At a time when defense stocks are generally moving higher, thanks to heightened geopolitical tensions arising from Russia's invasion of Ukraine, one key supplier is continuing to struggle.
That's because, after a merger with a larger rival fell through over regulator opposition, a boardroom battle for control has intensified between the executive chairman and CEO.
Real Money Columnist Kevin Curran looked into the situation recently.
“Aerojet Rocketdyne Holdings (AJRD), based in El Segundo, Cal., is the world leader in propulsion systems for flight, missiles, and more,” Curran wrote on Real Money. “As such, it counts Boeing (BA), Lockheed (LMT), Raytheon Technologies (RTX), and even NASA as crucial customers. In terms of competitors, there are really no alternatives to its pivotal place in the overall supply chain of these major names in U.S. space exploration and defense.”
Perhaps it’s unsurprising, then, that the Federal Trade Commission shot down Lockheed's intended $4.4 billion takeover of Aerojet.
"The acquisition would have eliminated the country's last independent supplier of key missile propulsion inputs," said FTC Bureau of Competition Director Holly Vedova at the time, arguing that the deal would have allowed Lockheed to cut off competitors' access to critical components. "Simply put, the deal would have resulted in higher prices and diminished quality and innovation for programs that are critical to national security."
Since the deal's demise, Aerojet Rocketdyne shares have traded sharply lower. “By contrast, the rest of the competitive field has risen modestly since the announcement,” Curran said. “Paradoxically, this includes Lockheed Martin, which has actually seen a slight jump in its share price after shaking off the deal altogether.”
(Curran wrote immediately prior to the Russian invasion of Ukraine, which sent shares of most defense plays higher.)
The strategic impact of the deal's collapse was a boost to Raytheon, which had lodged the most vocal complaints about the prospect of the purchase.
"We obviously have some concerns," Raytheon CEO Greg Hayes said at the Barclays Industrial Select Conference in 2021. "They are a huge supplier to us...It gives us pause as we think about the competitive landscape going forward."
Now that this potential problem in the supply chain has been sorted out, the outlook for Raytheon appears quite a bit clearer.
Lockheed has also seen its stock get a lift, as well, perhaps benefiting from the market seeing other opportunities to utilize its cash pile.
As for Aerojet, the steep slide after the FTC action to block its deal with Lockheed seemed at least slightly overdone to Curran, especially against growing geopolitical tensions.
"We are confident in our future performance with an impressive backlog that is more than three times the size of our annual sales and a strong macroeconomic environment underpinning our portfolio," the company said in a recent statement.
The ability of the company to deliver on this outlook and encourage confidence as a standalone company will be of paramount importance.
“Otherwise, a proxy battle in the upper echelons of the firm and an FTC challenge to any acquisition could be bearish for the near term,” Curran said.
The boardroom fight is continuing to develop. This week, Warren G. Lichtenstein, executive chairman of the company released a blistering letter to shareholders seeking support for his alternate slate of board candidates.
For her part, Chief Executive Officer Eileen Drake has launched an internal probe of Lichtenstein.
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