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Investor Stock Play for Two Growing Missile Threats

Companies / Investing 2015 Jun 28, 2015 - 01:39 PM GMT

By: ...

Companies William Patalon III writes: We've given you many reasons to like Aerojet Rocketdyne Holdings Inc. (NYSE: AJRD), a company whose stock we recommended at $11.40 a share back in February 2013, when it was still known as GenCorp Inc.

Now we're about to give you two more.

They're both "ripped from the headlines."

And they both underscore why a stock that's given you a peak gain of better than 100% since we first told you about it still has plenty of room to run.

So let's take a look…

An Old Threat Is New Again

I told you I'd share two reasons the rocket engine maker's shares will keep surging.

Here they are…

In the first of the two, Russian President Vladimir Putin this week said he would boost his country's stock of nuclear-tipped intercontinental ballistic missiles (ICBMs) by 40 by the end of this year.

And in the second, Saudi Arabia says it used a U.S. Patriot missile to shoot down a Scud missile fired from Yemen.

The Patriot missile – an "interceptor" – is powered by a solid-rocket motor made by Aerojet.

And the growing world arsenal of ICBMs – like those promised by Putin – will force the U.S. military to boost its investments in advanced missile interceptors. And many or most of those, too, will be powered by Aerojet rocket motors.

Rocket motors have become a "growth industry" – just as we said they would in the April report "Missiles of October, Missiles of Pyongyang – and the One Stock to Buy."

That's why we're following the missile programs in North Korea, Iran, and China.

And it's also why we continue to recommend Aerojet as a long-term investment.

Especially since – as we've shown you here already today – our investment thesis just got a big boost.

Surprise "First Strike" Capability

As we've said in our reports to you, there's been a gap between the "official" assessments of North Korea's missile capabilities and what other non-U.S. military experts believe the country is capable of.

Officially, North Korea's missiles were said to have ranges too short to reach the United States. And North Korea's nuclear and warhead know-how were not yet advanced enough to top those missiles with megaton potential.

But a recent report now says the Hermit Kingdom has actually achieved some major advances in the last several years.

According to the membership organization and news website, U.S. Army Gen. Curtis "Mike" Scaparrotti – the U.S. commander in South Korea – in April told the U.S. Senate Armed Services Committee (SASC) that he believes North Korea has the ability to fit a nuclear warhead to a long-range missile capable of hitting the U.S. mainland.

"I believe they've had the time and the capability to miniaturize" a nuclear weapon to arm North Korea's new KN-08 intercontinental ballistic missiles, Gen. Scaparotti said. "We must assume they have that capability" of hitting the United States.

U.S. Navy Adm. Samuel J. Locklear, head of the Pacific Command, also testified – and agreed with Scaparrotti's assessment. But Adm. Locklear said the North Koreans had yet to test the KN-08, which also goes by the names No-dong-C and Hwaseong-13.

The worry here, of course, isn't just having the ability.

It's the wildcard factor of North Korea's leader, Kim Jong-un, who has demonstrated a willingness to push the envelope.

Indeed, the SASC chairman, U.S. Sen. John McCain (R-Ariz.), said the North Korean threat was enhanced by the unpredictability "of this overweight young man on the Korean peninsula" – a reference to Kim.

Adm. Scaparrotti agreed and said "that's a disturbing factor."

These two experts aren't alone in sounding the alarm.

At the Pentagon earlier this year, U.S. Navy Adm. William E. Gortney, commander of U.S. Northern Command (USNORTHCOM) and the North American Aerospace Defense Command (NORAD), said "our assessment is that they have the ability to put a nuclear weapon on a KN-08 and shoot it at the homeland. We assess that it's operational today, and so we practice to go against it."

And if you're the worrying type, the story even gets worse: Adm. Gortney said the mobility of the KN-08 limits "our ability to get the indications that something might occur."

One reason the reports on the KN-08 are so sketchy is that it's a new weapon. Analysts think it has a range of 3,400 miles – though some experts argue it has the potential to travel as far as 4,350 to 5,900 miles. If that's true, that would put West Coast cities like San Francisco, Los Angeles, and Seattle in range.

Mainland targets aren't America's only worry: The United States is obligated – by treaty – to come to the aid of Japan and South Korea.

(Ironically, a nuclear-enabled North Korea is also a huge worry for China, its ongoing benefactor, because it may force Beijing to face off against a sovereign state that's willing to flaunt accepted international conventions. Chinese defense officials recently told their U.S. counterparts that North Korea may already have as many as 20 nuclear warheads – and the ability to double its arsenal by next year.)

There is one piece of reassurance, and Gortney cited it: America's anti-missile defense systems, which he has a "high confidence" will be able to defend against a potential North Korean strike.

And Aerojet makes many of the rocket motors for those interceptors.

The Truth About "Going Ballistic"

When we hear the term "ballistic missile," most of us immediately think about a rocket being shot from an underground silo – or even from a mobile rocket launcher, just like the Iraqi Scud missiles of the first Gulf War… or the Yemeni Scuds fired at Saudi Arabia on Saturday.

But a recent Pentagon intelligence report said that China's military has the world's "most active and diverse ballistic-missile program." And it can top those rockets with a rapidly expanding array of warheads – creating ballistic missiles capable of targeting the U.S. mainland, the report concluded.

One of China's newest weapons is the Jù Làng-2 (JL-2) – a submarine-launched ballistic missile that for the first time will enable the Asian heavyweight to target portions of the United States from ultra-long range. China's "boomers," their ballistic missile subs, will be able to sit just off that country's coastline and still hit key parts of the U.S. mainland, the National Air and Space Intelligence Center said in a report obtained by Bloomberg Business.

The intelligence center – situated at Wright-Patterson Air Force Base near Dayton, Ohio – is the Pentagon's top provider of aerospace insights and secrets. This particular report is a survey of global developments in ballistic missiles, with specific views on China, North Korea, Pakistan, India, and Iran.

And a key part of the report specifically supports a thesis we've repeatedly presented to you – namely that some of China's weapons are "specifically designed" to keep the U.S. military from assisting with any conflicts that arise near China or anywhere else in East Asia.

In 2013's Private Briefing special research report on "China's 'Internet Army,'" we explained that the Red Dragon is executing a two-part strategy that will give it regional dominance – and that could ultimately put it on a relatively equal global footing with the United States.

First, by purchasing key assets in North and South America – and by carefully crafting alliances and partnerships in Central and South America – China is expanding its sphere of influence in the United States' backyard.

Second, by flexing its muscles in East Asia – for instance, laying claim to vast expanses of the East China and South China seas – China is creating a buffer in its home region, which it hopes will keep the United States at arm's length. This second strategy depends heavily on new types of weapons systems, including a so-called "carrier killer" antiship missile that the U.S. Navy reportedly can't figure out how to counter.

This is all happening as the United States is attempting to engineer a "pivot" toward Asia – shifting its diplomatic and military efforts to that part of the world, because that's where global growth will be concentrated in the decades to come.

China isn't at all happy with this U.S. initiative. And adding missile muscle is one way it's responding.

As Bloomberg recently reported: "China is boosting its missile program under a broader military modernization plan that's seen the country's defense spending more than double since 2006. China's neighbors, including Japan and the Philippines, have expressed concern that its government is becoming more aggressive in the region, as the U.S. also puts new emphasis on forces in the Asia-Pacific."

According to the intelligence assessment, the number of Chinese nuclear warheads capable of hitting the United States "could expand to well over 100 within the next 15 years."

And then there's North Korea, the hermit kingdom that's been a weapons dealer to the world.

Thanks to Pyongyang, ballistic missiles will become a "growth business" on the world stage.

In addition to the aerospace business, Aerojet also owns about 12,000 acres of land – much of it prime highway frontage – in Sacramento County, Calif., near its headquarters.

The land, which GenCorp had owned for decades, is being carried on the company's books at historic costs, meaning its true value isn't being reflected.

That land "kicker" has been part of our big investment thesis for this stock.

And that hasn't changed.

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