New Rocket Lab Price Target After Sell Off Reverse
The aerospace firm is riding high on news of some major government contracts.
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Sarge-fave, core Sarge-folio holding and former core "Stocks Under $10" portfolio holding Rocket Lab USA RKLB reported the firm's first quarter financial results last Thursday evening. Due to a family emergency that required my having to take Friday off, I was not able to cover those earnings on Friday morning as planned. I know many readers of the "Small Caps / Stocks Under $10" column are invested in and follow this name. Hence, a trading day late, here it goes...
For the three-month period ended March 31, Rocket Lab USA posted an adjusted EPS of -$0.07 (GAAP EPS of -$0.12) on revenue of $122.569 million. Both the top- and adjusted bottom-line numbers beat Wall Street's expectations, while that sale sprint was good enough for year-over-year growth of 32.1%.
During the quarter, the firm successfully on-ramped the Neutron rocket to the Department of Defense's $5.6 billion national Security Space Launch program (Phase 3, lane 1).
The firm also launched five Electron missions for three separate commercial satellite constellation operators and was awarded a new HASTE launch contract by Kratos KTOS for the DoD's MACH-TB 2.0 hypersonic defense program.
Lastly, the firm was elected to two multi-billion-dollar U.S. and U.K. government programs making the HASTE launch vehicle eligible to compete for hypersonic flight tests.
New News
Rocket Lab announced this past Thursday that the firm will launch its new medium-lift reusable Neutron rocket for the U.S. Air Force Research Lab for a cargo mission that supports point-to-point transportation. The launch contract will test Neutron's survivability in an experiment as the DoD looks to expand space cargo delivery capabilities using commercial providers.
Operations
For the quarter, Rocket Lab drove product revenue of $80.804 million (+49.2%) and services revenue of $41.765 million (+8.1%) to get to that $122.569 million (+32.1%) sales number. Total cost of that revenue increased 27.3% to $87.322 million, leaving a gross profit of $35.247 million (+45.8%). This took the firm's gross margin from 26.1% up to 28.8%.
Total operating expenses printed at $94.435 million (+40%), leaving the firm's GAAP operating income/loss at -$59.188 million, down from the year-ago comparison of -$43.079 million. After accounting for interest, taxes and other income and expenses, the firm's GAAP net income/loss attributable to shareholders landed at -$0.12, down from -$0.09 a year ago. After adjusting primarily for stock-based compensation expense, as well as depreciation, amortization and transaction costs, EPS moved to -$0.07, down from =$0.06 for the same period a year ago.
Guidance
For the current (second) quarter, Rocket Lab is projecting revenue of between $130 million and $140 million. At the midpoint, this would be good for year-over-year growth of 27.1% but is short of the $137 million that Wall Street had in mind. That's probably why there was a risk-off reaction to these earnings this past Friday. Gross margin is seen at 30% to 32%. Adjusted gross margin would be 34% to 36%. Finally, adjusted EBITDA is projected at $28 million to $30 million.
Fundamentals
For the period, operating cash flow ran at -$54.225 million. Tack on capex spending of -$28.677 million and free cash flow landed at -$82.902 million. Obviously, Rocket Lab is not yet able to return capital to shareholders.
Turning to the balance sheet, the firm ended the period with a cash position of $428.396 million and inventories of $125.588 million. This brought current assets up to $724.85 million. Current liabilities add up to $348.116 million, including just $20.49 million in short-term debt. That puts the firm's current and quick ratios at a quite healthy 2.08 and 1.72, respectively. Rocket Lab can easily meet the firm's short to medium term obligations.
Total assets amount to $1.255 billion, including $127.201 million in goodwill and other intangibles. At 10% of total assets, this is not concerning. Total liabilities less equity comes to $823.679 million, including $403.654 million in longer-term debt. The firm has enough cash on hand to cover its entire debt-load, so that does not concern me. My one concern regarding the debt is that $345.926 million is in the form of convertible notes, simply meaning that as the stock does well, equity would become diluted
Wall Street
On Friday, four sell-side analysts rated at three stars or better at TipRanks chimed in on RKLB. Sujee De Silva (five stars) of Roth MKM, Cai von Rumohr (five stars) of TD Cowen, Erik Rasmussen (five stars) of Stifel Nicolaus, and Andres Sheppeard (three stars) of Cantor Fitzgerald all reiterated "buy" or buy-equivalent ratings.
De Silva and von Rumohr reiterated their respective $25 and $29 target prices. Rasmussen increased his target price from $27 to $29, while Sheppeard took his target from $24 up to $29. Readers will recall that I went into the event with a $28 target price.
My Thoughts
I'm impressed with the continued growth in revenues and the expectations for further growth. The continued engagement with the U.S. Department of Defense is encouraging and the potential for truly lucrative deals moving forward both in launch services and in hypersonic weapons delivery is reason enough for me to not only stay invested but grow my investment on weakness. The quality of the balance sheet is a significant positive, but cash flows must improve going forward.
Readers will see the double-bottom pattern of bullish reversal that we showed you several weeks ago. This produced the rally that we expected. However, in doing so, a rising-wedge pattern of bearish reversal formed as well. The stock suffered that sell-off late last week going into and coming out of earnings.
Relative strength is neutral. The daily MACD is still postured bullishly with the 12-day EMA above the 26-day EMA and both of those components as well as the histogram of the nine-day EMA all in positive territory. That 12-day line came close to testing the 26-day line from above, but Monday morning's early price discovery should help avoid a bearish cross-under.
Rocket Lab USA (RKLB)
Target Price: $30 (up from $28)
Pivot Point: $23.80 (April high)
Add: Down to the 50-day SMA ($19.70)
Panic: Loss of 200-day SMA ($17.20)
At the time of publication, Guilfoyle was long RKLB equity.
