Boardroom drama at Aerojet Rocketdyne (AJRD) is apparently working to the benefit of the rest of the defense industry.
The El Segundo, California-based company is the world leader in propulsion systems for flight, missiles, and more. As such, it counts Boeing (BA) , Lockheed (LMT) , Raytheon Technologies (RTX) , and even NASA as crucial customers. In terms of competitors, there are really no alternatives to its pivotal place in the overall supply chain of these major names in U.S. space exploration and defense.
Perhaps it is unsurprising, then, that the Federal Trade Commission shot down Lockheed's intended takeover, leading to an abandonment of the $4.4 billion blockbuster acquisition by both parties.
"The acquisition would have eliminated the country's last independent supplier of key missile propulsion inputs," said FTC Bureau of Competition Director Holly Vedova, arguing that the deal would have allowed Lockheed to cut off competitors' access to critical components. "Simply put, the deal would have resulted in higher prices and diminished quality and innovation for programs that are critical to national security."
Since the deal's demise, the trend for the would-be Lockheed subsidiary has been lacking, with the stock falling nearly 20%. By contrast, the rest of the competitive field has risen modestly since the announcement. Paradoxically, this includes Lockheed Martin, which has actually seen a slight jump in its share price after shaking off the deal altogether.
The fall-through of negotiations is most immediately a boost to Raytheon (RTX) , which had lodged the most vocal complaints about the prospect of the purchase.
"We obviously have some concerns," Raytheon CEO Greg Hayes said at the Barclays Industrial Select Conference in 2021. "They are a huge supplier to us...It gives us pause as we think about the competitive landscape going forward."
These hangups were reiterated in a recent interview Hayes granted to TheStreet's founder Jim Cramer on CNBC, wherein Hayes again clarified his strong opposition to the deal.
"There really are only two rocket motor providers in the country that we all rely on. Orbital ATK was one, they were acquired by Northrop Grumman (NOC) a couple of years ago, and the other is Aerojet Rocketdyne," he explained. "Having an independent supplier of a key component is absolutely essential to providing a level playing field for all of us in the defense space."
Now that this potential problem in the supply chain has been sorted out, the outlook for Raytheon appears quite a bit clearer. This tailwind is bolstered by simmering geopolitical tensions that could put defense stocks firmly in vogue for investors amid uncertainty.
Indeed, these factors as well as steadily growing free cash flow prompted Wolfe Research analyst Michael Maugeri to hike his price target for the stock to $110 while maintaining an "Outperform" rating on the shares, calling it a top pick.
Of course, a similar rationale applies to Boeing, which counts itself as a significant customer of Aerojet. However, its commercial airplane business remains burdensome amid travel restrictions and its history of hiccups in safety.
Lockheed has seen its stock get a lift, as well, perhaps benefiting from the market seeing other opportunities to utilize its cash pile.
"It's more likely to seek small technology accelerators rather than larger transactions that might face stiffer regulatory hurdles." Cowen analyst Cai von Rumohr wrote in a note on Monday, noting the availability of less onerous acquisitions. He added that a share buyback could likewise placate shareholders.
The company's ability to capitalize on this opportunity will surely remain a pivot point.
Battle in the Boardroom
Still, there might be significant problems still existing in the company that counts itself as a critical supplier to these aforementioned firms. Per military news outlet Breaking Defense, the takeover was fraught with issues even aside from anti-competitive challenges.
The outlet recently reported that a power struggle has materialized between Aerojet CEO Eileen Drake and its executive chairman Warren Lichtenstein, with internal legal challenges leading to increasing strife.
These rumors are solidified by proceedings in the Delaware courts between the two parties, alleging misconduct in both directions about control of the board and direction of the company's future. Per Bloomberg, the chairman, Lichtenstein, was displeased about the potential lockup with Lockheed and is seeking to wrest control of the company from Drake now that the deal has failed.
Still for Sale?
It seems that the trials, (literally) and tribulations ahead for the boardroom drama will be telling as to the future of the firm. As the potential deal with Lockheed shows, this could entail another stab at a sale if Drake comes out on top.
While another FTC challenge is to be expected, additional caveats on consent agreements and other clauses could feasibly bring a deal to fruition. Given its recent selloff, this could be a risk another firm is willing to take down the road.
At the very least, its steep slide after the FTC action to block its deal with Lockheed looks at least slightly overdone, especially amid a promising geopolitical backdrop.
"We are confident in our future performance with an impressive backlog that is more than three times the size of our annual sales and a strong macroeconomic environment underpinning our portfolio," the company said in a statement on Sunday.
With an earnings report due Thursday, the ability of the company to deliver on this outlook and encourage confidence as a standalone company will be of paramount importance. Otherwise, a proxy battle in the upper echelons of the firm and an FTC challenge to any acquisition could be bearish for the near term. Investors therefore will need to decide today whether the critical supplier is worthy of an earnings day gamble or another look after the print and executive commentary.