As a result of the financial meltdown, many solid, well-run companies were left undervalued by the market. We believe that a recent addition to our portfolio – Orbital Sciences Corp. (NYSE: ORB) – exemplifies this type of situation and highlights the opportunities available to fundamental, long-term investors.

ORB develops and manufactures small and mediumsized rockets, satellites, and advanced space systems. ORB’s rockets are used for various purposes, including several missile defense applications and as launch vehicles for low Earth orbit (LEO) satellites. ORB, a market leader in the small to medium-sized geosynchronous Earth orbit (GEO) satellite market, manufactures satellites primarily for commercial communications applications; however, its satellites are also deployed for scientific, educational, and national security purposes.

ORB is currently involved in two major development programs. In 2008, ORB and the National Aeronautics and Space Administration (NASA) entered into a three year Commercial Orbital Transportation Services (COTS) agreement under which ORB agreed to help develop a new space transportation system to conduct resupply missions to the International Space Station (ISS). As part of the agreement, ORB is developing the Cygnus Advanced Maneuvering Spacecraft. The company is also privately developing the Taurus-II Rocket (T-II), which will launch the Cygnus Spacecraft into orbit. In the fourth quarter of 2008, NASA awarded ORB a Commercial Resupply Services (CRS) contract. Under this contract, ORB agreed to execute eight missions (using both the T-II and the Cygnus Spacecraft) to deliver cargo and supplies to the ISS between 2011 and 2015. The CRS contract provides the company with a built-in customer for its two major development projects prior to either product entering the production phase. The company should generate approximately $230 million in annual revenues from the CRS contract. Additonally, there is a good chance that the contract will receive an extension through 2020.

When completed, the T-II will provide the company with a launch vehicle capable of serving the medium-lift, LEO space systems market, which is currently dominated by the Delta-II series of rockets. However, production on the Delta-II rockets has been suspended and they are being phased out of service. The medium-lift LEO market represents a $75-$375 million (depending on the number of launches) opportunity for ORB’s T-II rocket program.

Unsurprisingly, both of ORB’s major development projects have experienced cost overruns, resulting in increases to the company’s research and development (R&D) costs.

These execution problems, along with the overall macroeconomic outlook, have driven down the company’s stock price. However, we believe that these issues are the industry norm (after all, we are talking about rocket science!) and that the company will successfully complete both development programs.

We are prepared for ORB to finish 2009 on a negative note and generate negative cash flows in 2010. However, we feel that the market has overreacted to ORB’s execution problems and the reaction to near-term cash flow projections has been overdone. As the T-II and Cygnus exit the development stage and enter production, ORB will see a substantial decrease in its R&D costs, resulting in higher operating margins. We feel that in the long-term, ORB’s major development projects, combined with its current portfolio of products, will enable the company to experience double-digit earnings growth and return to generating strong free cash flow. We view the next quarter or two as an attractive buying opportunity for long-term investors. As ORB begins to achieve mileshones and gains visibility on the outcome of the T-II and Cygnus projects, the market should react accordingly. We feel that ORB’s future prospects for earnings growth remain very strong.

ORB also represents a potentially attractive acquisition target. Any decrease in defense spending would make it difficult for the major prime defense contractors to grow organically; thus, they would look to grow earnings through acquisitions. The future benefits of ORB’s major development programs, its position as a market leader in several niche aerospace markets, the overall risk profile, and the possibility of an acquisition combine to make ORB an attractive long-term investment. Go slow with this one, but if you’re patient, you may be rewarded in the long-term.

Joel Hainsfurther is a Securities Analyst for Wanger Investment Management, Inc.