The Wall Street Journal - 23.08.2019

B12| Friday, August 23, 2019 THE WALL STREET JOURNAL.

A Rocketing Stock Won’t Fall Back

Aerojet Rocketdyne can benefit from interest in outer space and defense-industry consolidation

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

HP’s new boss will have the

same problem as the old boss:

How to make the ink run right.

The storied tech pioneer said

Thursday that CEO Dion Weisler is

stepping down for family health

reasons. Mr. Weisler has run HP

since the company split from the

other half of the Hewlett Packard

empire in 2015. He will be suc-

ceeded by Enrique Lores, who has

been running the printing business

since the split.

As such, Mr. Lores should have

little trouble coming up to speed

on the company’s biggest problem.

While most of HP’s revenue comes

from personal computers, most of

its profit comes from the printing

side, specifically print supplies.

That business has been slipping

since earlier this year and is get-

ting worse.

The company’s fiscal third quar-

ter results posted Thursday

showed printing supply revenue

falling 7% from a year earlier to

about $3.2 billion. That is the

worst decline for that business in

three years and notably more than

the 2% drop expected by analysts.

Strong PC sales helped offset

the hit, bringing overall revenue

for the quarter in line with Wall

Street’s projections. But that was

no surprise, given strong industry

data reported last month by mar-

ket research firms IDC and Gart-

ner. And investors watch HP’s sup-

plies business closely, given the

outsize impact on the bottom line.

HP shares slid 17% in February af-

ter the first print supply miss.

Thursday’s report took the stock

down an additional 6% after hours.

HP says the supply problem is

confined to its non-U.S. regions. It

also says it is taking aggressive

steps to address the issue. But the

problem has persisted for nearly a

year now, and a near-term resolu-

tion doesn’t seem at hand. HP

shares might look cheap at just

eight times forward earnings, but

Mr. Lores will need to get the ink

business back in line before inves-

tors will want to hook back up.

—Dan Gallagher

HP’s

Printer Jam

Gets Even

Wo r s e

Supply business

continues to weaken

As China’s electric-vehicle push
shifts gears, the country’s largest
EV maker—Warren Buffett-backed
BYD—has suddenly stalled.
BYD on Wednesday reported an
87% jump in net profit for the
quarter through June, compared
with the year-earlier period, while
forecasting a 70% to 90% drop for
the third quarter. Its Hong Kong-
listed stock fell 6.6% Thursday. Mr.
Buffett’sBerkshire Hathaway
owns a roughly 8% stake in the
company.
The reason for the sharp turn is
simple: China cut its EV subsidies
sharply in late June. Overall sales
of new-energy cars, including
plug-in hybrids, dropped 4.7%
from a year earlier in July, the
first decline in more than two
years.
Instead of relying on subsidies,
which are expected to disappear
completely by next year, Beijing
hopes to encourage auto makers to
produce more and better EVs with
a credit trading system similar to
the European Union’s. Credits are
allocated based on factors such as
vehicle range or energy efficiency.

Traditional auto makers will have

to have to buy credits from others

or face penalties if they don’t

make enough new-energy cars.

Many foreign brands’ joint ven-

tures in China are launching new

models this year, including Mer-

cedes, Toyota and Volkswagen.

This will be bad news for domestic

car makers, particularly the hun-

dreds of EV startups that popped

up to take advantage of China’s

subsidies.

BYD is in a stronger position

than most of these locals. It is al-

ready profitable, and as the mar-

ket leader, it will get the most

credits under the new system.

Moreover, unlike other EV produc-

ers, BYD also makes batteries—

roughly a third of which it sells to

other manufacturers.

Still, it is hard to be optimistic

about the net effect of all this up-

heaval on BYD’s profit. Its credits

may not prove that valuable given

a potential oversupply as conven-

tional auto makers jump into EVs.

Pure-play Chinese battery makers

includingContemporary Amperex

Technologyare likely to benefit

most from the launch of new EVs

in China by prestigious foreign

brands, as well as South Korean

battery makers likeSamsung SDI

andLG Chem, which were previ-

ously shut out of the Chinese mar-

ket.

BYD should survive the industry

shakeout, but it may not thrive.

—Jacky Wong

China’smonthlysalesofnew

electricvehicles

Source: Wind

250,000

0

50,000

100,000

150,000

200,000

vehicles

2015 ’16 ’17 ’18 ’19

The U.S. seems to be ready to engage in a new space race—this time with China—to return to the moon.

ROGER RESSMEYER/NASA/CORBIS/VCG/GETTY IMAGES

It has been 50 years since hu-
mans first landed on the moon,
but the maker of the engines that
took them there may have further
to go.
U.S. rocket makerAerojet
Rocketdynehas already reached
the stars in terms of investor per-
formance. In July 2012, Aerojet, a
manufacturer that dates back to
World War II, announced it would
buy Rocketdyne, the maker of the
five F-1 engines that powered the
Saturn V rocket that took people
to the moon in 1969. Since then,
its stock has returned almost
690%. That compares with 280%
for the U.S. aerospace and defense
industry overall and 150% for the
broader S&P 500.
After a post-Cold War drought
in demand for rockets, the U.S.
seems to be ready to engage in a
new space race—this time with
China—to return to the moon.
Aerojet is one of the key contrac-
tors involved in the development
of Space Launch System, NASA’s
new heavy-load space rocket.
This has sparked investor inter-
est in space-related companies,
giving Aerojet’s stock another
bump this year. Analysts at UBS
estimate that the space economy
will have more than $800 billion
in annual revenue by 2030. A new
generation of minisatellites is a
particularly big profit opportunity
for the rocket companies that will
launch them into space.
True, competition is heating up.
Aerojet’s products are expensive,
and SLS has been saddled with de-
lays and a cost overrun of almost
$2 billion. Technology tycoons
Elon Musk and Jeff Bezos are try-
ing to build cheaper rockets with
their own space ventures—SpaceX
and Blue Origin, respectively.
However, Aerojet seems to be
succeeding in slashing costs, for
example, by moving out of Rancho
Cordova, Calif., and expanding its
workforce in Arkansas. Its margins
have almost caught up with the
broader U.S. aerospace industry’s.
It also has an edge that many of

the new entrants don’t: It can

pitch its products as offering

lower risk, thanks to nearly 80

years of accumulated expertise

and intellectual property. As the

company’s Chief Financial Officer

Paul Lundstrom puts it: “It is

rocket science, and we’ve been

here from the beginning.”

Even better than being at the

center of one positive industry

trend is being at the center of two.

In June,United Technologiesand

Raytheonannounced their inten-

tion to merge into the world’s

third-biggest aerospace conglom-

erate. Investors have been looking

for further consolidation in the in-

dustry, and some see Aerojet as

a target.

This is because the UTC-Ray-

theon deal may partly be moti-

vated by a need to bid more ag-

gressively for government defense

programs, with competition in-

creasing after a six-year Goldilocks

period for contractors. Last year,

defense giantNorthrop Grumman

bought Orbital ATK, Aerojet’s main

competitor in building solid rocket

boosters. Thanks to this move, it

has become the sole bidder for the

Pentagon’s new $85 billion inter-

continental ballistic system, after

Boeingpulled out in July.

Impressive as the rally in Aero-

jet’s shares has been, its earnings

have mostly kept pace. The com-

pany’s valuation has merely caught

up with the rest of the industry.

Now that investors have ac-

knowledged its comeback story,

the rocket maker may finally reach

escape velocity.

—Jon Sindreu

Uber’s Long Road to Profit

Ride-hailing leader has yet to show defensible position in an increasingly competitive industry

HP’sprintsupplyrevenue

Source: the company

$4.5

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

billion

FY2012’13 ’14 ’15 ’16 ’17 ’18 ’19

Fiscal year ends October 31

Cheap fares helpedUber Tech-
nologiesgrow into a global giant.
They also look to be a lasting
brake on its share price.
The case for buying the ride-
hailing leader’s stock rests on two
hopes. One is that it can carry on
growing fast as it helps the taxi in-
dustry meet a bigger share of con-
sumers’ transportation needs,
while expanding into related areas
such as food delivery—its current
growth engine—and freight. The
other is that competition will be-
come more rational, allowing it to
wind down the subsidies it pays to
drivers and start making a profit.
Achieving growth and profit at
the same time always seemed a
tall order, and the company’s fi-
nancial results show little evidence
that it is possible. Uber’s ride-hail-

ing revenue shrank in the second

quarter, compared with the first,

as it shifted capital into food deliv-

ery. A one-off “driver appreciation

award” related to May’s initial

public offering skewed the num-

bers a bit, but this still seems to

be an industry where growth re-

quires subsidies.

The underlying problem is low

barriers to entry: There is little to

stop startups beating Uber at its

own game of undercutting the ex-

isting offer. In London, for exam-

ple, the company’s position is un-

der siege from new competitors,

including a low-cost Estonian com-

pany called Bolt that thinks it can

afford to take a lower share of

fares than Uber.

This kind of threat seems likely

to last at least as long as there is

venture capital financing to burn.

The end isn’t in sight yet: Soft-

Bank, one of the industry’s key

benefactors through its almost

$100 billion Vision Fund, is now

raising an even larger sum for a

second Vision Fund.

Driverless cars have the capac-

ity to transform ride-hailing by

taking drivers out of the picture.

In a world of robotaxis, Uber could

expand massively by offering a

service as cheap as car ownership.

Seductive as this vision is,

though, it is still years away. Since

March 2018, when a fatal crash in-

volving a self-driving Uber sent

shock waves through the industry,

companies have been reversing

away from near-term delivery tar-

gets and tapping third-party capi-

tal to ride out more losses. Uber’s

program itself raised $1 billion

from SoftBank,Toyotaand its

supplier Denso in April.

Even when robotaxis arrive,

most of the extra profit they might

bring probably won’t accrue to

their operator but to the technol-

ogy owner. Uber’s technology is

likely behind that ofAlphabetand

General Motors’ Cruise unit.

That leaves Uber competing in a

scrappy present in which the only

substantial barrier to entry seems

to be access to investors’ cash.

Even after a roughly 22% fall since

the IPO, the current share price

doesn’t really discount the risks.

The falling stock could even be-

come a problem in the battle for

capital. This is a ride that could

cost investors dear.

—Stephen Wilmot

China’s Changes Hit Electric Vehicles

OVERHEARD

It is probably a good thing that

Patrick Byrne has resigned as

chief executive of Overstock.com.

That doesn’t mean investors

should rush into the stock.

Mr. Byrne issued a cryptic

statement earlier this month that

he had assisted government au-

thorities in both “the Clinton in-

vestigation” and “the Russia in-

vestigation.” It wasn’t clear what

he meant.

After his resignation on Thurs-

day, shares of the company were

trading sharply higher. Nonethe-

less, it would be prudent to

let some smoke clear at

the furniture retailer

turned blockchain de-

veloper before put-

ting any money in.

On Thursday, Mr.

Byrne released a letter

hinting at possible

strategic discus-

sions over the company’s retail

business. He also said the com-

pany has “removed the pistol

from our temple” by reversing

earlier missteps, and trumpeted

the prospects for a “keiretsu” of

blockchain assets, borrowing a

term for interlinked Japanese

businesses.

On the other hand, here are

some cold facts from Overstock’s

financial statements: Revenue in

the first half of 2019 was down

20% from a year earlier, and while

the company’s net loss narrowed

over the same period, it was

still substantial at $70.5

million.

At least until there is

a detailed business up-

date from Overstock’s

new managers, it proba-

bly doesn’t pay to try to

make sense of

all this.

STEVEN FERDMAN/GETTY IMAGES