GeoEye, Inc.: Satellite stock heading for orbit?
You know they’re watching you; those satellites in the sky spying for government spooks or taking pictures for Internet mapping services. One company you can thank for taking pictures for both the government and commercial interests is Dulles, Va.-based GeoEye, Inc. (Nasdaq: GEOY), which designs and launches satellites to keep an eye on the world.
But there are few views of GeoEye from Wall Street. Only one independent analyst, Jeff Evanson at Dougherty & Co., follows the stock. Perhaps that limited coverage is why the stock is trading at $33 per share, while Evanson raised his target price to $45 from $40 after the company reported stellar third-quarter earnings on Nov. 1. Excluding a one-time insurance payment, net income almost doubled to $19.6 million from $10.4 million a year ago. Revenues were up nearly 23% to $53.8 million, from $43.5 million last year.
GeoEye went public on the Pink Sheets in January 2004 as Orbimage Holdings and quickly peaked at about $27. Since then, its stock chart has looked like a Jack-O-Lantern’s crooked smile, dipping as low as $6 in September 2004. In January 2006 it completed the acquisition of competitor Space Imaging LLC, which added the IKONOS satellite to its own OrbView satellite arsenal, and changed its name to GeoEye. On Sept. 14, 2006, it graduated from the Pink Sheets to Nasdaq.
From a price of about $11 at the time of the acquisition, its stock has steadily risen to about $33.44 now, a P/E of 10.08. Its 52-week high of $34, was established earlier this week, about eight months after the low for the year of $15.98 was put into place. It has a market cap of $621 million, and 86% of its 17.59 million shares outstanding are owned by institutional investors. Its primary competitor is privately-owned Digital Globe, but GeoEye says it’s the larger of the two companies.
GeoEye’s biggest customer is the U.S. National Geospatial-Intelligence Agency (NGA). Although the government has its own spy satellites, it has made it clear that it wants to increasingly rely upon commercial entities to supply its arsenal of eyes in the sky, especially since the 2004 cancellation of an ambitious but overzealous new satellite project, called Future Imagery Architecture, at a loss of at least $4 billion.
The only weak point in GeoEye’s third-quarter conference call with analysts was a warning that government revenues declined in October and might affect fourth-quarter earnings. “If investors have any concern, it’s about reducing a fourth-quarter estimate,” says analyst Evans. But he notes that slowdown was, ironically, due to strong demand. NGA burned through its previous allocation of $54 million to GeoEye in the last two quarters, when it was supposed to take three. A new allocation for $60 million was signed but did not start bringing in revenues until November, leaving a one month lag between contracts.
GeoEye should also see its commercial program grow. Aside from government spy agencies, it sells images for Yahoo’s and Microsoft’s Internet mapping services (Google Maps uses images from Digital Globe) and fisheries looking for schools to catch. It also sells images for oil and gas drilling, environmental monitoring and even images of neighborhoods so insurance companies can determine what properties look like higher risks from factors such as fires or floods—all businesses that could see substantial growth in coming years.
But its future success depends primarily on the successful launch of new satellites, a business marked by big successes and bigger failures. It last launched a satellite in late 2006, the OrbView-3, which failed a couple months later due to a faulty component. That led to a $36.1 million write-off in the first quarter. Fortunately, the satellites were insured, and the third-quarter profit was boosted to $58.7 million by the insurance payoff of $39.1 million.
GeoEye’s next launch is the GeoEye-1, scheduled for April 16, 2008. It will be able to spot objects as small as 16 inches on the earth’s surface from its orbit over 400 miles high, better than twice the resolution of its current workhorse IKONOS satellite. GeoEye switched manufacturers from Orbital Sciences Corp., which built the OrbView-3, to General Dynamics for the GeoEye-1. This satellite is insured for $270 million. GeoEye has also begun work on the GeoEye-2, scheduled for launch in 2011, which might have a resolution down to 10 inches.
So far, testing for GeoEye-1 has gone well, meeting all milestones. Analyst Evanson gives it a 90% to 95% probability of successful launch by April 2008. His $45 valuation of GEOY stock tries to balance this probability. If the GeoEye-1 fails—either because of a bad launch or another component failure—the stock will be worth just $25. If it is successful, he thinks the stock will really be worth $60 to $70, based on a multiple of 10 times 2008 EBITDA.
And that’s a potential that looks great from any vantage point.
