The period between post-undergrad and the first day of full-time employment is definitely an interesting time (dubbed this phase as “pre-employment”). I’ve been spending my days reading outside, traveling, golfing, and finding various ways to occupy my time. Having more time can lead to overthinking, complacency, and impatience, but it’s nice to be back home. One way I’ve chosen to fill my time is by thinking heavily about the future. Rent? Buy? What is the economy going to look like in 2025? During this reflective period, I revisited a company I discovered back in April: Redwire Corporation. Defensive and pharmaceutical positioning could be interesting in the near future.
Post Formats Going Forward
As I prepare to start working full-time, I need to find a way to make my posts more concise while maintaining consistent rigor and thoroughness. I have many drafts that should have been posts but were left incomplete. It would have been intriguing to review analyses of a Disney or Google call, but I didn’t complete them.
Moving forward, today’s post will be more structured, focusing on four sections: the business model, history, management, and critical factors that could lead this company to outperform. You’ll be responsible for conducting further research, and I’ll provide links to help you get started.
Redwire Corporation (RDW)
Key Financials (as of 6/28/2024)
- Market Cap: $448.6 mm
- Enterprise Value: $619.5 mm
- EV/Revenue: 1.6x
- Current Stock Price: $6.92
- HQ: Jacksonville, FL
Redwire Corporation (NYSE: RDW) is a leader in space infrastructure for the next generation space economy, with valuable IP for solar power generation and in-space 3D printing and manufacturing. With decades of flight heritage combined with the agile and innovative culture of a commercial space platform, Redwire is uniquely positioned to assist its customers in solving the complex challenges of future space missions.
AEI’s Redwire investment description: https://www.aeroequity.com/investments/#redwire26
Business Model: Space Infrastructure
Redwire Business Model Overview
Redwire Corporation (“RDW”, “Redwire”, or “the Company”) is a global leader in providing space infrastructure for the next generation space economy with a strengthening industry backdrop, improving profitability, and growing demand.
- Value Proposition: Provides components and services necessary for space utilization
- Markets: NASA, US Military, and Second Space Age commercial partnerships
- Sales: Bundling and relationships
- Execution: Heavy R&D, in-house and third-party manufacturing
- Financing: Two year runway, must watch debt and equity balances, positive FCF trends
Value Proposition: Space infrastructure?
Explanation in Space Jargon
Space infrastructure refers to the foundational facilities, systems, and services necessary to support activities in outer space. This includes a wide range of components, such as – satellites, launch vehicles (rockets), space stations, ground station communication, spacecraft, spaceports, in-space manufacturing/assembly, space debris management, navigation and timing systems, and space exploration tools. These elements of space infrastructure work together to enable and support a wide range of activities in space, from scientific research and commercial ventures to national security operations and international cooperation.
Redwire’s primary focuses include:
- Enabling space mission providers with its broad portfolio of space infrastructure products, systems, and components
- Providing technology needed for people to live, work, and explore in space
- Assisting international spacefaring allies in developing their own space capabilities
The Company’s core space infrastructure offerings include – avionics and sensors; power generation; structures and mechanisms; radio frequency systems; platforms, payloads, and missions; and microgravity payloads.
Translation: Like an Auto Parts Company
Imagine space infrastructure as the essential parts and services needed to build and maintain everything in space, much like how an auto parts company provides all the necessary components to build and repair cars. Redwire’s core offerings include some of the necessary components for space usage:
- Avionics and Sensors: Like the electronic systems and sensors in cars that control everything from engine performance to safety features
- Power Generation: Similar to car batteries and alternators that keep everything running
- Structures and Mechanisms: Like the chassis and mechanical parts that hold a car together and make it function
- Radio Frequency Systems: Comparable to the radios and communication systems in cars
- Platforms, Payloads, and Missions: Much like design platforms for cars that can simulate performance
- Microgravity Payloads: Think of these as special tools and equipment designed for unique tasks, much like specialized tools for car repairs or custom modifications
Summary: Provides components and services necessary for space utilization
Redwire Markets: Civil, Defense, and Commercial
These core space infrastructure offerings are widely applicable across nearly all space markets and numerous space assets being developed by civil space agencies, national security space customers, and commercial companies worldwide. Redwire’s technological expertise and broad customer base across multiple space markets offer strategic resilience against disruptions.
Primary markets
- Civil Space: This market includes customers who intend to gather data for the advance of research, exploration, or development of space domain uses. These contracts typically involve governmental entities funded outside of defense. Key customers include NASA, ESA (European Space Agency), and other ESA member nations
In May 2024, Redwire won another high profile contract with the Artemis program (after several in 2023) and will provide the Solar Arrays for the Lunar Orbiting Power and Propulsion element. The Artemis missions surround learning how to live on another world by establishing the first long-term presence on the moon.
Learn more here: https://www.nasa.gov/humans-in-space/artemis/ - National Security: Space is becoming contested, much like international waters. As near-peer threats emerge, the US and other nations stress the importance of investing in space assets. Key customers include U.S. national security agencies
- Commercial: As launch costs continue to decrease, industrial and commercial pursuits are becoming more viable. With the advent of space privatization, this era of space travel is increasingly referred to as the Second Space Age. RDW’s core space infrastructure offerings are allowing the commercialization of Low Earth Orbit (LEO).
In March 2024, Redwire announced a partnership with Eli Lilly and Company (Lilly) to conduct a second space flight mission surrounding RDW’s PIL-BOX. The PIL-BOX is an in-space pharmaceutical manufacturing product, which Lilly used to successfully create crystals (larger than possible on Earth) during its first PIL-BOX mission.
Learn more here: https://ir.redwirespace.com/news-events/press-releases/detail/113/redwire-partners-with-eli-lilly-and-company-on-second
Summary: NASA, US Military, and Second Space Age commercial partnerships
Sales, Development, and Delivery
Due to its collection of heritage products, services, and acquisitions, Redwire’s strategy focuses on bundling sales to provide complete satellite mission solutions. Continued strategic acquisitions, scaling, a reputation for quality demonstrated by consistent contract wins, and strong relationships enable the company to expand its business model.
Research and Development
Redwire’s business strategy depends on technological advancements that support its existing and future core space infrastructure offerings. Its research and development focus aligns with strategic areas of significant growth and long-term opportunity. Looking forward, Redwire expects to continue investing in fields offering the greatest opportunities for long-term growth and profitability. Redwire conducts research and development primarily in the U.S. and Belgium, with expenses totaling $5.0 million for the year ended December 31, 2023.
Manufacturing
The Company engages in light manufacturing activities. It uses its own production facilities as well as a base of third-party suppliers and subcontractors.
Summary: Bundling, relationship focused, heavy R&D, in-house and third-party manufacturing
Financing Operations
Not Profitable: Historically Negative Cash Flows
Yes, the technology is fascinating and the market is exciting. However, for a company to endure, it must be able to sustainably fund its operations. Historically, Redwire has not achieved profitability on a net income basis.
Typically, at Achaion.com, RDW’s lacking cash flow generation would be a red flag, prompting us to move on to the next opportunity. We recognize the risk of falling into the cliché investor pitfall of loving the idea of a cool stock rather than seeing it for what it really is—potentially not a viable company. That said, RDW’s current unprofitability is one of our critical factors that could lead to outperformance. It’s crucial to identify the funding source if positive free cash flow isn’t consistent.
Debt
Since the company has not yet achieved a year of positive unadjusted EBITDA and has negative equity, we will examine its cash to interest expense ratio to evaluate its leverage. This ratio is slightly under 3x. What does this mean? It suggests that, all else being equal, I would estimate the Company has a margin of safety for a two year runway without significant financial worries. In other words, its a safe assumption that the Company will be able to afford its interest payments for two years.
This provides us with a two-year window to evaluate Redwire. If Redwire succeeds, it will either have issued significant equity or achieved profitability. Below is a detailed look at the debt, which should interest my finance enthusiasts. Notably, most of the outstanding debt aligns with this two-year timeframe, with the principal amounts largely due in 2026.
Equity
As mentioned, our biggest concern should be the amount of equity being issued, which dilutes our early position and could render our investment less valuable. Redwire would be issuing equity to pay for its interest expenses. This is typical for a semi-recent IPO, high-tech, and non-profitable entity facing financial hardship.
Since 2022, the company’s equity issuances have unsurprisingly included employee stock-based compensation. Paying employees with stock can improve cash flow and help retain talent.
More importantly, there was a large sale of Series A Convertible Preferred Stock to private equity funds AE Industrial Partners and Bain Capital in 2022.
Redwire received $81.3 million from the sale. The preferred shares granted AE Industrial Partners and Bain Capital five and one board seats, respectively. Along with the issuance, the company payed $20 million in preferred dividends in 2023, which has impacted the bottom line. Cash flow that could have been used for further investments. As of December 31, 2023, the company had no shares of preferred stock outstanding, as the preferred stock was converted to common stock upon purchase. More on AE Industrials in History and Management.
It’s concerning that other equity investors are prioritized and paid dividends despite the company’s lack of profitability. However, the trade-off between using preferred dividends to reinvest in the business versus the initial cash payment from the preferred investors that sustained the business must be understood.
Overall, equity issuance will not be a major cause for concern if the Company grows as intended and focuses on profitability. Nevertheless, it underscores the importance of growth and vigilance regarding potential future equity issuances.
Positive Free Cash Flow
In Q4 2023 and Q1 2024, Redwire Corporation achieved consecutive quarters with positive free cash flow for the first time in its short history. This is a trend in the right direction towards business durability.
Additionally, in the first quarter, it reported an adjusted EBITDA of $4.3 million (fifth positive in a row). However, it’s important to note that the adjusted EBITDA figure is somewhat misleading, as approximately $2.3 million of adjustments stem from Capital Market and Advisory Fees. These fees are integral to the company’s strategy and business model, particularly due to its acquisitive nature.
Summary: Two year runway, must watch debt and equity balances, positive FCF trends
Redwire Business History: Guardians of the Space Economy
Like the Guardians of the Galaxy, private equity firm AE Industrial Partners combined a number of space related businesses to form Redwire in June 2020. The heritage businesses had histories going back to enabling space missions in the 1960s. Since the merger, the Company has grown organically while adding nine acquisitions. The purchased companies possessed innovative capabilities, deep flight experience, and complimented the portfolio of space infrastructure products and services.
At the time of the merger, Redwire had a revenue of $119 million and an adjusted EBITDA of $13 million. Management expected the company to continue growing through acquisitions and projected $1.4 billion in revenue and $250 million in adjusted EBITDA by 2025. However, in comparison in 2023, the company earned $244 million in revenue and $4.3 million in adjusted EBITDA.
RDW went public via a special-purpose acquisition company (SPAC) and began trading on the New York Stock Exchange on September 3, 2021. As evident, the initial optimism was followed by a corrective phase, a common pattern among many SPACs.
Obviously, the company has fallen short, with an expectation of $300 million in revenue for 2024. However, this forecast represents a 22% year-over-year growth in revenue. While trading at a 1.6x forward revenue multiple and a 22x forward EBITDA multiple, the original expectations have been subdued. If we were evaluating this stock at the time of the IPO, we might not have been as interested.
Summary: An ambitious coalition of companies that was probably brought to the public market three years too early. However, the optimism has dampened over the years, making it a better opportunity today.
Redwire Management
AE Industrial Partners
AE Industrial Partners (AEI) owns 55% of Redwire’s outstanding shares and controls 5 out of 9 board seats.
Founded in 1998 and based in Boca Raton, Florida, AEI is a private equity firm managing $6.2 billion in assets. The firm invests in companies within the defense and government services, commercial aerospace, specialty industrial, space, power and utility services, and business aviation sectors. AE Industrial Partners has made 29 platform investments while completing over 80 minority add-on since 2015.
Check out the company website here: https://www.aeroequity.com/
American Pacific Case Study
Within the space sector, AE Industrial Partners (AEI) has made eight investments since 2015, including one buyout. AEI’s initial investment in American Pacific Corporation occurred in 2020. In January 2024, AEI sold American Pacific Corporation to NewMarket Corporation (NYSE: NEU) for $700 million in cash. The original terms of the 2020 transaction were not disclosed. American Pacific produces chemicals used in missile defense, space launch, pharmaceuticals, and fire suppression applications.
Learn more about the transaction here: https://www.businesswire.com/news/home/20240116935581/en/AE-Industrial-Partners-Completes-Sale-of-American-Pacific-Corp.-to-NewMarket-Corp.-for-700-million
Knowing the initial transaction price would help calculate the return, yet seeing a successful leveraged buyout in AEI’s space industry portfolio is reassuring. Eventually, it is likely that AEI’s goal will be to sell Redwire once it achieves consistent profitability. This should align with our investing priorities.
CEO – Peter Anthony Cannito, Jr.
Peter Anthony Cannito, Jr. has served as Chairman and CEO of Redwire since September 2021. Pete has been an Operating Partner at AE Industrial Partners, LP since July 2019. He plays a crucial role in developing acquisition strategies for AE Industrial Partners and guiding portfolio companies in strategic initiatives. Moreover, he has extensive board experience, including roles at Firefly Aerospace Inc., American Pacific Corporation, BigBear.ai, Edge Autonomy, and Gryphon Technologies LC.
Cannito has a background in leading high-growth companies, particularly in defense, technology, and government services sectors. Previously, he served as Chief Executive Officer of Polaris Alpha and held executive roles at EOIR Technologies. He began his career at Booz Allen Hamilton, focusing on defense and intelligence programs, and later founded a company specializing in enterprise mobile computing. Cannito holds a BS in Finance from the University of Delaware, an MBA from the University of Maryland (2002), and served as an officer in the United States Marine Corps.
Summary: Redwire has an activist investor with proper industry focus and expertise to lead the Company. The experienced CEO comes from this investor, ensuring aligned management. Given private equity’s nature, a prudent investor would not be surprised by a future buyout. In essence, investing in Redwire depends heavily on AE Industrial’s ability to lead the company to profitability.
Critical Factors
When evaluating stocks, it typically comes down to one or two critical factors that drive outperformance or underperformance.
At Achaion.com, we focus on stocks that are naturally out of favor. Given our value-based approach, an unprofitable and growthy entity like Redwire would normally be excluded from our screening process. Despite the S&P 500 being at all-time highs and economic uncertainty inflating the cost of quality companies, Redwire stands out. Even with its current unprofitability, it is slowly approaching quality with a reasonable revenue multiple, making it an interesting case study.
Outperformance
Profitability
After Q1 2024, Redwire has had five consecutive quarters of positive adjusted EBITDA and revenue growth, including two consecutive quarters of positive free cash flow (FCF). This EBITDA momentum is driven by various factors, with the most important being the acquisition of larger contracts and development of scaled production.
An astute reader will notice that I have not touched on bidding and backlog for a company whose revenue is driven by government and commercial contracts. Personally, I do not rely on backlog as a forecasting method because it is typically not audited. Backlog figures represent unfulfilled received orders.
However, it is important to consider backlog to complete the picture. Below is the year-to-date (YTD) submitted bids and contracts from Redwire’s Q1 2024 investor presentation.
Based on the bidding strength and contracted backlog, and with the company having a trailing twelve months (LTM) book-to-bill ratio greater than one for at least the past six consecutive quarters, there is clearly a growing demand for Redwire’s products. The book-to-bill ratio is orders received divided by orders shipped. A book-to-bill greater than one indicates that Redwire is receiving more orders than it filled.
The growing demand is translating into better profitability. Below are Redwire’s EBITDA margins from FY 2021 to FY 2023. As seen, the margins remain negative but are accelerating towards profitability.
As Redwire becomes profitable, it will strengthen its position as a leader in space infrastructure, enabling it to undertake more venture projects and reinvest in the business to build scale. Achieving a sustainable financial position with its civil, defense, and commercial relationships by 2026 will attract larger institutional investors, making it a home run.
Pharma in the Second Space Age
I believe the most exciting technologies in Redwire’s portfolio are the PIL-BOX and 3D bio-printing. The video below will explain these innovations better than I can.
According to Acumen Research, the study below sized the drug discovery market at ~$80 billion in 2023. It projected the market to grow to ~$180 billion by 2032 (8.5% CAGR).
Read more here: Drug Discovery Market Size – Global Industry, Share, Analysis, Trends and Forecast 2023 – 2032
If significant use cases arise from microgravity (organ printing, novel drugs), there will be an inherent supply constraint. There are only so many space missions per year and time on the International Space Station. Pharmaceutical products could drive major revenue in the short term while unproven companies need to scale. Redwire already possesses the reputation needed to capitalize on this opportunity.
Currently, there are 16 PIL-BOX missions scheduled for 2024, following three missions completed since November 2023.
Space Industry Economic Insulation
- Macro: Regardless of the economic plans discussed by either Presidential option, some level of inflation is inevitable due to either substantial tax cuts or extensive fiscal spending. If the Fed remains independent and strong, it will likely maintain higher interest rates for the foreseeable future. This could strain consumer spending patterns we saw from 2020 to 2023.
Due to the space market’s connections to defense, medicine, and research, this industry should perform well regardless of ground-level economic conditions. It’s unlikely that any Republican-led government pullback will significantly affect the space sector, given its ties to national security. One could say, it will be “above” all the noise (needed to include at least one space pun). - Micro: From a competition and barrier to entry perspective, security clearances and regulatory approvals protect Redwire’s and other major space players’ positions. Redwire and its competitors will have to acquire the startups that require large customer bases.
Risks
As excited as I am by RDW’s potential, I possess a healthy amount of skepticism because there are significant risks.
- Unprofitable by 2026: If Redwire reaches 2026 without achieving the growth needed for profitability and intends to continue beyond 2027, it will likely need to take on significant debt. Or, more likely, dilution could reduce our 2024 position to smithereens.
- AE Industrial: We are placing significant trust in AE Industrial’s operational capabilities. Given AEI’s track record, Redwire aligns well with their portfolio and would likely be a favored option as an activist investor. Investing in Redwire could be seen as a way to tail AEI’s effectiveness in growing and ultimately selling the company.
- Headline and Reputation: Recently, the stock has gained momentum on the back of headlines about contract wins, which can also have the opposite effect. Boeing’s reactions to negative news serve as a clear example. For a company as small as Redwire, any setback could be devastating. Without a profitable outlook, the downside risk could be a zero.
- Unfavorable Spending Cuts: While theoretically improbable, any government cuts to NASA or specific US military budgets could hinder Redwire’s ability to convert its backlog into sales. However, given the historical competitiveness in space exploration among nations, it appears unlikely that the US will retreat from the Second Space Age.
- Space Bubble: After the AI and GLP-1 bubbles run their course, I could see the space industry being the next hype bubble. If this were to occur, it could cause a lovely boost in equity prices but greater scrutiny and unsound expectations.
Investment Summary
Redwire Corporation presents a unique story from several fronts. It operates in an unfamiliar and novel industry, approaching quality at a reasonable revenue multiple. Its technology has achieved significant wins with the most important customers in the industry. Currently, the risks have deterred our typical investor base. However, with strong due diligence, a responsible investor can envision the potential upside in RDW given its economic strengths while weighing the potential downside (total loss of investment).
Continue the Research
This stock carries significant risks. Investors should only consider it if they fully understand the downside, which necessitates further research on RDW.
Get started
- RDW 2023 10-K
- RDW 2021 10-K
- First Quarter Results and Earnings Release
- https://redwirespace.com/
- https://x.com/RedwireSpace
If you have more questions or want to talk all things RDW, do not hesitate to reach out on X, instagram, or shoot me a text.
Employ your curiosity.
-Maximus Beach
Learn more about Maximus Beach’s background here.
The opinions and statements contained in the writing in this post do not constitute an offer, a solicitation, or a recommendation to enact or decrease an investment or to make any other transaction. It should not be the cause for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. This content has been produced by Achaion.com and has not had any outside input. Read more about Achiaon.com’s Disclosures and Privacy Policy.
