Terran Orbital: Market Not Pricing In Positive Catalysts (NYSE:LLAP)

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Terran Orbital Corporation (NYSE:LLAP) went public in March 2022 via a merger with SPAC company Tailwind Two Acquisition Corp. While SPACs tend to be high-risk investments, in the case of Terran Orbital, it has been doing business with private and public companies since it was started in 2013.

The company is a manufacturer of small satellites that compete primarily in the US aerospace and defense industry.

With its growing pipeline, relationship with Lockheed Martin, and growing demand in the satellite sector, LLAP looks poised for a solid, long-term growth trajectory, bearing in mind the fact SPACs have fallen out of favor, weak economic conditions, and the risk -off environment for tech and potential high-growth stocks.

In this article we’ll look at the latest numbers, the company’s pipeline, and some of the potential is has for the long haul.

Latest earnings numbers

Revenue in the third quarter was $27.8 million, up 171 percent from the $10.3 million in revenue from the third quarter of 2021. The increase in revenue was attributed to the progress the company made in fulfilling customer contracts.

Gross profit in the reporting period was $37,000, down from the $1.5 million in gross profit last year in the same quarter. EAC adjusted had an adverse impact of approximately $2 million on gross profit and adjusted gross profit.

Cost of sales came in at $27.8 million, significantly up from the $8.8 million in cost of sales in Q3 2021. Of the $27.8 million, $15 million of it was directly related to costs incurred from working on customer contracts. Another contribution to increased costs was the share-based compensation associated with the Tailwind Two merger. Another $1.9 million in increased costs came from EAC adjustments.

Adjusted EBITDA dropped to $(13.9) million compared to $(8.7) million in the third quarter of 2021. The decline came from increased SG&A expenses associated with wages and various operational costs, including the Tailwind Two merger. Net loss in the third quarter was $27.4 million, up $15 million from the net loss of $12.4 million year-over-year. Along with previously mentioned items mentioned above, the net loss was up because of higher interest expense and financing costs in association with financing transactions. The major concern there is financial transactions are going to get more expensive before they reverse direction because of the anticipated increase in interest rates over the next two to three months.

At the end of the third quarter, LLAP held $35.8 million in cash. Lockheed Martin also recently invested $100 million in the company “in exchange for convertible notes and warrants issued by Terran Orbital.”

Also, as of September 30, 2022, LLAP had about $202 million in gross debt obligations.

Share price performance

After LLAP went public in March 2022, it quickly took a dip to about $8.00 per share on March 18, and ten days later it reached its 52-week high of 12.69 per share. From there it fell off a cliff, falling to under $4.00 per share by April 18, 2022.

From there it traded choppy, with a triple bottom of approximately $3.80 per share, and a double top of around $6.50 per share. After falling from that last of the double top, it traded in a tight range from early July to mid-September, before taking another dive to its 52-week low of $1.69 on October 3.

Since then, it has made a gradual move up to trade at about $2.80 per share as I write. With the current negative sentiment in regard to SPACS, high inflation and interest rates, and the potential for the recession to go deeper for longer, I think the company hasn’t done too bad on its share price when taking into account from the price action that it has probably found it range at about $3.50, give or take.

For that reason, and the backlog the company has, along with its beneficial partnership with Lockheed Martin, it seems to me a lot of the potential LLAP isn’t being priced in at this time.

Catalysts to consider

The first positive catalyst the company has is its backlog, which was at $198.0 million as of September 30, 2022, up 168% since the end of calendar 2021. The momentum of the company, along with its big investment from Lockheed Martin, also don it seem to be priced in.

Not only has LLAP received a boost from the $100 million investment from Lockheed, but it also entered into a Strategic Cooperation Agreement that runs through 2035. That agreement empowers LLAP to go after other opportunities in the Lockheed Martin universe.

If this agreement has more to it than meets the eye, which I think it might, it offers a lot of potential opportunities for LLAP in the future. But even as it stands, I don’t see it being priced in at all.

As for the $100 million investment, the company will use it to acquire more manufacturing space, boost module production, and of course for working capital. This should accelerate the growth trajectory of the company as it increases manufacturing capacity in anticipation of fulfilling its backlog obligations.

In response to the $100 million investment from Lockheed, LLAP decided to not invest “in its own synthetic aperture radar [SAR] constellation.” Instead, it’s considering offering SAR as a product to its customers. The benefit of that is it wouldn’t require near the amount of capital to build out.

Conclusion

LLAP launched not only in a negative SPAC environment, but also in increasingly challenging economic conditions.

I think in regard to the SPAC issue, that immediately turned potential investors off from the company. Another issue is some of its larger space-related peers have been underperforming (even if it wasn’t related solely to the satellite industry). I think the overall sector was also painted with a wide, negative brush, also affecting the performance of LLAP since it went public.

But looking at the backlog, available capital, and visible long-term demand, I like the future prospects for LLAP, and think it is now at a good entry point. Yes, it could fall further before it finds its bottom, which is why using dollar-cost averaging and position sizing would be the best way to play the stock.

I really don’t think it’s going to take long before the market starts to price in the positive fundamentals and catalysts the company has.

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