Jan 2017) Fulfilling campaign promise, Trump to propose big increase in defense spending. With the president's first budget proposal just weeks away (despite not having an OMB director thanks to activist Democrats holding up Mick Mulvaney's confirmation), some themes are beginning to crystallize. Trump will call for a sizable increase in defense spending, citing the lack of military readiness after eight years of apathy and outright negligence. In fulfilling another campaign promise, the president will not call for cuts to Social Security or Medicare, so he will be targeting government waste in departments such as the Environmental Protection Agency to fund the extra defense expenditures. Our Penn Dynamic Growth Strategy holding, the iShares US Aerospace & Defense fund, is up 39% since we purchased it last January, and we expect plenty of gains ahead.
(03 Jan 17) SpaceX eyes 08 Jan return to space. After concluding its investigation into the explosion of a Falcon 9 rocket during launchpad refueling last September, the company is targeting a return to space this coming Sunday, January 8th. Broken carbon fibers in the vacinity of the upper oxygen tank apparently allowed super cold liquid oxygen to mix with materials used for the helium pressure vessels, causing a disastrous chemical reaction. SpaceX says it has made modifications to the rocket to assure a similar incident will not take place.
Cessna Delivers 5,000th Light Jet
The company has come a long way since Clyde Cessna, a farmer in Rago, Kansas, built and flew his own aircraft. 105 years later, the Wichita-based subsidiary of Textron (TXT) Aviation just delivered its 5,000th light private jet.
Lucky number 5k, which rolled out of the Textron Aviation hanger in Wichita during a special ceremony, is a Citation M2—an entry level corporate jet that can fly 1,550 nautical miles without refueling. With a maximum cruise speed of 404 ktas (knots true airspeed), or 465 mph, you could make it from the middle of Kansas to Disneyworld (via Orlando Int’l Airport) in under three hours.
This particular jet was purchased by Helitrip Charter LLP for lease to Catreus Ltd., a charter operator out of the United Kingdom. With a list price of around $4.4 million, the Citation M2 is about half the price of the average light private jet, and has been a popular choice for companies moving into the jet arena (from turbo-prop).
With first deliveries beginning just five years ago, this reasonably-priced gem comes packed with a Garmin G3000 flight deck and an all-glass, touch-screen controller. Parent Textron has recently been a member of the Penn Global Leaders Club (PGLC).
(See our target purchase price for Textron in this coming Sunday’s Penn Wealth Report, Vol. 4, Issue 40.)
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The company has come a long way since Clyde Cessna, a farmer in Rago, Kansas, built and flew his own aircraft. 105 years later, the Wichita-based subsidiary of Textron (TXT) Aviation just delivered its 5,000th light private jet.
Lucky number 5k, which rolled out of the Textron Aviation hanger in Wichita during a special ceremony, is a Citation M2—an entry level corporate jet that can fly 1,550 nautical miles without refueling. With a maximum cruise speed of 404 ktas (knots true airspeed), or 465 mph, you could make it from the middle of Kansas to Disneyworld (via Orlando Int’l Airport) in under three hours.
This particular jet was purchased by Helitrip Charter LLP for lease to Catreus Ltd., a charter operator out of the United Kingdom. With a list price of around $4.4 million, the Citation M2 is about half the price of the average light private jet, and has been a popular choice for companies moving into the jet arena (from turbo-prop).
With first deliveries beginning just five years ago, this reasonably-priced gem comes packed with a Garmin G3000 flight deck and an all-glass, touch-screen controller. Parent Textron has recently been a member of the Penn Global Leaders Club (PGLC).
(See our target purchase price for Textron in this coming Sunday’s Penn Wealth Report, Vol. 4, Issue 40.)
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(19 Jul 16) For the fifth time in seven months, Elon Musk’s SpaceX has launched a Falcon 9 rocket and successfully soft-landed the first stage back on solid ground. But the launch wasn’t about the rocket’s first stage; the focus was on getting 5,000 lbs of cargo, scientific equipment, and a new port to the International Space Station.
The port (or International Docking Adapter) the Dragon capsule delivered into orbit will be an essential part of upcoming manned missions to the ISS. The 63-inch wide ring will be fitted to the space station to allow astronauts easier access from the Dragon to the ISS. A manned version of the Dragon capsule is slated to go into orbit later next year. The port is universal, meaning it will also allow for access from other space vehicles, such as United Launch Alliance’s (a Boeing/Lockheed Martin joint venture) manned capsule.
Since the retirement of the Space Shuttle, American astronauts have been forced to hitch a ride to the ISS aboard Russian rockets. Additionally, NASA has been forced to buy Russian engines to launch American rockets. We wonder what would John F. Kennedy think of that situation?
What is done is done. We can now look forward to a bright future of American private enterprise operating in near-earth orbit and beyond. Well done, Elon Musk.
SpaceX is a privately-held—at least for now—aerospace company founded by Musk in 2002, with the ultimate goal of enabling humans to live on other planets.
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(Reprinted from this coming Sunday’s Penn Wealth Report, Vol. 4, Issue 29.)
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The port (or International Docking Adapter) the Dragon capsule delivered into orbit will be an essential part of upcoming manned missions to the ISS. The 63-inch wide ring will be fitted to the space station to allow astronauts easier access from the Dragon to the ISS. A manned version of the Dragon capsule is slated to go into orbit later next year. The port is universal, meaning it will also allow for access from other space vehicles, such as United Launch Alliance’s (a Boeing/Lockheed Martin joint venture) manned capsule.
Since the retirement of the Space Shuttle, American astronauts have been forced to hitch a ride to the ISS aboard Russian rockets. Additionally, NASA has been forced to buy Russian engines to launch American rockets. We wonder what would John F. Kennedy think of that situation?
What is done is done. We can now look forward to a bright future of American private enterprise operating in near-earth orbit and beyond. Well done, Elon Musk.
SpaceX is a privately-held—at least for now—aerospace company founded by Musk in 2002, with the ultimate goal of enabling humans to live on other planets.
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(Reprinted from this coming Sunday’s Penn Wealth Report, Vol. 4, Issue 29.)
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United Technologies
(10 Jan 2016) Unless you are betting on a big aerospace downturn (a mistake) or major economic slowdown (another mistake), now is the time to add UTX to the mix. (See article in The Penn Wealth Report by clicking button to right) |
Northrop Grumman Beats Back Boeing to Win Long-Range Bomber Contract
(02 Mar 16) It wasn’t too long ago—last year, in fact—that Northrop GrummanNOC appeared on the verge of losing its status as a major contractor for the US Department of Defense. Had the company lost its bid to build America’s next generation bomber to BoeingBA, it might have had little choice but to exit the defense business lock, stock, and gun barrel. All that changed when the Air Force awarded the lucrative long-range strike bomber (LRS-B) contract to the company, over the vociferous protests of Boeing.
Last week BA and Lockheed MartinLMT lost their legal battle to reverse the award on the grounds that the process was “fatally flawed.” The Government Accountability Office disagreed with that specious argument, greasing the skids for what could be a $60 billion to $80 billion windfall to Grumman.
The weapon system itself, which Air Force Secretary Deborah Lee James unveiled in an artist’s rendering last week, is a thing of beauty. Resembling it’s father, the B-2 Stealth Bomber, the machine is designed to replace the generations’ old B-52 Bomber, and have the capability to launch from the United States and attack any point on earth. Ultimately, the yet-to-be-named aircraft will also replace Rockwell’sROK B-1 Lancer, which entered service in 1986. That would leave two Northrop Grumman beasts, the B-2 and the B-21, in control of the aircraft leg of America’s nuclear triad.
The Pentagon is thinking strategically with respect to the military-industrial complex. While we believe NOC was clearly the right choice, the DOD wants to maintain a healthy stable of defense contractors. Boeing, which gobbled up McDonnell-Douglas in 1997, has been the clear behemoth in the space for the past 20 years.
As an investment, we have held NOC in the Penn Global Leaders Club in the past, but find it a bit overvalued right now. At $192 per share and with a P/E of 19, we prefer our current defense holdings: RaytheonRTN, Boeing, and United TechnologiesUTX.
(Reprinted from the Journal of Wealth & Success, Vol. 4, Issue 3.)
Two Penn Global Leaders Club members may morph into one
(UPDATE 23 Feb 16) United Technologies' exemplary CEO Gregory Hayes said, bluntly, deal is NOT going to happen. We believe him.
(22 Feb 16) Two industrial giants, both members of the Penn Global Leaders Club, are talking merger. Industry analysts are buzzing reports that HoneywellHON and United TechnologiesUTX are in the very nascent stages of discussing how their two $85 billion companies might forge into one.
Of huge concern is whether or not the US government and the EU would let the merger actually take place, considering the large overlap of products and services between the two. Expect fierce opposition from the likes of BoeingBA and Airbus if a deal does get hammered out.
In the discussions, two weeks in the works, it is rumored that Honeywell offered a premium to UTX’s current stock price of around $94 per share (post-bounce) to be funded by cash and share offerings. For its part, UTX has expressed grave concern over whether or not a deal actually could pass antitrust reviews on both sides of the pond. Combined, HON and UTX provide an enormous number of components placed in new airliners during assembly. A combination, Boeing and Airbus would argue, could increase costs by eliminating competition.
Last year, when UTX was actually larger in market cap than Honeywell, the former’s CEO approached Honeywell’s David Cote to discuss a “merger of equals,” though UTX would hold the upper hand. The tables turned after UTX suffered a large decline it its share price, and the talks were called off. Then, smelling blood in the water, Honeywell approached UTX with a “bear hug” letter offering shareholders a slight premium if a deal went through.
Despite the “merger of equals” talk, HON now held the upper hand. UTX flatly rejected the offer last October, leading to speculation that a hostile takeover may be attempted by Honeywell should this most recent deal be shunned.
Shares of Honeywell were flat on the news, while slightly smaller UTX bounced 7% on the report. Keep in mind that a GE attempt to buy HON in 2000 was ultimately shot down by EU regulators.
(Reprinted from the Journal of Wealth & Success, Vol. 4, Issue 3)
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The historic SpaceX launch was a victory for Americans, not the government
It will ultimately be remembered as a turning point in the history of spaceflight. On Monday night, the 21st of December, Elon Musk’s Space Exploration Technology Corp. (SpaceX) lit up the dark Florida sky when its Falcon 9 rocket, powered by nine Merlin engines, blasted off from Launch Complex 40 at the Cape Canaveral Air Force Station. The success of the mission was impressive enough—the rocket carried a payload of eleven ORBCOMM satellites to low earth orbit (LEO), releasing them precisely as planned—but the real excitement remained within the atmosphere.
For the first time in history, the initial stage of a massive, two-stage rocket was safely maneuvered back to the earth after its launch, nestling itself within the confines of its pre-planned target area. Witnessing the heart-pounding feat took us back to the thrilling earlier days of NASA, when moon launches, missions to Mars (remember Viking in 1976?), and shuttles taking off and returning horizontally to earth seemed to be the norm. When President Obama scuttled George Bush’s plans to build a lunar base, it seemed as though we had left the Space Age for a return to the Dark Ages. But Elon Musk has changed that, with an exciting twist.
Sure, SpaceX has government contracts to resupply the International Space Station (can we really still call it that, since the Russians have claimed it now belongs to them for all intents and purposes?), but SpaceX is a private company. And Musk’s grand plan for space travel and the colonization of Mars will be a private sector venture. No longer must Americans listen to the likes of then-Senator Mondale, who voted against the Apollo program on the grounds that we needed the money here on earth. No longer must we really care that NASA is now a taxpayer-funded tool for “Muslim outreach,” as Obama’s space chief famously proclaimed to Al-Jazeera in July of 2010. No, not this time.
Musk’s accomplishment was a uniquely American feat, reminiscent of the Union Pacific and Central Pacific railroads meeting in Promontory, Utah in 1869. The zeitgeist at that point in American history was manifest destiny—a term demonized by those who apologize for American greatness. For all who scoff at the notion of American exceptionalism, we dedicate Monday’s Falcon 9 launch to you. Despite the naysayers, detractors, and grand failures, entrepreneurs and visionaries like Musk will press forward, ultimately improving the lives of all—even the loud-mouthed cogs in the machinery who seem to get all of the attention these days.
How to take part in the private space travel renaissance.
It is our professional opinion that two groups will take the lead in the great private space race that is unfolding. Fittingly, both groups are American. The first is the United Launch Alliance, a 50/50 partnership between BoeingBA and Lockheed MartinLMT. The second big player will be SpaceX, which has already secured contracts that include manned trips to the International Space Station using the company’s Commercial Crew Transportation Capability (CCtCap). Unlike Musk’s auto and solar interests, SpaceX is not (yet) a publicly-traded company. When it IPOs, you can bet we will be on board.
(Reprinted from the Journal of Wealth & Success, Vol. 4, Issue 1.)
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Penn New Frontier Member Orbital Takes Part in Secret Launch
(08 Oct 15) The United Launch Alliance, a joint space launch venture between Boeing and Lockheed Martin, successfully launched a spy satellite from California’s Vandenberg AFB early this morning. The secret NROL-55 payload included 13 small CubeSats which can be controlled independent of one another. These miniaturized satellites are cubes of about 10 cm in height and width.
While NASA will control four of the CubeSats, the other nine will be controlled by the National Reconnaissance Office (NRO), one of the “big five” US intelligence agencies. The NRO reports to the SecDef and the Director of National Intelligence.
Orbital ATKOA produced structures and components for the Atlas V launch vehicle that rocketed the payload into low-earth orbit. This launch marked the 23rd consecutive successful flight of Orbital’s retro motors. (Reprinted from next Sunday's Journal of Wealth & Success, Vol. 3, Issue 38.)
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Industrials: Aerospace & Defense
Google May Invest $1 Billion in Musk’s New SpaceX Project
(20 Jan 15) Pioneer Elon Musk wants to build a global communications system designed to bring Internet access to every corner of the world. And Google, which has a history of lofty ideas, wants in on the deal.
It appears that Google may be close to investing about $1 billion in Space Exploration Technologies Corp. (SpaceX), Musk’s aerospace company, to support the company’s uber-ambitious plan to build and launch hundreds of satellites into low-earth orbit (LEO) for the purpose of delivering the Internet to every remote location on the globe....
Boeing Soars at the Dubai Airshow--Union Fight at Home
(18 Nov 13) Middle East-based airlines gave Boeing a lot to crow about during the weekend's Dubai Airshow event. The U.S. airline maker announced the official launch of its 777X wide-body jet, and the news was greeted with 259 firm orders worth roughly $100 billion. Boeing also announced large orders for its 787 Dreamliner and the 737 MAX and Next Generation aircraft. The American manufacturing juggernaut already has a $344 billion commercial backlog of orders it carried forward from the third quarter of 2013.
Airbus, the EU-sponsored European aircraft firm and competitor of Boeing, had some nice orders for its own new wide-body, the A380, but there is little doubt that Boeing came away the real winner. Purchasers included Lufthansa with 34 airplanes, Etihad Airways with 25, Qatar Airways with 50, and Emirates with 150. Each 777X comes with a list price of between $350 million and $375 million, though manufacturers often make some price concessions for large orders. The long-range jets are capable of carrying between 350 and 400 passengers. The 777X's cabin has dual aisles, with ten seats in each row--four in the middle and three on both sides.
A fascinating storm is brewing with respect to where Boeing will build the enormous new aircraft. The company is expected to announce by January whether it will be built at their Washington state location,where workers can be forced into a union, or in Right to Work South Carolina, where many of the 787 Dreamliners are now fabricated and assembled. On Wednesday the 13th of November, members of the International Association of Machinists and Aerospace Workers rejected, by an overwhelming margin, a contract offer that would have made Washington the odds on favorite. Members may come to regret that vote, as we now expect Boeing to announce South Carolina as the winning facility.
In another interesting twist, the president of Emirates Airlines strongly urged Boeing to build 100% of the 777X within the United States. He cited the huge cost overruns and logistical problems the firm faced with the Dreamliner, as parts of that aircraft were assembled in locations such as Japan and Italy. The CEO made headlines by telling Boeing "Please don't do to the 777X what you did to the 787. Don't do that to us." His sentiments were echoed by Qatar Airways' Chief Executive Akbar al Baker.
The order at Dubai was extremely important for Boeing, which relies on military contracts for about 40% of its earnings. Defense cutbacks in the U.S. have necessitated firms like Boeing to allocate more resources to their civilian product lines.
Japan Airlines Delivers a Blow to Boeing with Airbus Deal
(07 Oct 13) When America helped Japan rebuild after World War II, U.S. manufacturing companies began forging strong relationships with their Japanese counterparts which have lasted for generations. One of the strongest industrial relationships was in the aerospace and defense sector. That cozy friendship was dealt a serious blow with the announcement that Japan Airlines, JAL, would proceed with a $8 billion deal to buy 31 model A350 long-haul aircraft from Airbus.
A catalyst for the deal has been the long delays encountered by Dreamliner customers, as the aircraft's advanced technology created unforeseen technical glitches needing attention--and time. JAL was an early customer for the new jet, but problems came to a head when the fleet was grounded due to battery issues. Ironically, more and more of the makeup of Boeing jets consist of Japanese instruments and labor, including the batteries tied to the problems. It was Kyoto-based GS Yuasa Corp. which made the batteries and Kanto Aircraft Instrument of Tokyo which made the circuit board for the battery pack. In all, roughly 35% of a Boeing 787 Dreamliner can be traced directly to a Japanese manufacturing firm.
This is the free market in action and, while disappointing, the executives at JAL have every right to give this contract to the European Union's pet project, Airbus. However, so many Japanese companies are directly tied to Boeing that a slap in the fact to the American firm may reverberate as a knockout blow to firms back in Japan. Only time will tell, but our guess is that this was simply a shot across the bow and a culmination of industry executives' frustration with the delays and groundings. All Nippon Airways, JAL's competitor, will need to replace its aging Boeing fleet soon, and we would expect Boeing to get those contracts.
South Korea Postpones New Fighter Jet Contract
(24 Sep 13) To read the headline, South Korea dealt a blow to the United States when it rejected a plan to buy 60 F-15 Silent Eagle fighters from Boeing. As is typical, the journalists misrepresented the facts and wrote their dream, anti-military, headline instead.
South Korea, which must be in a perpetual state of readiness thanks to its nut-job neighbor to the north, needs to begin replacing its aging fleet of roughly 400 fighters--many of which are Vietnam-era F-4 Phantoms and F-5 Tiger IIs. Boeing pitched its F-15 Silent Eagle--a "stealthy" version of its deadly F-15 Strike Eagle--to our Korean friends. The challenge for the government was to balance its budget for the aircraft (the deal would have been worth $7.7 billion) with the advanced technology it needs to counter the Russian- and Chinese-supplied North Korea.
While the F-15 is an impressive beast, the Koreans really want the brand new, state-of-the-art, F-35 Lightning II rolling off the Lockheed Martin (LMT) assembly lines. The Pentagon is happy to supply our close allies with the fifth-generation fighter, as the more buyers available the greater the economies of scale will be able to reduce the price tag. Price, in fact, is the only major sticking point with the Koreans; so far, the jet is just out of their budget range.
Lockheed believes they can continue to reign in the cost of the F-35 to the point where they will receive the Korean contract. They are likely to have two major competitors in the contest--Boeing will re-bid and a European consortium known as Eurofighter will probably also take part in the process. In the end, however, we believe Lockheed will prevail. This is good news for the United States, whose "lifetime price" of its 2,400-strong fleet of the jets will exceed $1.1 trillion. Then again, putting that sum in perspective, it is only the amount the U.S. government exceeds its budget every twelve months.