Insights

Did SpaceX Really Save Taxpayers $40 Billion?

“A billion here, a billion there, and pretty soon you’re talking real money.”
— Sen. Everett McKinley Dirksen  
Now, there’s some dispute about whether the late Illinois Sen. Dirksen actually said the quote above in just those words, but whether he did or he didn’t, one thing’s certain: Even if a billion isn’t quite “real money,” $40 billion certainly is.
This is why, when NASA Administrator Bill Nelson (himself a former senator) told a Senate subcommittee last month that price competition from SpaceX helped save taxpayers $40 billion on the cost of military space launches, well, as an investor that got my attention right away.  
Image source: SpaceX.

Quotable senators
Nelson was testifying before the Senate Appropriations Subcommittee on Commerce, Justice, Science, and Related Agencies, and talking about what funding NASA needs to accomplish all the missions it wants to accomplish. Specifically, what he told the subcommittee was this:
“General Hyten, [then] the Vice Chairman of the Joint Chiefs, told me last year … the fact that we have competition now on going to space — just for the military — has saved them $40 billion in launch costs.”
Now, $40 billion is a big number, and it’s not entirely clear how Hyten came up with it. Still, SpaceX has been launching government satellites at significant discounts to the prices charged by space companies such as Boeing (NYSE: BA), Lockheed Martin (NYSE: LMT), and Northrop Grumman (NYSE: NOC) for about a decade. Add in savings from SpaceX developing new products — the Falcon Heavy rocket, for example, the Starship reusable megarocket, and even a lunar lander — largely on its own, or with minimal support from NASA, and the $40 billion figure could be close to accurate.  
And this wasn’t Nelson’s only revelation during his testimony.
In the context of thanking Congress for supporting a requested 9% increase in NASA’s 2023 budget to $26 billion, Nelson described his plan to develop a second lunar lander, such that NASA would have two landers to choose from “somewhere in the 2027 timeframe.” This second lander contract will be awarded as a fixed price contract — and that was the point Nelson continued to hammer on throughout his testimony.  
Fixed-price versus cost-plus
“The old way of doing things was always cost-plus,” explained Nelson, discussing a form of government contract that reimburses a contractor for the costs it incurs — even if those costs exceed the price it bid — and then adds a guaranteed measure of profit on top of that (the plus). Problem is, this kind of contract doesn’t require a defense contractor to work efficiently and keep costs in check.
In practice, this has resulted in project delays and cost overruns that cost both NASA and taxpayers money. Nelson cited the recent example of a contract awarded to Bechtel in 2019, to build a rocket-launching platform in 44 months for $383 million. As problems cropped up, this evolved into a contract to build the same launcher in 47 months for $402 million. Sad to say, this is not an isolated example, and Nelson told the Senate that in fact, cost-plus contracts have “been a plague on us in the past.”        
But Nelson says NASA is “committed” to managing its costs better, and has “been moving to fixed price where we can … really crack down on [cost-plus contracts].” Similar to how consumers shop in a store, a fixed-price contract requires contractors to bid a certain price for a certain service, and then receive that price when the service is performed — whether it actually costs the contractor more (or less) than its bid to perform the work.  
What it means for investors
Granted, this sounds like common sense. When you or I go shopping, we almost always pay a fixed price to fill our shopping carts. But this idea is kind of new for NASA. If Nelson is right and it lowers the cost of space launch, this will save NASA money, and mean taxpayers get more bang for their space bucks — which may increase taxpayer approval of, and support for NASA.
The switch from cost-plus to fixed-price does, however, have implications for investors in space stocks.
Consider that every government contract SpaceX wins at a discounted price is a contract lost by competitors like Northrop, Boeing, and Lockheed Martin. Moreover, every contract that these publicly traded space companies must bid low on, to beat competition from SpaceX, means less revenue for them.
Going forward, Nelson says he wants more NASA contracts to be priced this way. And this implies that going forward, Northrop could see its 10.6% operating profit margin in its space segment shrink. Lockheed could earn less than its present 9.3% margin — and Boeing, which only earns a 5.8% margin in its defense, space, and security division business, could be at even greater risk of margin shrinkage.
This is the policy NASA will pursue in the future. Investors in the space industry should start planning for smaller profits today.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy. –

“A billion here, a billion there, and pretty soon you’re talking real money.”

— Sen. Everett McKinley Dirksen  

Now, there’s some dispute about whether the late Illinois Sen. Dirksen actually said the quote above in just those words, but whether he did or he didn’t, one thing’s certain: Even if a billion isn’t quite “real money,” $40 billion certainly is.

This is why, when NASA Administrator Bill Nelson (himself a former senator) told a Senate subcommittee last month that price competition from SpaceX helped save taxpayers $40 billion on the cost of military space launches, well, as an investor that got my attention right away.  

Image source: SpaceX.

Quotable senators

Nelson was testifying before the Senate Appropriations Subcommittee on Commerce, Justice, Science, and Related Agencies, and talking about what funding NASA needs to accomplish all the missions it wants to accomplish. Specifically, what he told the subcommittee was this:

“General Hyten, [then] the Vice Chairman of the Joint Chiefs, told me last year … the fact that we have competition now on going to space — just for the military — has saved them $40 billion in launch costs.”

Now, $40 billion is a big number, and it’s not entirely clear how Hyten came up with it. Still, SpaceX has been launching government satellites at significant discounts to the prices charged by space companies such as Boeing (NYSE: BA), Lockheed Martin (NYSE: LMT), and Northrop Grumman (NYSE: NOC) for about a decade. Add in savings from SpaceX developing new products — the Falcon Heavy rocket, for example, the Starship reusable megarocket, and even a lunar lander — largely on its own, or with minimal support from NASA, and the $40 billion figure could be close to accurate.  

And this wasn’t Nelson’s only revelation during his testimony.

In the context of thanking Congress for supporting a requested 9% increase in NASA’s 2023 budget to $26 billion, Nelson described his plan to develop a second lunar lander, such that NASA would have two landers to choose from “somewhere in the 2027 timeframe.” This second lander contract will be awarded as a fixed price contract — and that was the point Nelson continued to hammer on throughout his testimony.  

Fixed-price versus cost-plus

“The old way of doing things was always cost-plus,” explained Nelson, discussing a form of government contract that reimburses a contractor for the costs it incurs — even if those costs exceed the price it bid — and then adds a guaranteed measure of profit on top of that (the plus). Problem is, this kind of contract doesn’t require a defense contractor to work efficiently and keep costs in check.

In practice, this has resulted in project delays and cost overruns that cost both NASA and taxpayers money. Nelson cited the recent example of a contract awarded to Bechtel in 2019, to build a rocket-launching platform in 44 months for $383 million. As problems cropped up, this evolved into a contract to build the same launcher in 47 months for $402 million. Sad to say, this is not an isolated example, and Nelson told the Senate that in fact, cost-plus contracts have “been a plague on us in the past.”        

But Nelson says NASA is “committed” to managing its costs better, and has “been moving to fixed price where we can … really crack down on [cost-plus contracts].” Similar to how consumers shop in a store, a fixed-price contract requires contractors to bid a certain price for a certain service, and then receive that price when the service is performed — whether it actually costs the contractor more (or less) than its bid to perform the work.  

What it means for investors

Granted, this sounds like common sense. When you or I go shopping, we almost always pay a fixed price to fill our shopping carts. But this idea is kind of new for NASA. If Nelson is right and it lowers the cost of space launch, this will save NASA money, and mean taxpayers get more bang for their space bucks — which may increase taxpayer approval of, and support for NASA.

The switch from cost-plus to fixed-price does, however, have implications for investors in space stocks.

Consider that every government contract SpaceX wins at a discounted price is a contract lost by competitors like Northrop, Boeing, and Lockheed Martin. Moreover, every contract that these publicly traded space companies must bid low on, to beat competition from SpaceX, means less revenue for them.

Going forward, Nelson says he wants more NASA contracts to be priced this way. And this implies that going forward, Northrop could see its 10.6% operating profit margin in its space segment shrink. Lockheed could earn less than its present 9.3% margin — and Boeing, which only earns a 5.8% margin in its defense, space, and security division business, could be at even greater risk of margin shrinkage.

This is the policy NASA will pursue in the future. Investors in the space industry should start planning for smaller profits today.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.

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