From the September 2010 issue of Research Magazine • Subscribe!

Space Commerce's New Dawn

Opportunity glimmers on a challenging investment frontier.

Space, long dominated by military and civilian government agencies, is becoming the target of an intense commercial competition. Companies are racing to be at the forefront of a new generation of private-sector spacecraft that, it is hoped, will make Earth orbit a more accessible -- and profitable -- place to send satellites, cargo and even passengers.

Adding fuel to such efforts is a shift in government policy, initiated by the Obama administration, whereby NASA plans to rely increasingly on the private sector to provide orbital transportation as the nation phases out its space shuttle fleet. Such capabilities could also foster the development of space tourism (an industry that so far has been limited to a handful of paying passengers aboard Russian rockets).

Seeking to position themselves in this changing space arena are a number of well-established companies in aerospace contracting, such as Boeing, and an array of smaller firms -- such as SpaceX, Virgin Galactic, SpaceDev and Bigelow Aerospace -- that were set up in recent years to capitalize on emerging opportunities in space commerce.

The latter category, sometimes called NewSpace, is currently a field of privately owned companies, but speculation about public offerings is growing as NewSpace enterprises achieve technological milestones. For instance, SpaceX, started by PayPal co-founder Elon Musk, successfully test-launched its Falcon 9 rocket in June, increasing the plausibility that the firm will follow the trajectory to the stock market taken by PayPal and, more recently, the electric-car company Tesla Motors, also founded by Musk.

Moreover, the burgeoning of space commerce could mean a boost for the share prices of already publicly traded companies such as Boeing (BA), Orbital Sciences (ORB), Lockheed Martin (LMT) and Northrop Grumman (NOC). Exchange-traded funds such as PowerShares Aerospace & Defense (PPA) and iShares Dow Jones US Aerospace & Defense (ITA) also offer avenues for investors to take a stake on the space frontier.

Tracking Space Stocks

Many publicly traded companies and funds relevant to space also include aviation or terrestrial defense assets, so options remain scant for achieving a pure play on the space business. Nonetheless, one can get a sense of the space industry's equity performance by monitoring an index constructed by the Space Foundation, a Colorado-based non-profit organization that seeks to promote greater utilization and appreciation of space.

The Space Foundation Index, labeled SFI, is an index of 30 companies that are listed on U.S. exchanges and derive revenues from space-related business; the index is market-cap-weighted with some modifications (such as factoring in the percentage of a company's revenues attributable to space activity). The foundation also has sub-indexes focused respectively on space-related infrastructure and services.

Set at a level of 100 at inception at end-June 2005, SFI surged into the 140 vicinity in mid-2007 before dropping to levels just above 60 in mid-2009. By mid-2010, the index was back around 100, having put in a flat performance for the past five years. During that period, the index underperformed the Nasdaq Composite (up about 8 percent over five years) and outperformed the S&P 500 (down some 7 percent during that time).

In short, the space industry's stock market performance in recent years has been respectable but unspectacular. This middling showing reflects factors such as the relative maturity of existing space business fields including communications satellites, along with pressures on civilian and military government-contracting budgets.

But those pressures are indeed what drive much optimism that a new era of space commerce is about to dawn, since the federal government -- having run up vast deficits and not being willing to spend expansively on space projects -- is poised to rely on private-sector space activity to a degree unprecedented through the half century of the space age.

Dreams and Realities

Ever since the U.S. government scrambled to set up NASA in response to the Soviet Union's 1957 launch of the Sputnik I satellite, political and military considerations have tended to outweigh commercial motives in getting space hardware off the ground. The Apollo moon missions, for instance, were implemented in a spare-no-expense manner that would have been a poor model for any cost-conscious private-sector effort.

Even so, dreams of extraterrestrial profit bubbled up even at the height of the space race. In the summer of 1969, as NASA landed men on the moon, Pan Am began taking reservations for a lunar flight scheduled for the year 2000. As it happened, Pan Am would not stay in business that long, let alone fly to the moon, but it did sign up over 90,000 would-be passengers including Ronald Reagan, then California's governor.

The first commercial communications satellite, named Early Bird, was placed in orbit in 1965, launching what would become a large industry. However, the federal government played a hefty role in getting that industry started, funding the publicly traded company Comsat and organizing the international consortium Intelsat. Similarly, while GPS navigation would become an important commercial field, it was one that piggybacked on the Defense Department's Global Positioning System satellites.

Throughout the space age, there have been efforts to move away from government dominance of the celestial. In the 1980s the Reagan administration opened a licensing office for commercial rockets, effectively removing regulations that had prevented the private sector from competing with NASA's shuttles in carrying satellites. In 2004, President George W. Bush signed the Commercial Space Launch Amendments Act, designed to resolve regulatory ambiguities over future private human spaceflight.

The centerpiece of the Bush administration's space policy, however, was a government-focused effort to return humans to the moon and eventually move on to Mars. In scrapping that plan, the Obama administration sparked criticism that it was foreclosing the nation's long-term future in space. At the same time, the administration received some support from free-market enthusiasts who saw the shift to a more private-sector approach in space as a welcome contrast with administration policies on Earth.

Soaring Ambitions

The credibility of a private-sector push into space received a major boost in 2004 when the experimental vehicle SpaceShipOne made the first non-governmental manned flights into space, receiving the $10 million Ansari X-Prize for this accomplishment. SpaceShipOne, designed by engineer Burt Rutan and financed by Microsoft co-founder Paul Allen, performed two suborbital flights beyond Earth's atmosphere.

Virgin Galactic, founded by British billionaire Richard Branson, working with Rutan's firm Scaled Composites, has unveiled a successor vehicle called SpaceShipTwo, which is currently being tested for its ability to bring tourists on point-to-point flights beyond the atmosphere. A subsequent step would be a rocket capable of orbital flight.

Blue Origin, a company set up by Amazon founder Jeff Bezos, also is reportedly investigating suborbital and subsequently orbital flight capabilities. Meanwhile, SpaceX and Orbital Sciences are working to develop orbital rockets to deliver cargo to the International Space Station, also a possible step in developing a human-rated orbital craft. Another company, Bigelow Aerospace, is looking even further afield, developing inflatable orbital habitats that could serve as the first space hotels.

Surely, caution is in order in contemplating such possibilities. The history of the space age has seen many unfulfilled or delayed objectives (as those who reserved seats on Pan Am's millennial moon flight can attest). But importantly, never before has there been such a ferment of private-sector activity aimed at developing commercial markets in space. From an investment perspective, it makes sense to keep an eye on the heavens.

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The Airmail Precedent

The Obama administration's push to step up the private sector's role in space travel has a long-ago precedent: In the 1920s, the federal government allowed commercial airlines to contract with the United States Post Office to deliver airmail.

The Kelly Act of 1925, named after Congressman Clyde Kelly (R.-Pa), ended the government monopoly on delivering mail by air. Railroad interests had complained that this federal service was cutting into their business.

As the fledgling airline industry competed for mail contracts, delivery became faster and more efficient. Moreover, air transportation increasingly came to be seen by the public as a normal and safe activity.

Things did not go entirely smoothly, however. In the early 1930s, amid allegations of fraud in mail contracts, Franklin D. Roosevelt's administration opted to hand airmail delivery over to the Army Air Corps. This became an embarrassment as it turned out the cash-strapped Depression-era military was poorly prepared for the assignment, operating limited hours and losing a number of pilots in blizzards.

Soon, the government returned to commercial airmail arrangements, with tighter oversight. Airmail was an important factor in the growth of the U.S. airline industry.

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Energy from Space?

Space visionaries have long dreamed of getting clean, abundant energy from beyond Earth. One way to do this would be through space-based solar power -- putting solar arrays in orbit, unhindered by the atmosphere, and beaming the energy down to Earth.

This has seemed to be a technology that's decades away, given the economic and technical difficulties involved. For one thing, barring a huge reduction in launch costs, electricity from space would cost far more than market electricity rates today.

In 2009, California utility Pacific Gas & Electric (ticker: PCG), announced a deal with start-up company Solaren to purchase space-based solar energy starting in 2016. Skepticism lingers as to whether such a system could be in place that soon, though the utility seems to have risked little, in that it will only pay if the energy shows up.

Another idea for extraterrestrial energy involves mining helium-3 on the moon for use in future nuclear-fusion reactors. This concept has a high-profile advocate in former astronaut and U.S. Senator Harrison Schmitt (R.-N.M.). So far such moon mining has not become a staple of corporate prospectuses, though it did appear in the 2009 sci-fi film Moon, with Sam Rockwell playing an astronaut-miner who seems to be losing his mind.

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