The Looming Constraint of the Space Industry

0:00Space stocks get thrown a curveball. Motley Fool hidden gems investing starts now. Welcome to Motley Fool hidden gems investing. I'm your host Tyler Crowe and today I'm John by longtime full contributors Matt Frankl in Lou Whitenay. Guys we're going to get into space stocks today. We're going to talk about potential dividend cuts as well as going to the mail bag. But as we said starting at the top let's get into space here. Space stocks have been front and center for investors as of late. It's gathered a ton of attention especially after the SpaceX IPO back in May. But I would say the enthusiasm for space started far before that just into a lesser degree. Now Lou I'm going to steal one of your go-to lines here but space is hard. And while there's a lot of promise here the timeline when those things may materialize can come into question from time to time. And that was really laid bare recently when there was a somewhat I wouldn't say shocking but surprising announcement that SpaceX actually plans to retire

1:02its Falcon 9 rocket in 2028. This has been the workhorse I you could say of the space launch industry. Lou guys is the industry really ready to lose this vehicle in 2028 like I know there's a lot of stuff coming but we haven't really seen a lot of progress yet. But I think a big caveat on that decision because that is assuming that SpaceX's internal successor to Starship is ready to take over. If it's not there's no reason why they can't continue it. But to space excise the Starship is a much larger vehicle so it's capable of bringing a lot more into orbit. So your per ton launch price goes down so it's just like you know it's more efficient to have 30 people on a bus versus 30 people driving a car. So I think that that is the plan and if it happens it'll mean that Starship is going to script if Starship something goes wrong or it's not ready for prime time. I don't think you'll see the Falcon 9 retired as planned so I do think

2:07there's at least some wiggle there and it's kind of upside-down, upside at least in their head but it is a huge thing for people trying to book now looking to 2028 because you're kind of booking into an unknown. Yeah Matt one of the things that's interesting about this too is we're talking about shuttering a vehicle when some of the the successors of it we've talked about like New Glenn for example they have their accident where the basically the launch plan blew up. Neutron rocket has been slower to develop. Part of me wonders is like is saying that it's going to shut down in 2028 just kind of a famed response to the market? Yeah I mean to see if there are if there's some caveats like you know you know you must set some targets for that to happen. I mean like like Lucid that assumes that the Starship is going to be up and running and and taking over and it assumes that they don't need it really. If they need it it's there it could continue but I mean customers can't book the

3:07you know space flights and it comes at really a terrible time like you said the the new Glenn rocket it's been down since May. Vulcan was grounded in February and it comes at a time when you know launch demand is really heating up from a space development agency one of their program managers said recently that thousands of satellites are scheduled to launch by 2030 and there simply aren't enough vehicles to launch them and that's given what exists in the market now. So it's not a great time to remove one of the main you know the main player. Immediately as an investor we think like how does who benefits who loses out here like I said we have the obvious candidates are the publicly traded companies because they very much in the forefront of like investors mind you know rocket lab with its neutron rocket SpaceX probably to a lesser degree voyager and firefly some recent IPOs as well but those are only solutions here like who else could be benefiting that maybe people are thinking about because they're not necessarily public. Well I think it's more even

4:11complicated than that because even the neutron and what firefly are what they're working on that's not going to replace the Falcon 9 those are coming in smaller so there is a real void there that there aren't a lot of people trying to fill to be honest because it's the expenses the complexity of it. So there's a bunch of ways this can go if SpaceX is right and Starship can come online and it can just be this massive distributor of satellites there's going to be competition all the way up and down the food chain but if Starship continues to be delayed or if the kind of demands from NASA and other things there are going one of two things has to happen either these medium rockets are going to have to be maxed out or the companies that want to want lift are going to have to rethink their businesses rethink their designs for less weight. I think the winners in the near term are companies like rocket lab that just have all this capacity to hopefully be coming online and firefly but I

5:14think to be honest I think the real winners are going to be the companies that have the DOD blessing or the Pentagon blessing because the one thing I'm sure of is is that nothing will be delayed on the military side. I think for any company that I'm looking at that part of their plan is to book capacity to launch satellites or launch something into space on the commercial side. They are a likely loser or at least delayed it's going to take longer than they hope just based on this bottleneck. Lose right that I think rocket lab is the natural winner here now the stock is priced for that but the neutron is arriving at honestly the exact right time to take advantage not just of the Falcon 9 not taking orders past 2028 but just to take advantage of the growing backlog of just demand for launches in general other under discussed winners could be the components suppliers there's one called Carmen they're guiding for 57% revenue growth this year and companies like

6:14this for the most part trade at much lower multiples than the pure pure play space stocks like like rocket lab do so there are a lot of potential winners and I totally agree with what Lou said about the companies that are backed by the DOD. Just one thing on that though too the problem with the components supplier is that while they have opportunities on the launch side if this causes delays for the commercial customers going up into space they aren't going to buy and pay for the components going into their satellites so I think it's a kind of pushback I think the winner too here is the engineers because even if the neutron works it doesn't compete with the Falcon 9 it's just it cannot what SpaceX is retiring is larger than the neutron and there is a company a private company Taryn that is trying to build a Falcon 9 replacement we need to see it going up but engineers are going to have to figure out how to get these things smaller or to way less or how to they can self assemble in space there's going to have to be a workaround period because we are

7:17just not going to have that heavy capacity unless Falcon heavy or starship come through. I've actually been wondering a little bit the Taryn are that I believe is actually relatively space I think that's Eric Schmidt's private company that is expected to maybe not this year or the coming 12 months but I think it likely will go public sometime sooner than another so it definitely be one to watch and you guys you really touched on some some of the nuances of space here and I think a lot of people looking at it just say more stuff goes up everybody benefits so there's a lot of like misconceptions in perhaps like misunderstandings of space so as we're kind of rounding out this conversation here like what would be your message to investors when it comes to investing in space what are some of these misconceptions that are maybe less discussed risk or opportunities that investors should be aware of. So I'd point to a risk and it's something I've kind of already said but there is a lot there are a lot of business plans that are resting on starships ability to capability and reliably get things into orbit and they're not there yet

8:22even when they're ready there's a lot of internal plans for starship plus NASA plus DoD plans for Starship. We I really worry and this is both on the kind of the side of some companies that are actually building lunar modules and building satellites but also the components suppliers like Matt mentioned Karm and Redwire the companies that are going to sell to these companies there is a real risk that most of the business plans that are driving a lot of these backlogs will be delayed and that is going to depend on starship that doesn't mean the companies are ruined but it does mean that I think investors should set expectations I hope everything goes well and there's a case where it will all go to plan but I know a lot of great businesses that are just kind of sitting in neutral right now waiting for starship and what we know about a space is hard as you say and B Elon Musk likes to set aggressive deadlines and then not hit them there's a real risk that a lot of these valuations will be just drained over time by this

9:30by a slowdown that I think is inevitable. Yeah you make a good point about Elon Musk's aggressive deadlines the Tesla Roadster reveal is happening next week and it was supposed to happen in 2017 so yeah that's just one example but I would say you know in addition to that one of the biggest risks is that with more things that need to get into space then there are rockets which is kind of the the simple way of saying what we've been saying the companies that you know the companies that have the rockets will have the pricing power so companies whose business model it is to get things transported into space could be the losers here they could you know see margins kind of compressed at least in the near term until the bottleneck goes away. It's going to be a fascinating one because the degree of difficulty here is certainly a lot harder than then topic we're going to discuss next and that's kind of the boring and stodgy dividend stocks coming up after the break. Trading as Schwab is now powered by Ameritrade unlocking the power of thinker swim the award-winning

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11:38journey is defined by peerless comfort whether it's through unique interior finishes or custom wheel options the ways to personalize your Range Rover Sport are nearly unlimited command attention and experience ultimate luxury and motion exclusive offers are available now explore further at Range Rover.com a few weeks ago Campbell's the maker of the most I would say the most famous soup label ever made announced a dividend cut alongside with layoffs and to cost cuts you know try to show up the balance sheet basically the reason anyone actually cuts a dividend these days it was basically 25 years to the quarter that the Campbell's company cut its dividend you know one of those markers everyone tries to hit with dividend payments and now I did or there was a research research note that came out and so far this quarter 19% of dividend payout announcements have actually been cuts and it's been the highest in six years so basically since covid times is what we're seeing here higher interest rates lots of reasons as to why this may be the case I wanted to use Campbell's specifically because it's an iconic company and use it as a jumping off

12:41point here because I think it highlights some signals investors use for determining dividend safety like dividend streaks that go on for a really long time and iconic brands that aren't necessarily great indicators over the long term you know I think this story here is the going to be the big takeaway is no dividend streak is safe and while we're at you as investors guys and we do this all the time like when you're looking at companies because we all have dividend stocks in our portfolios what are some of the like those false flags or like those data points that you see that really aren't great signals to finding a quality company that pays a dividend there are a few flags that I look for one is I use free cash flow to analyze dividends stability not necessarily earnings per share there's a lot of different accounting things that happen with the bottom line earnings number that don't necessarily reflect the company's ability to keep paying dividends I was just kind of doing some research for this segment and I found one company who's on an earnings per share basis their dividend payout ratio was about 70% and as a percentage of

13:44free cash flow it was about 130% so that's one thing to look for and there are some kind of warning signs you know one is growing debt load one is upcoming debt maturity we can talk about that more if you want to but that's one of the biggest reasons that the dividend streaks are coming to an end and you know it's you can see like boards kind of that have streaks like you mentioned Campbell's a lot of companies that I follow that have 30 40 year dividend raised streaks are now just making like penny a share dividend increases just to say that they increase them and when you see boards start to do with that like kind of just giving nominal dividend increases it's not necessarily a sign that a cuts coming but it's a sign that the the streak might be cracking I have to say that that's right yeah you want to look for just their ability to fund it without taking on debt because all two common companies if they are risks that they don't have enough cash to pay their dividends they will take on debt which is kind of very you know that that that that's short term thinking I want to say though I one of the issues I think with all of this and one of the things that

14:48causes companies to make weird decisions is this I almost wish that dividends weren't as automatic as they were I wish a company could just say all right this is our excess cash we're going to distribute quarter to quarter as we see it the market punishes that and we do see dividend cuts is almost always a sign of stress management teams would have a lot more flexibility and probably run the business better if they could just not have to it's kind of do what they do with buybacks where you know as the cash is coming in if we have excess we will distribute it versus just having like Matt says play the game where all right well we don't want to blow our streets we'll just raise it by a penny to Matt as you're saying like debt majorities we have rising interest rates I'm sure that that is playing a part here with why it's happening right now with as long as other you know points of pain we've seen retail companies struggling a little bit so we mentioned Campbell's at the top here as you guys have been scouring the world of of potential investments and maybe looking

15:49for things that are red flags what are some of the companies you're looking at right now we're like hey I know they pay dividends and they've been pretty reliable for a while but this is not looking as hot as as you know the market may be suggesting that it is for one thing I'm not sure Campbell's made the wrong move cutting the dividend their stated goal is to cut dividends to pay down debt which at a time when you're seeing so many companies having to refinance debt that they took out during the 2020-2021 zero interest era you know and having to refinance a today it's not necessarily a bad move to shore up your balance sheet right now some of the thing they made a bad decision but yeah there are some others that I mean Amcourt is one ticker symbol a mcr they've raised their dividend for 28 consecutive years this is the one that I was saying 133% of free cash flow it's a 5.4% yield several analysts have come out and said that they're at risk of cutting genuine parts is one that's really interesting GPC they've increased the dividend for 70 consecutive

16:53years but their dividends really exceed free cash flow right now it's 134% free cash flow account ratio compared to 57% two years ago and a lot of that is debt so there's you know there are others like that but for the sake of saving time I'll pass it over to Luke yeah so a couple I'd look at I came or the chemical company they cut their dividend last year I think they could have to do it again you've seen it throughout the industry a lot of dividend cuts this is just a bad environment for them other ones I'd look at with higher rates kind of higher rates and just the business conditions commercial rates like the ones that do offices and office mortgages companies like granted point Orion office they look vulnerable right now in my screen I might catch some flack for this one but I've mentioned it a couple times before actually one on my radiator is actually EPS I brought it up and sometimes I get waved off but everything we've mentioned you know payout ratios their north of 100% cash from operations doesn't cover its dividends and

17:56interest coverage metrics are all deteriorating I know that a lot of there's a lot of people said oh it's it's you know EPS they'll figure it out because they're in the middle of the turnaround but I add all the companies over the 12 months that's one that's always been on my radar as a potential dividend cut candidate that perhaps a little more cost worse than others coming up after the break we're gonna hit the middle night get a concise daily market preview from Charles Schwab including stock updates US and global economic news monetary policy decisions and key results and statistics that may impact your trading Schwab market update is an original podcast from Charles Schwab join host Keith Lansford for this information pack daily market preview delivered in 10 minutes or less listen today at Schwab.com slash market update podcast or wherever you get your podcasts that's Schwab.com slash market update podcast you just found out that your sales team is at risk of missing quota don't panic just ask rippling AI since it's built on your real time people in business data

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20:04we also left the email in the show description so you can get it there always keep it foolish keep it short enough I can read on air and we can't give personalized advice to I apologize I'm gonna save this name wrong today's comes from careless shimkus and the question is hey guys love your podcast we're talking a lot about chips supply chains and a lot of AI related stuff as a hidden gem podcast have you found anything interesting in the AI build out space specifically in Europe so I think we might be a little unsatisfying here but guys as far as when I look at this most of the European companies also happen to be like global leaders and so they're benefiting not just from you know europe europe's build out but the us as well right exactly I mean the first name is kind of my list and it's not very satisfying but asmls nitro electric Siemens all of these companies great European companies that are doing a ton of business in the us and all over the world related yesterday I build out and other things but I mean I think whether I was in europe or in the

21:06us I think going with the established companies versus trying to play the fringe of a trend when things are overvalued it makes sense to me to use the boring companies there's other little companies in the weeds uh was it prisming group in uh italy does a lot of high voltage cables that's been a popular one Tyler but uh I do think just kind of playing the hits here with these pick and shovel make sense and those big companies are really good companies yeah I'll second asml that's my number one you know as the listener put it AI build out stock in europe but to get a little more in the weeds one that I'm watching uh just recently filed to go public it's called end scale there are essentially Europe's version of core weave I love these neo cloud companies to watch um so like core weave they do kind of like um infrastructure is a service for AI companies they they build out data centers they build out the compute and then they kind of lease it off to their customers uh so I it's a great model I think as you know compute requirements go up at some point

22:10the the hyperscalers are going to need to find you know more capital light waves of getting the compute they need um so I love this business I have no idea how to value them so end scale for example their their revenue was about a hundred forty one million dollars in the first half of this year that grew twelve hundred percent year over year how do what price to sales multiple just to find you know is justified by twelve hundred percent year over year growth I don't know I don't know if you guys do uh they have uh you know a hundred forty one million dollars in revenue fifty six point four billion dollars in bookings so they're impossible to value but I think they are going to play a big role in the future of the the AI build out um there's another one that's currently public called nebius that has a lot of europex exposure and b is but but end scale is is a really interesting one it's growing very rapidly more of a europeeer play um and so the the neo clouds are are very interesting to me yeah and the other comment I would give to to this is that the development rate in europe right now is a little bit slower if you look at it we'll call it

23:15europe's ai champion mistral ai there you know the closest assembly we could say to open ai anthropic I know there are different businesses but in terms of like the leader in ai in europe i would probably say mistral right now their capex plans or like obligations relative to what we see at open ai or anthropic is right now is orders of magnitude smaller uh development rates are going to be a little bit slower and it's just by design they're kind of focusing a little bit more on like physical ai so for like robotics and things like that especially manufacturing related and I'm not saying that it's bad that it's slower but you know the growth opportunities are just going to be not as robust and for a lot of these companies we mentioned asml Schneider Electric much of their growth at least for the next couple of years is going to be largely predicated in the US so we can see a build out in europe but it's going to be hard to uh separate like a company that's

24:15going to succeed uh as a europe only ai champion in terms of like the ai built out versus for example a company that is supplying the world uh in in this regard well that's all the time we have for today as always people in the program may have interest in the stocks they talk about and the motleyful may have formal recommendations for or against so don't buy yourself stocks based solely on what you hear all personal finance content follows motleyful editorial standards and is not approved by advertisers advertisements response or content and provided for informational purposes only to see our full advertising disclosure please check out our show notes thanks to our producer Dan Boyd and the rest of the motleyful team for Lou bat myself thanks for listening and we'll chat again soon