Shocker. Fundamentals Do Matter. Momentarily.
Aerojet Rocketdyne delivered a very strong Q2 report after the close last night. This was off the back of the stock being handed a severe drubbing in recent weeks. (See our AJRD Q2 Earnings Preview for details). The stock closed up 16% today - a result, it seems, of old-fashioned things like growth in backlog, revenue, earnings and cashflow. A victory for reason over sentiment, stimulus and the various other horsemen riding to end the Enlightenment.
Below we walk you through our take on the quarter.
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Before we begin, you should note that as a house we've been at Buy on AJRD throughout its period of stock price weakness - subscribers can read our full Pro investment note here - if you're not yet a subscriber you can buy the Pro note on a standalone basis here. In addition, at the time this post was published, Cestrian Capital Research, Inc staff held long positions in the stock on a personal account basis.
We'll get right to it. Here's how the quarter played out:
Note the big step-up in backlog, which we flagged would likely be the case, the solid revenue growth, improved EBITDA margin, and very strong cash generation. All rather boring and rational reasons for a stock to rise.
And rise it did. Up 16% on the day. But even after that rise, the stock is attractively valued in our view. Here's the valuation on a fundamentals basis.
1.5x trailing revenues, sub 9x trailing EBITDA and, note, an unlevered pretax FCF multiple lower than the EBITDA multiple - meaning the company is generating more cash than profit, even after capex. We believe the stock to be undervalued still. We remain at Buy.
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