Credit Suisse has initiated coverage of the aerospace & defense (A&D) industry. In an analyst note issued on Oct. 11 and seen by Payload, the bank writes that the two should not be viewed in the same light, and that “A” and “D” are a zero-sum game.
“From 1940 to 2017, these two sectors worked cooperatively, creating positive-sum outcomes across several layers of engagement,” CS analysts write. “This included shared innovation and a shared industrial base, whereby progress from one fueled the strength of the other.”
Today, the industries face similar challenges, from Covid-induced supply shocks to labor shortages, as well as similar opportunities. But now, the bank argues, a schism is developing between the “A” and the “D.”
- D, or defense, has the short-term tailwind of war in Eastern Europe and longer-term growth prospects driven by mounting US-China tensions. Credit Suisse sees defense as a growth industry for the rest of the decade, delivering 7.9% CAGR for the next eight years.
- A, or aerospace, includes both the commercial aviation sector and space. For our purposes and obvious reasons, we’ll focus on space.
Ouch: Credit Suisse has broadly bearish views on space, saying it’s a capital-intensive, highly competitive sector “with challenged unit economics, high technical and operational risks, unsupportive base rates, and little demonstrated ability to earn its cost of capital.” The bank is particularly bearish on launchers—more on that below.
Breaking out space
In an accompanying deck to its coverage initiation note, Credit Suisse says that the only proven “space” companies are in fact pure-play defense contractors or niche component suppliers.
- The space sector overstates revenue potential while soft-pedaling costs, the deck notes. (For further reading on the matter, see the forward-looking revenue estimates in space SPACs’ investor decks.)
- The industry is headed toward a speculative bubble, reminiscent of one that took place in the 1990s. (For further reading, check out Eccentric Orbits.)
- SpaceX—the poster child of “new space”—has the best shot at commanding most of the industry’s remaining upside, while other promising players have been snapped up by defense primes through M&A and industry consolidation.
- 11 newly public space companies tracked by Credit Suisse reported $1.3B in operating expenses last year against $335M in sales. High burn rates, shortening runway, and a recessionary environment don’t help the sector’s top- or bottom-line financial prospects.
“In this context, an investment in one industry is an implicit short on the other,” analysts write. “Given the state of the world today, we prefer defense.” The bank has initiated coverage of 15 A&D stocks:
- Outperform: Northrop Grumman ($NOC), L3Harris Technologies ($LHX), BWX Technologies ($BWXT), TransDigm Group ($TDG), HEICO Corp. ($HEI), Mynaric ($MYNA), and BlackSky ($BKSY)
- Neutral: Raytheon ($RTX), General Dynamics ($GD), Huntington Ingalls Industries ($HII), and Spire ($SPIR)
- Underperform: Boeing ($BA), Lockheed Martin ($LMT), Rocket Lab ($RKLB), and Virgin Orbit ($VORB)