It’s official… space is an industry. 

Space-based companies have been progressively preparing for the transition toward commercial space travel, and it appears that things are finally starting to get underway.

In the most recent news, Virgin Galactic (SPCE) has brought interest to the new sector through the completion of its first commercial space flight.

This tourism venture has been in the works since 2004, and in June, the venture successfully brought passengers on a 75 minute journey 50 miles above New Mexico.

Furthermore, it’s clear that this could be big business. Virgin Galactic has already sold 800 tickets at $450,000 a seat.

This is just the beginning for commercial space travel. More companies are likely to gear up to get a piece of the action.

With space-related companies continuing to get into the commercial space industry, there could be an expansion in outer space aircraft and related technology.

With all the new excitement and noise around the space sector, Procure found it the appropriate time to launch its newest ETF, the Procure Space ETF.

Procure builds ETFs around specific events. For instance, it has funds focused on disaster recovery and aerospace, whose strategies are designed around the outcome and development of these unique opportunities.

Procure’s Space ETF allows investors to gain exposure to space travel technology and initiatives.

The ETF contributes 80% of its assets toward companies that receive at least 50% of revenue or profits from space-related segments.

This acts as its differentiating factor compared to most aerospace funds. This ETF is attempting to capture a wider net of all these new space initiatives.

There are so many companies that are set up to profit from the expansion of this new industry. Let’s take a look at Procure’s Space ETF top holdings and see which appears the most promising.

Economic productivity is massively misunderstood on Wall Street. This is reflected by the 130+ distortions in the Generally Accepted Accounting Principles (GAAP) that make as-reported results poor representations of real economic productivity.

These distortions include the poor capitalization of R&D, the use of goodwill and intangibles to inflate a company’s asset base, a poor understanding of one-off expense line items, as well as flawed acquisition accounting.

It’s no surprise that once many of these distortions are accounted for, it becomes apparent which companies are in real robust profitability and which may not be as strong of an investment.

See for yourself below.

Looking at as-reported accounting numbers, investors would think that the companies in Procure Space ETF is barely profitable.

On an as-reported basis, many of the companies in the ETF are poor performers. The average as-reported ROA for the top 15 holdings of the ETF is 1%, which is significantly below the U.S. corporate average.

However, once we make Uniform Accounting adjustments to accurately calculate the earning power, we can see that the average return in Procure Space ETF’s top 15 holdings is actually 7%.

As the distortions from as-reported accounting are removed, we can see that Sirius XM Holdings Inc (SIRI) isn’t a 13% return business. Its Uniform ROA is 29%.

Meanwhile, L3Harris Technologies Inc. (LHX) seems like a 4% return business, but this massive aerospace company actually powers a 31% Uniform ROA.

That being said, to find companies that can deliver alpha beyond the market, just finding companies where as-reported metrics misrepresent a company’s real profitability is insufficient.

To really generate alpha, any investor also needs to identify where the market is significantly undervaluing the company’s potential.

These dislocations demonstrate that most of these firms are in a different financial position than GAAP may make their books appear. But there is another crucial step in the search for alpha. Investors need to also find companies that are performing better than their valuations imply.

Valens has built a systematic process called Embedded Expectations Analysis to help investors get a sense of the future performance already baked into a company’s current stock price. Take a look:

This chart shows four interesting data points:

• The average Uniform ROA among Procure Space ETFs top 15 holdings is actually 7%, which is better than the corporate average in the United States.
• The analyst-expected Uniform ROA represents what ROA is forecasted to do over the next two years. To get the ROA value, we take consensus Wall Street estimates and convert them to the Uniform Accounting framework.
• The market-implied Uniform ROA is what the market thinks Uniform ROA is going to be in the three years following the analyst expectations, which for most companies here are 2023, 2024, and 2025. Here, we show the sort of economic productivity a company needs to achieve to justify its current stock price.
• The Uniform P/E is our measure of how expensive a company is relative to its Uniform earnings. For reference, the average Uniform P/E across the investing universe is roughly 20x.

Embedded Expectations Analysis of Procure Space ETF paints a clear picture. Over the next few years, Wall Street analysts expect the companies in the ETF to maintain the same levels of profitability. On the other hand, the market has a more optimistic view of the companies in the portfolio.

Analysts forecast the portfolio holdings on average to see Uniform ROA stay at the same levels of around 8% over the next two years. At current valuations, the market’s expectations are higher than analysts and it expects a 11% Uniform ROA for the companies in the portfolio.

For instance, Iridium Communications Inc (IRDM) returned 0% this year. Analysts think its returns will slightly increase to 2%. However, the market expects profitability to significantly improve and is pricing Uniform ROA to be around 19%.

Similarly, SES S.A (BDL:SESGL) Uniform ROA is -3%. Analysts expect its returns will stay around this level with a slight improvement to -1%, but the market is much more optimistic about the company’s future and pricing its returns to be around 4%.

Overall, the fund is full of speculative companies. As we mentioned, commercial space is a fledgling industry. So it’s no surprise a lot of these companies are only just showing financial promise.

The market clearly gets the story, too. That’s why it expects Uniform ROA to rise for a lot of these companies.

Meanwhile, with commercial space poised for growth, this ETF may show promise to investors if it can position and continue to align itself with all new spaceborne initiatives.

To make money on this fund, you’d need to assume commercial space will grow faster than the market’s pricing, and that these companies are able to ramp profitability faster than the market-implied rate.

It’s clearly a speculative industry… and that’s not stopping investors from pouring in.

This just goes to show the importance of valuation in the investing process. Finding a company with strong profitability and growth is only half of the process. The other, just as important part, is attaching reasonable valuations to the companies and understanding which have upside which has not been fully priced into their current prices.

To see a list of companies that have great performance and stability also at attractive valuations, the Valens Conviction Long Idea List is the place to look. The conviction list is powered by the Valens database, which offers access to full Uniform Accounting metrics for thousands of companies.

Click here to get access.

Read on to see a detailed tearsheet of one of Procure Space ETF’s largest holdings.

SUMMARY and Rocket Lab USA, Inc. Tearsheet

As one of Procure Space ETF’s largest individual stock holdings, we’re highlighting Rocket Lab USA, Inc. (RKLB:USA) tearsheet today.

As the Uniform Accounting tearsheet for Rocket Lab USA, Inc. highlights, its Uniform P/E trades at -31.0x, which is below the global corporate average of 18.4x, but above its historical average of -62.9x.

Low P/Es require low EPS growth to sustain them. In the case of Rocket Lab USA, Inc., the company has recently shown 73% Uniform EPS shrinkage.

Wall Street analysts provide stock and valuation recommendations that, in general, provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Rocket Lab USA, Inc.’s Wall Street analyst-driven forecast is for EPS to grow by 68% in 2023 and to shrink by 107% in 2024.

Furthermore, the company’s return on assets was -7% in 2022, which is below the long-run corporate averages. Also, cash flows and cash on hand consistently exceed its total obligations—including debt maturities and CAPEX maintenance. These signal low operating risk.

Lastly, Rocket Lab USA, Inc.’s Uniform earnings growth is above peer averages, and below peer valuations.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

This portfolio analysis highlights the same insights we share with our FA Alpha Members. To find out more, visit our website.