Satellites, Cyber Attacks and Defense
09/15/2017 2:52 am EST
Space today is teeming with manmade objects and activities that in all sorts of ways shape our lives here on the ground, and its importance to earthlings is steadily expanding, observes Stephen Leeb, growth stock expert and editor of The Complete Investor.
Today, more than 1,300 commercial satellites orbit the earth, making possible all the things we now take for granted, from mobile phones to television transmissions to global positioning systems to weather forecasting and the assessment of climate change.
Satellites in orbit are one part of a burgeoning space infrastructure, which also includes ground stations and multiple communication links among regional, national, and international players.
Space is also critical to our nation’s defense. The key initials are “ISR”, standing for intelligence, surveillance, and reconnaissance – all ways of obtaining information about potential foes.
The downside: space isn’t immune to cyber attacks, which could ricochet throughout systems we all depend on. In other words, cyber attacks on space infrastructure can profoundly disrupt infrastructure on earth.
For investors, one potential approach to profiting from space is with companies that launch and repair satellites and other space infrastructure.
Another is to bet on companies that protect the security of space infrastructure, including major defense companies that have big space components.Below are our four top picks that give you a stake in the ever more important realm of space.
Among major defense contractors, Raytheon (RTN) and Northrop Grumman (NOC) are the two that devote the largest percentage of their revenues to space and to cybersecurity. In terms of operating margins, the two are standouts in the industry, nearly tied for first place among the major defense contractors.
At Raytheon, space activities represent about 25 percent of revenues and operating income. While cyber activities are spread throughout multiple divisions, the company also has a dedicated cyber unit whose growth from a very small base has been torrid.
Approximately 41 percent of Northrop’s revenues come from aerospace, one of its two largest divisions, with a meaningful though undisclosed portion of that coming from cyber activities.
Space-related products range widely and include high-energy laser systems, the Global Hawk system, which provides high-resolution imagery, and the James Webb Space Telescope, for which it is the major contractor.
Harris Corp. (HRS) is a highly diversified technology company whose proprietary hardware, technology, and services are used widely in both military and commercial space ventures as well as in other businesses.
In its space and intelligence systems division, the company provides sensing and observation systems that are vital in assuring that space-based payloads are delivered.
One sign of the company’s expertise is that it was given an active role in testing the $8 billion James Webb Space Telescope (for which Northrop was the major contractor). We expect all segments of Harris to post strong growth over the next several years.
Orbital ATK (OA), while smaller than the major defense contractors, is likely to play a critical, if somewhat secondary, role in many space-related areas.
There are some areas where the company offers special, if not unique, expertise, such as launching and providing payloads to certain types of military satellites. More important, however, is that Orbital ATK has long-term contracts that virtually assure it can maintain strong growth through the first part of the next decade.
Like Raytheon and Northrop, Orbital ATK generates considerable free cash and is committed to repurchasing its own shares. The company has a lower PEG than the two larger defense contractors, which amply compensates for the risks associated with its smaller size.