Proliferated Low Earth Orbit Demand Will Support Long Term Mission Services Upside

Catalysts

About York Space Systems

York Space Systems designs, manufactures and operates satellites and end to end mission services for U.S. government and commercial customers.

What are the underlying business or industry changes driving this perspective?

• Rising U.S. government focus on proliferated low earth orbit constellations for national defense, including programs like PWSA, Golden Dome and related classified architectures, supports a multi year pipeline of firm fixed price contracts that can influence revenue visibility and backlog conversion.
• York’s standardized S CLASS, LX CLASS and M CLASS platforms, which share a common hardware and software stack, create scale benefits as volumes increase, with the potential to improve contribution margin and overall gross margin as newer programs form a larger share of earnings.
• Vertical integration moves such as acquiring Orbion for propulsion and ATLAS for ground operations reduce supply chain risk and third party markups, which can support contribution margin and help protect net margins on large constellation awards.
• Growing commercial interest in large constellations, illustrated by the US$187 million M CLASS contract for a 20 plus satellite network and expectations of additional constellations for the same customer, broadens the revenue mix beyond defense and can add incremental contribution margin dollars over time.
• Investment in high volume manufacturing capacity, inventory of satellite platforms and an integrated software driven ground network positions York to shorten time to orbit for customers, which can support faster revenue recognition on programs and improve adjusted EBITDA as fixed costs are spread over more satellites.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming York Space Systems's revenue will grow by 41.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -22.0% today to 12.3% in 3 years time.
• Analysts expect earnings to reach $135.1 million (and earnings per share of $1.04) by about April 2029, up from -$85.1 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 33.8x on those 2029 earnings, up from -41.9x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 36.9x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.53%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• York relies heavily on U.S. defense programs such as PWSA, Golden Dome and classified architectures, and any shift in priorities, delays in contract awards or changes to architectures like the planned Space Data Network could slow backlog conversion and affect revenue and earnings.
• The business model is built around long term firm fixed price contracts and high material cost exposure, so inaccurate estimates at completion, supply chain pressures or mispriced newer programs could compress contribution margin and gross margin and limit progress toward profitability.
• Vertical integration through acquisitions such as ATLAS and Orbion and plans for further M&A add execution and integration risk. If these assets underperform or synergies do not materialize as expected, the outcome could be lower net margins and weaker earnings than implied by current guidance.
• York is investing in very high volume manufacturing capacity and building satellite inventory ahead of confirmed demand. If identified pipeline opportunities or expected commercial constellations do not translate into awards, utilization could remain below capacity, putting pressure on revenue growth and adjusted EBITDA.
• The thesis assumes continued strong demand from both national security and commercial constellation customers. Increased competition, pricing pressure or slower adoption of proliferated LEO architectures by agencies and commercial operators could limit new business wins, which would affect backlog growth, revenue and long term earnings potential.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $35.8 for York Space Systems based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $55.0, and the most bearish reporting a price target of just $26.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $1.1 billion, earnings will come to $135.1 million, and it would be trading on a PE ratio of 33.8x, assuming you use a discount rate of 7.5%.
• Given the current share price of $27.95, the analyst price target of $35.8 is 21.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.