The Space Force's Astronomical Market Impact

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About: The Boeing Company (BA), LMT, Includes: SPACE
by: Long Term Tips

Summary

The Space Force has been making tons of headlines recently, but none are dedicated to how much of an impact it can have on the market.

Boeing and Lockheed Martin are in prime position to skyrocket as a result of the formation of the Space Force.

This is a low risk, high reward thesis detailing how both previously mentioned companies can thrive with the Space Force.

Investment Thesis

An idea proposed by US president Donald Trump has been making headlines, as many people are torn on the idea of having a national Space Force. The Outer Space Treaty (OST) prevents the use of celestial bodies as military outposts or testing centers; governments also may not lay claim to any celestial body. Most importantly is makes it illegal for countries to place weapons of mass destruction in orbit, or space. President Trump has assured people that the Space Force will do nothing to violate the treaty, and will instead serve as a defensive force. Currently, the United States is not capable of launching anything into space on their own rockets because they don’t have any. In order to deploy the Space Force, the US government will likely need to rely on SpaceX (SPACE) or the United Launch Alliance (ULA) equally owned by Boeing (BA) and Lockheed Martin (LMT). Russia is very unlikely to allow the US to use their Soyuz rocket, and America would be very unlikely to want to use it as well. This new Space Force will create a strong competition between Boeing and Lockheed Martin as well as give them free reign to an empty market.

What is the Space Force

When first confronted with the idea of a space force, scenes from Star Wars are the first thing to come to mind. In reality, the Space Force is much different than this fanciful scenario. The actual Space Force is not something that is as far fetched as many make it out to be. It will take on the responsibilities of many currently active branches such as the Air Force Space Command, the Army’s 1st Space Brigade, the Navy’s Space and Naval Warfare Systems Command, and the Naval Satellite Operations Center. All of these branches are involved with space, so with the creation of a Space Force, it only makes sense to add those in as well.

The United States alone has tens of billions of dollars worth of satellites in space between both government and independent company projects. In addition, many of those satellites are integral to our everyday lives. For example, all GPS information is created with satellites, losing those could disrupt many people’s everyday lives. Mark Albrecht, the executive secretary of the National Space Council from 1989 to 1992, explained the basic principle behind the Space Force, saying that the Space Force would “not [be] materially different from the U.S. Navy, which goes around the Pacific and the Atlantic and the Mediterranean not to create trouble or to cause wars, but to make sure that all the things we enjoy are protected.”

The risk of other countries being able to destroy these satellites is becoming very real. Russia and China both had missiles capable of destroying satellites, China even tested their missile on an outdated weather satellite in 2007. This is why the Space Force is very likely to become a reality in the near future.

The Space Force’s main functions will be to monitor current satellites, and launch new military satellites when instructed to. If they detect something that doesn’t seem right, they will act in order to protect US satellites. However, the most important idea behind the Space Force, they will never attack other countries’ space property unless it is threatening the US or its space technology.

Space Technology

Lots of new technology will need to be developed in order to maximize the capabilities of the Space Force. When the United States Air Force was established in 1947, the idea of a supersonic jet probably wasn’t even considered. However, these jets are now commonplace for US Air Force fleets. This development in technology was crucial for the Air Force to be able to reach its full potential and be as effective as possible. Many similar developments will need to be made for the Space Force. In order to support the Space Force, the US government will launch the Space Development Agency (SDA) to help with the creation of new space technology.

The US doesn’t currently have any rockets to launch with, so they will need to utilize other launch vehicles. Rocket boosters could need to carry massive loads, potentially whole space stations. The Air Force has confirmed that they have been in talks with many different rocket companies, most recently SpaceX to discuss the use of their BFR. The BFR is the rocket that will carry the BFS, but has a capability to carry immense loads into space. The ULA will also likely receive many contracts to transport cargo to space. Blue Origin doesn’t yet have near the launch capabilities of SpaceX or the ULA, so they won’t even be able to be considered for many years. Lastly, the Russians are very unlikely to volunteer their Soyuz rocket as a launch vehicle for an American military branch, and the US would likely be too proud to even ask.

Market Impact

The Space Force isn’t just some task force, it is a whole new branch of the US military. This means that it will require a lot to keep it running. Much like the Air Force, when it was created many people didn’t think that it would become as large as the other branches. Companies like Lockheed Martin are heavily invested in the US military, with the vast majority of their revenue coming from the US military. Revenue from space made up only 18.1% of Lockheed Martin’s earnings in the second quarter. The rest of their earnings are generated from their aeronautics and other military operations. Currently Lockheed Martin generates the vast majority of their military revenue through contracts with the US Air Force, though they do operate under a few US Navy contracts as well.

Boeing’s main source of revenue lies in its commercial jets, but military revenues made up 22.7% of their revenue in the second quarter. In total, they generated $5.729 for military revenue in their second quarter.

Lockheed Martin and Boeing will be able to capitalize on the combination of their space and military revenues, with added opportunities. The SDA will likely follow in NASA’s footsteps and outsource the development of new technology to US companies. This is where Boeing and Lockheed Martin will thrive. SpaceX is a huge competitor for rocket boosters, but not military technology, nor do they plan to be. Northrop Grumman (NOC) is the a huge competitor for military contracts, but lacks the drive or experience to deliver to a Space Force. This means that the vast majority of the market, excluding boosters, will be dominated by Boeing and Lockheed Martin.

This could lead to a double in all military revenue for both companies. This may seem like a lot, but the Space Force, again, isn’t going to be just a small task force. In addition, Boeing and Lockheed Martin would be controlling the vast majority of the market share as Space Force suppliers. This doubling in revenue would lead to an increase in Boeing’s total EPS by $.431. For Lockheed Martin, their EPS would increase by $3.143. Both EPS increases were calculated by taking military revenue and the total outstanding shares. To give context to the increase in EPS of both companies, Lockheed Martin’s current EPS is $8.95 and Boeing’s is $15.922. The reason that Lockheed Martin would experience a larger gain in their EPS is because they focus primarily on military development, while Boeing’s more lucrative business is the sales of their commercial jets. With all of this information in mind, the Space Force could drive Lockheed Martin stock to $360 per share, and Boeing’s stock to $412 per share.

Risks

This thesis doesn’t have much risk associated with it. One potential event that would completely derail the thesis is if the Space Force doesn’t even get created. However, this is incredibly unlikely. There have already been reports into what the Space Force would entail, as well as councils formed to help with the creation of the new military branch. In addition, this idea has received support from the public as well. Even renowned astrophysicist Neil Degrasse Tyson supported Trump’s proposal, urging the public to do so as well. Also, as mentioned before, the need for a Space Force is increasing, and the public, as well as the government, is beginning to recognize that this idea may actually be one of the best to come out of the Trump administration. Although an often polarizing figure, Democrats and Republicans have united behind Trump to support this proposal.

The other risk that Boeing and Lockheed Martin would face is competition. However, as discussed earlier, competition shouldn’t be much of an issue as the two companies will be the primary suppliers for the Space Force. Even for launch vehicles, although SpaceX currently has the edge both in lift capability and cost, the ULA is working on a reusable rocket as well as an Advanced Cryogenic Evolved Stage (ACES) to help with orbital transportation. The ULA also has a perfect track record with its launches, while SpaceX does not, so the Space Force might opt to launch with the ULA on pricier objects. Boeing is also working on a revolutionary spaceplane with NASA called the Phantom Express which will be able to fly lighter payloads for only $5 million. When this is created, it will most likely be used as the launch vehicle for the Space Force’s lighter packages because it is expected to be able to launch a day after its previous flight.

Investor Opportunity

The new Space Force will provide an incredible influx of cash for both companies. This influx will have more of an impact on the Lockheed Martin stock price because of how the company is structured. To clarify, Boeing is more diverse, and they make much more money off of their commercial jets than their military services. However, Lockheed Martin focuses most of their resources on supplying the US military with equipment. Due to their stronger reliance on military contracts, Lockheed Martin is set to benefit more than Boeing will. This doesn't mean that Boeing won't be able to capitalize on the Space Force, just less so than Lockheed Martin.

Buy into these two companies before the potential market impact of the Space Force is recognized. By beating the market to this realization, potentially huge returns could be waiting by investing into either company. Both companies will benefit immensely once the Space Force becomes a reality, but it doesn't appear that the market has realized this yet.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.