This small space stock just got bigger – and more profitable

Rewiring (RDW 1.20%) had an interesting month in August. Shares of the satellite parts and space infrastructure company fell after the company reported earnings on Aug. 7.

On the one hand, second-quarter revenue was up nicely, up 30% year-over-year and nearly $10 million above analysts’ estimates. On the other hand, Redwire reported a loss 4 times Wall Street’s estimate ($0.42 per share) and free cash flow — which had been positive for the space company — fell to 11.2 million, removing one of the stock’s biggest attractions for investors.

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Over the next few days, Redwire lost as much as 13% of its pre-earnings share price. But then, a miracle happened: Redwire found a way buy itself some profits.

Rewire buys Hera

Or more precisely, to buy himself a profitable profit subsidiary.

The news broke Aug. 14, exactly one week after Redwire’s mixed earnings report: For an undisclosed sum, Redwire will acquire Hera Systems, a spacecraft developer focused on military sales.

Hera is not a big company. In 2023, the company’s revenue was just $15 million — compared to $244 million for Redwire. That said, Redwire was quick to point out that Hera has “experienced profitable growth.” (In contrast, S&P Global Market Intelligence data shows that Redwire lost $27 million last year.) Going forward, Redwire expects Hera to “significantly contribute to future growth and profitability” for its new parent company.

In fact, updating guidance to account for the acquisition, Redwire noted that if it is able to close this acquisition in Q3 as planned, Hera could add up to $10 million to its 2024 revenue. Given that with only about four months left in the year, that means Hera may have already doubled her annual income. Ten million dollars in four months implies that Hera’s sales could be $30 million in the 12 months of 2024 – so twice the revenue of 2023.

Should Redwire have bought Hera?

Now, it remains to be seen exactly how profitable all this additional income will be. It almost certainly won’t be profitable enough to single-handedly erase the $26 million in losses Redwire has already racked up this year. But any improvement would be better than none. More importantly, the purchase price for this acquisition — apparently $15 million on $30 million in revenue — implies a price-to-sales ratio of just the 0.5 that Redwire pays.

That’s a bargain price to pay for any space stock, let alone a profitable one. And it’s a price Hera can afford.

Balance sheet data shows that Redwire has just $31 million in cash versus $111 million in debt, which isn’t great. It is, however, more than enough to easily finance the purchase. And Redwire says that’s exactly what it plans to do, paying with “balance sheet liquidity” rather than taking on additional debt or issuing shares in payment for Hera.

What’s next for Redwire (and Hera)?

Redwire appears to be planning to use the Hera acquisition to enter the emerging market for spacecraft that can service other spacecraft in orbit – so-called “space tugs.” As Redwire explains, Hera is “developing a new class of high-performance spacecraft to support evolving requirements for national security missions operating in contested space” and is contracted to build three satellites for an “in-orbit service demonstration” for Orion Space. Solutions under contract with the US Space Force.

In-orbit services are fast becoming a competitive market, with rival space companies such as The rocket labFirefly Aerospace and Northrop Grumman all have introduced spacecraft that can perform certain services in orbit. But if Redwire isn’t in first place, at least buying Hera puts it in the running — and better late than never.

Rewire is (or was until recently) one of the few cash flow positive companies in the space. While not expected to become consistently “profitable” before 2027, analysts on average forecast a return to positive free cash flow as early as next year – and strong double-digit sales growth through 2027 and beyond .

While last quarter’s performance was a disappointment, I’m still bullish on Redwire stock.