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This Tiny Space Stock Just Bought a $1 Billion Defense Business. Is It a Buy?

1 day ago

As stock markets reopen for business Monday, Redwire (NYSE: RDW) investors will be coming off of a terrific week. Last Monday, President Trump doubled down on his commitment to "unlock the mysteries of space," declaring "we stand at the birth of a new millennium." The crowd approved, yet Trump inherits the priciest stock market in history.

Space stocks of all sorts rocketed higher when stock markets reopened on Tuesday. Redwire in particular enjoyed an even stronger boost because, on top of the generalized space stock enthusiasm, Redwire had some very specific news of its own to announce.

Redwire is becoming a defense stock.

As the company announced after close of trading Monday, sometime in the second quarter Redwire will buy privately held Edge Autonomy, "a leader in providing innovative autonomous systems, advanced optics, and resilient energy solutions" to, among other customers, the U.S. Department of Defense.

Although hardly a household name, Edge Autonomy produces "Penguin" unmanned aerial vehicles (drones) for the military, and its drones have already seen action in the battlefields of Ukraine. The drones come in both conventional and vertical takeoff-and-landing configurations, and can fly up to 25 hours without refueling, with ranges up to 110 miles. Additionally, the company produces advanced batteries and imaging systems to power and equip its drones.

Which is all well and good, you say, but why would a space company like Redwire even want to own a terrestrial aerospace company like Edge?

If you ask Redwire itself, it would say the goal is "to transform Redwire into a global leader in multi-domain autonomous technology, broadening its portfolio of mission-critical space platforms to include combat-proven autonomous airborne platforms." (In other words, Redwire is looking for diversification into the defense business to complement its space activities).

Other analysts have other thoughts. Commenting on the acquisition this week, Payload Space hypothesized that marrying Redwire's space assets to Edge Autonomy's drones will permit "communicating with the uncrewed aerial systems through over-the-horizon space-based comms," or even "using a space-based system to task and control an uncrewed system" directly.

Read: autonomously. And probably using artificial intelligence to guide the drone.

Thus, buying Edge gives Redwire the ability to offer the Pentagon a way to safely observe hostile territory utilizing uncrewed drones controlled from space, and to observe things close up and in greater detail than perhaps satellite imagery alone could do.

Military drone flying at dusk. — Image source: Getty Images.

So that's what Edge does for Redwire technologically. What will it do for Redwire financially?

Redwire will pay a total purchase price of $925 million to own Edge Autonomy, payable in $150 million cash, plus $775 million worth of Redwire stock. (Redwire only has about $43 million in cash at last report, however. It will need to borrow the rest, adding a bit to its $138 million debt load. For a company with $1.5 billion in market capitalization, that seems reasonable, resulting in a net debt of $245 million on the balance sheet.

Plus, Redwire should be in a good position to begin paying down that debt pretty soon after finalizing the acquisition.

Redwire estimates that the combined business will generate between $535 million and $605 million in sales this year. At the top of the range, that would roughly double the $298 million in business Redwire did solo over the last 12 months. Redwire also predicted that the combined company will produce positive free cash flow this year. Again, this seems like a reasonable prediction. Analysts who follow publicly traded Redwire were already predicting the company would turn FCF-positive in 2025, even before the company's scheduled doubling in size.

Granted, this still leaves the question of valuation. Analysts polled by S&P Global Market Intelligence see Redwire losing money under GAAP but generating about $28 million in positive free cash flow this year. On a $1.5 billion market cap, that works out to a price-to-free cash flow ratio (P/FCF) of 54 -- pretty pricey.

Then again, these same analysts see Redwire's free cash flow growing rapidly in outlying years and reaching $171 million by 2027. This implies a P/FCF of less than 9x today's price, just two years in the future. Assuming they're right about that growth rate, Redwire stock could be a tremendous buy right now.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This Tiny Space Stock Just Bought a $1 Billion Defense Business. Is It a Buy? was originally published by The Motley Fool