Short-seller calls out Aerojet Rocketdyne for 'aggressive accounting' and says losing out to Jeff Bezos' Blue Origin was its 'death blow'

Blue OrginJeff Bezos, founder of Blue Origin, inspects New Shepard’s West Texas launch facility before the rocket’s maiden voyage.
  • Short-seller Spruce Point Capital has targeted Aerojet Rocketdyne as having 40-60% downside.
  • It says the rocket manufacturer has used “aggressive accounting” and that losing out to Jeff Bezos’ Blue Origin was its ‘death blow.’
  • Shares of the company dropped nearly 5% upon the report’s release Tuesday morning.
  • Watch Aerojet Rocketdyne trade live.

The hedge fund Spruce Point Capital, founded by former banker Ben Axler, has called out the $US2.6 billion rocket manufacturer Aerojet Rocketdyne for using “aggressive accounting” tactics and said that its loss to Blue Origin was its “death blow.”

In a presentation released Tuesday morning, Spruce Point Capital said Aerojet Rocketdyne’s stock price faced significant downside. Spruce, which is a well-known short-seller, claims Aerojet can fall 40-60% once investors better understand the many issues facing the company. Aerojet was down as much as 11.4% on the news, hitting a low of $US30.11 a share, before recovering to a 2.5% fall.

Spruce Point’s report describes fundamental business challenges and “aggressive accounting and financial obfuscation” which have masked the company’s struggles.

These include new revenue recognition practices which render year-over-year results incomparable and several “one-time” items that are treated as ongoing revenues, according to Spruce Point. In addition, the hedge fund cites $US900 million of liabilities, including an unfunded pension of $US468 million that is says is not recognised by analysts covering the stock.

“While holding no conference calls, and having only four analysts cover the stock, we believe the market is fundamentally ignoring ~$US900M of liabilities associated with the business, making the Company 5x more levered than it appears and its valuation ‘cheap,'” the report noted.

In addition, the presentation criticised research analysts who “blindly pencil” in growth assumptions despite evidence that questions marks hang over revenue projections. In particular, the hedge fund note the entry of low-costs entrants such as Blue Origin and SpaceX are taking share from the company.

“Aerojet’s primary rocket propulsion business has historically benefited from high barriers to entry, oligopolistic pricing and favourable cost-reimbursable contracts,” the report said. “These dynamics have shifted in recent years with the emergence of disruptive low-cost competitors driven by lionized CEOs (Blue Origin / Bezos and SpaceX / Musk ).”

The report added: “We believe the loss to Blue Origin was the death blow to Aerojet by losing ULA, its only customer in space launch.”

Spruce Point also cites low management stock ownership and members of executive team who have been previously associated with companies charged with securities violations. Aerojet President General Merrill McPeak was previously lead director of Miller Energy Resources, which entered bankruptcy after the Securities and Exchange Commission charged the company and its management with violating securities laws for fraudulently overstating its assets. The SEC also initiated actions against United Industrial Corp, whose former CFO, James Perry, recently resigned from Aerojet’s board.

Aerojet was down 6% this year.

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