Aerojet Rocketdyne Stock Chart Shows a Breakout Setting Up

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iStock.com/Dmytro Lastovych

Aerojet Rocketdyne Aims to Benefit From Massive Defense Spending

The defense budget for fiscal 2018 in the U.S. is a whopping $696.0 billion, greater than the combined defense spending of the rest of the G8 countries. The grand scale of the funds means more missiles, ships, tanks, jets, and personnel.

It’s a move that is helping both large and small military equipment contractors, like mid-cap Aerojet Rocketdyne Holdings Inc (NYSE:AJRD).

While AJRD stock has been outperforming the S&P 500 over the past year with a 32.4% advance, the price action has been underwhelming in 2018, down 6.8%.

Aerojet Rocketdyne is off 20% from its 52-week high, but it has rallied 13.4% over the past month and is showing some signs of wanting to move higher.

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Chart courtesy of StockCharts.com

Aerojet Rocketdyne is involved in missile defense systems and non-military projects with NASA, such as space launch systems and space systems.

The company sells a broad line of advanced propulsion systems, the key technology used to fire missiles and rockets. Aerojet also makes specialized rocket motors found in precision tactical and long-range missile-based weapon systems.

My bullish view is driven by what will likely be continued strong tailwinds for military spending, especially under the current administration and with the geopolitical risk in the Middle East and the Korean Peninsula.

The Fundamental Bull Case for AJRD Stock

Aerojet Rocketdyne has reported higher revenues in each year, from $1.4 billion in 2013 to $1.9 billion in 2017, representing a compound annual growth rate (CAGR) of eight percent.

Year Revenue ($ Billions) Growth
2013 $1.4
2014 $1.6 15.5%
2015 $1.7 6.9%
2016 $1.8 3.1%
2017 $1.9 6.6%

There are some growth concerns, as AJRD is estimated to see its revenue growth fall two percent to $1.91 billion in 2018 before rising 4.2% to $1.99 billion in 2019. (Source: “Aerojet Rocketdyne Holdings, Inc. (AJRD),” Yahoo! Finance, last accessed June 1, 2018.)

But my bullish view is that Aerojet Rocketdyne has done a good job growing its earnings before interest, taxes, depreciation, and amortization (EBITDA), which will help drive stronger earnings growth.

Year EBITDA ($ Millions) Growth
2013 $90.6
2014 $143.8 58.7%
2015 $150.3 4.5%
2016 $160.6 6.9%
2017 $186.9 16.4%

Aerojet Rocketdyne earned an adjusted $0.74 per diluted share in 2017 and is expected to grow this by about 39.2% to $1.03 per diluted share in 2018—much higher than the two percent revenue growth.

In 2019, AJRD is predicted to increase adjusted earnings by 18.5% to $122.00 per diluted share, above the corresponding revenue growth of four percent.

The key free cash flow metric is positive. It increased in 2016 and 2017 by 291.5% and 65.5%, respectively, following a 73.6% decline in 2015.

Year Free Cash Flow ($ Millions) Growth
2013 $14.4
2014 $107.0 643.1%
2015 $28.3 -73.6%
2016 $110.8 291.5%
2017 $183.4 165.5%

Analyst Take

The fact that Aerojet Rocketdyne’s expected earnings are expanding at a far higher rate than revenues are is a bullish sign.

AJRD stock has decent support at $25.00, which represents the previous upside trade gap. An upside breakout could see Aerojet Rocketdyne stock take a run at $31.00–$32.00 and higher, toward the previous high.