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Subject: Re: Thomas Watts, Iridium, and Merrill Lynch
Date: Fri, Jul 24, 1998 19:35 EDT
From: Readware
Message-id: <1998072423354000.TAA19989@ladder01.news.aol.com>
My comment on Thomas Watts pertainto his continual change of mind regarding one business entity, sc. Iridium. Arguendo, we can disregard his Loral change of mind.
If you are going to continue to change your mind (rating recommendation) on a company, it indicates that you cannot regress away effectively whatever contingencies might develop in the company you propose to cover as a Wall Street equities analyst. Accordingly, you should not cover that company, or pretend to have a competence to cover that company.
In any event, I did get the answer to my question about why Watts changes his mind so much-- brokerage commissions. As far as I can tell in studying the method of Warren Buffett, the "oracle of Omaha" (for whom I have the highest respect) does a bit more work on a company than a brokerage analyst before he buys shares in that company. He doesn't change his mind every few months. He foresees the possible variables and pitfalls.
But then Mr. Buffet doesn't need the commissions. Then, again, he might be a bit more intelligent.
Subject: Re: ICO Global andG* Price
Date: Fri, Jul 24, 1998 23:00 EDT
From: Readware
Message-id: <1998072503000700.XAA21853@ladder03.news.aol.com>
ICO should be priced next week some time.
I do suggest you do a lot of research on the company and its MEOs, and its suppliers, and its market demand, of course, and not in any way just read or depend only on what I have written. I was only passing along what I had read and heard at the ICO presentation. What you want to do most is find out how their capital structure (debt plus equity) compares with the other systems, and how its total capacity of minutes per year compares with the others
in the case that price softness does become an issue (which I do not think it will-- but it is important to know how much financial flexibility in pricing its calls ICO has relative to others in a "price war").
Subject: Re: Thomas Watts, Iridium, and Merrill Lynch
Date: Fri, Jul 24, 1998 22:54 EDT
From: Readware
Message-id: <1998072502542300.WAA21093@ladder03.news.aol.com>
A neutral, to answer your question if I may, is not an "accumulate". Nor is it a buy.
The criticism of Watts, and other analysts it turns up as I have learned from asking portfolio managers over the past two days (interested, it appears, at my puzzlement over these constant changes of opinions of honest Wall Street analysts) is well-founded: he scares the bejeebers out of investors by opining some grave doings about a possible delay in Iridium's start-up date from 23 September to 15 November 1998. Result-- the price of the stock drops
almost 19% in one day. And over two million shares trade... Did someone say commissions?
Is this not nonsense? If there is a delay in the start-up by two months, and you have a $200 plus price target for the stock only three and half years later [(2002) a 4 fold appreciation], you live with the delay. Remember: you have stated in your first report on the company that the company will exceed $200/share by the year 2002. Perhaps you should not have written that in your first report. Correct?
If you keep changing your opinion on the stock over the next six-eight subsequent months, it's like shouting "fire" in a theatre five, six, seven times in one night when there is no fire...
Watt's analyses-- and I do not single him out-- Smith Barney Salomon started Iridium with a "buy" the afternoon immediately before the stock dropped 19%-- manifest a grossly overpaid inability to judge a company over the near, intermediate, and long-term. That is why I said he should not cover Iridium. He obviously has little grasp of the satellite industry. He's either guessing or seeking to generate commissions. What conviction can he have of his
$200 price target for Iridium in 2002 when the stock is $54/share if a slight delay in its roll-out bothers him enough to reduce his rating on the company he once lauded to a "neutral"? The fact that he has changed his recommendations on Iridium five times in less than two years seems evidence enough to draw that conclusion.
That, to answer your question if I may, is the point of the criticism. I don't really see what is so difficult for you to see. I suspect, in fact, there is nothing difficult at all for you to see, that you understand quite well the criticism.
Res ipse loquitur
Subject: Loral FY 2000 Earnings estimates
Date: Sat, Jul 25, 1998 13:41 EDT
From: Readware
Message-id: <1998072517414100.NAA26907@ladder03.news.aol.com>
Below is a table for one way of considering Loral's year-end 2000 business performance.
We assume, for purposes of reference, a 37% growth rate in year 2001 over year 2000, and a 29% growth rate in year 2002 over 2001.
The year 2002 growth assumption is exclusive of Cyberstar-Skyrbridge.
Our RONTA and Discount Rate valuations imply, on a froward looking basis, however, C*-Skybridge.
*******************************************************************************************************
FY 2000 estimates
GEO transponder revenues: 477 transponders
[For purposes of calculation we use a 71% weighted average utilization and $1.45 million/year weighted average revenue/transponder, and a 33% US tax rate]
Loral Orion: 99 transponders
Revenues $140 million (EBITDA $112 million)
SatMex: 82 transponders
Revenues: $60 million [Loral portion] (EBITDA: $43 million [Loral portion]
Skynet: 296 transponders
Revenues: $335 million (EBITDA: $271 million)
(We assume a 71 average "fill" rate. For purposes of reference, Loral's pro forma assumes an 85)
Cyberstar: (lease off Telstar 5 & 7)
Revenues: $48 million (EBITDA: $33 million)
GEO transponder totals:
Revenues: $583 MILLION
EBITDA: $459 MILLION
Net Earnings: $391 million (net earnings and net earning per share are exclusive of start-up, development costs, and inter-company elimination).
Space Systems Loral:
Revenues: $1.63 billion
Net earnings: $66 million (EBITDA: $89 million)
Globalstar
Revenues: $988 million (EBITDA: $899 million)
Net earnings (Loral portion): $124 million (Revenues $415 million [EBITDA $373 million)
For purposes of reference, Loral's pro forma projects $1.344 billion in revenues and an EBITDA $1.229 billion, with a net income of $637 million)
*******************************************************************************************************
FY 2000 estimate totals
Total Revenues: $2.628 billion
EBITDA: $921 million
Net earnings: $581 million
Total shares: 300 million (Loral has 331 million shares fully diluted; we assume 300 million as the FY 2000 divisor)
Net earnings/share: $1.94
Valuation measures:
RONTA (net operating income/net tangible assets): 28% (RONTA rises with the utilization of new satellites, and is higher as a percentage the smaller the satellite base from which the growth in utilization emerges).
ROE: 34%
EBITDA multiple: 15 (We use 15 as commensurate with a RONTA of 28%).
Projected FY 2000 year-end share price: $76 (as a multiple of 2001 EBIDTA)
Required return on equity: (13.7%)
WACC (Weighted after-tax average cost of capital): 12%
Discount rate (12%)
Subject: Re: ICO Global andG* Price
Date: Sat, Jul 25, 1998 01:37 EDT
From: AjitC
Message-id: <1998072505373600.BAA09302@ladder03.news.aol.com>
Readware:
Thanks for your comments on ICO. My initial impression is that ICO @ $4 B cost, with long lasting MEO orbits of 11-12 years and 24 B minutes/yr or 7 M customers will have a lot more pricing flexibility than G* based on discounted cash flow - economics assuming G* is not upgraded. Individual investor return will depend how much we will be paying for what we get for those shares.
Ajit.
Subject: Re: ICO Global andG* Price
Date: Sat, Jul 25, 1998 16:44 EDT
From: Readware
Message-id: <1998072520442900.QAA16664@ladder03.news.aol.com>
Ajitc: Actually, it is where you can price the call/minute and still clear all costs that determines pricing flexibility. G* is at $.07/share in that regard. It can lower its wholesale price of $.47/minute almost 6 fold and still clear, i.e., "break even".
Once one sees how much equity ICO raises their break-even will become clearer. Because of its orbital configuration it cal only take on 7 million users. If you read back to one of my posts, you will see my mention of that. That is why I had asked the ICO CEO about the 24 billion minutes of capacity. In some ways it appears excessive, and I have not calculated the cost to ICO of that excess (it is capacity that really will never be used, is what I am
saying). I really am not going to go into their financials in depth, however, since we are not going to be covering them. Our work on ICO will be for acquaintanceship only purposes. The emergence of broadband, as I had posted a while ago, is becoming an increasing area of focus here which means getting a grasp of Skybridge, Mitsubishi, technologies for Ka-band, frequency imporvements in broadband, ground station components, development of
interactive tereminals for satcom broadband, European market demand, and on and on.
To follow a company (and get salaried for it), you really have to know almost every interstice of the company. In the case of ICO, that means the suppliers of the MEO components and their reputation, what the quality of the components is, what the rate of technological improvement is for competitor components, the gateway providers, their suppliers, the chip designers of the handsets, the flow of goods to ICO, the order flow, the schedule of
implementation and timeliness of building each MEO, not to mention the rocketry for launching, and on and on.
You just cannot read a report or two or ten and speak to the management once or twice or five times, and then hope for the best. A research analyst of a company, it seems to me, must know almost as much as the CEO and CFO of the company he/she is covering, and have a good degree of cross-check capabilities, a good degree of skepticism in other words.. It seems to me that is about the only way one can expect to be reasonably fair in his assessment of
a company's value.
I will not have capability with ICO.
Subject: Re: ICO Global andG* Price
Date: Sun, Jul 26, 1998 13:42 EDT
From: AjitC
Message-id: <1998072617423000.NAA02312@ladder03.news.aol.com>
Readware:
As an investor I do have to be aware of the challenges ICO will pose to my current investment in LOR/G*. Obviously, I do not have all the data including the capability if ICO to design and execute this project. However, I must assume that their execution will be as good as G* if not better because of the industry learning curve.
As a novice in this area, I was getting all ready to do a discounted cash flow analysis assuming: a) $4 B initial invesment + 25% contingency, 12 year double declining depreciation, operating expenses @5% of invesment - plus a customer base that peaks at 7 million with a usage time at a maximum of 4.76 hours/month with various per min charges. Had no idea what to assume for a discount rate for these risky project. It did not take me long
for me to figure that this would be a "garbage in garbage out exercise" since I did not have sufficient reliable information.
However, simple math tells me that if ICO collects $25/mo from each of the 7 M users it will amount to $2.1 B/year. That will be quite a competitive challenge to G - inspite of the industry supply limitations mention. Since different time frames are involved what the market place and technology will be when ICO starts is something I have not idea... obviously LOR/G will not be standing still. Again, I have no idea how efficient these satellites
systems can be made over time. I can not but notice that today's top of the line Pentium II in 3 years will be an overweight door stopper.
G* stock price has taken a hit even though there are no bad news relating to Zenit. It appears to me that in view of the ICO roadshow (and perhaps Iridium's problems), the market is discounting heavily G* prospects. Once I get more info, it may make sense for me to edge by making an investment in ICO if the price is right.
Subject: Re: ICO Global andG* Price
Date: Sun, Jul 26, 1998 15:42 EDT
From: Readware
Message-id: <1998072619420400.PAA13252@ladder01.news.aol.com>
Ajitc: I do not believe that the general investor marketplace has any idea genuinely of the demand for satcom telephony. Satellite industry managements obviously do-- at least relative to Wall Street market participants, it can be strongly argued. What follows is my opinion relative to the competition issue you brought up.
(1) One needs to continually, it can be suggested, to consider why it is that satellite manufacturers are spending billions and billions of dollars to launch telephony systems if supply of these systems is an unregressable variable (i.e., is not able to be economically/financially calculated with respect to the countervailing demand) . These systems are not being launched with the view that price pressures three years out are going to cut by a half,
or a third, EBITDA margins. As a rule of thumb, satellite services seek at least a continual year-over-year healthy high 50s EBITDA margin at the least for DTH. I do not think that G* is coming to market with a 94 EBITDA margin in 1999 to see it drop in three years to 60. Satcom DBS providers did not, e.g. launch satcoms for direct broadcast with a 58 EBITDA margin only to expect it to decline to 30. The margins in fact have been kept relatively
intact over a 10-year period.
(2) And, then again, one needs to travel extensively to see what the demand is for satcom telephony. The investor has no ability to do that, obviously. We continue to believe, with considerable evidence I believe, to see capacity as a continuing problem for satcom suppliers to meet telephony demand.
(3) A long view over the horizon three, four years out has to be maintained constantly, as well as the knowledge that these systems are limited by the ITU to 5: G*, Iridium World, ICO Global, Ellipso, and ECCO. The GEO systems to be launched will not have QoS (quality of service value) to the mobile user given the annoyance of GEO voice delay and interference/noise issues that GEOs present to the "user on the move". GEO telephony appears to have some
value in certain intranet applications and rural areas. But as a quality of service alternative to mobile no-latency systems they are not compeptitive. Accordingly, if one keeps to the 5 system profile for satcom telephony in areas of the world where cellular cannot be serviceable, it becomes highly difficult to conceive of a competition problem between G* and ICO.
(4) The premis again: only 5 satcom systems will ever have mobile user licensing by the ITU. That appears to be a supply constraint. If the demand is as we believe it is, competition seems to be an issue that is highly debatable. Again, I reiterate this is an opinion, but one I think with some teeth.
The "problems" Iridium is said to have are (1) 7 faulty sats out of 66 launched and (2) a "software" programming test-out delay. These are "perceptual" difficulties to what appears to this non Wall Streeter as a highly short-term " need the euphoria at this moment and not a moment later" participants in publicly traded stocks. (One needs only look at the price swings in stocks such as Computer Associates, COLTY, Telebras-- it is absolutely
mind-boggling what goes on. To a disposition that looks for incremental and steadily positive price appreciation as a reasonable measure of profitable investing, these aformentioned price swings are simply baffling. But that's me.)
The sats that have failed in the Iridium constellation do no damage to Iridium over a longer-term, nor do the software issues mentioned by Iridium in its conference call bring the system to see a loss of 19% in its share price in just one day in its price. While I believe, as I think a number of other observers do, that Iridium is an over-built system for what satcom technology could and can provide at a subsantially lower cost (and still be
reliable), and this might be reason to see the current price as too high (and I believe it is, based on other matters than these brief technology snafus), the recent issues in Iridium World to those in the satellite industry are not material actually to its share price movement-- at least of the magnitude they recently underwent. My belief in Iridium's share price as being somewhat too high (and it is only my opinion) is the 2002 multiple at which it
is trading relative to G*'s. One system is far more cost efficient, far more financially viable than the other, has far more capacity, and the like: the mutliple accorded to Iridium in this regard seems to me excessive. I do think Iridium will fare well, till the second generation financing becomes an issue. But we will see.
As for G*: G* is priced today as if the marketplace is not expecting the system to be available till the end of 1999 (if our pricing model has any value). It is puzzling that thie stock could reach $37 share (split price) early this year, and now as it gets closer to its actual inaugaration the price has declined over 30%.
There is very good reason to believe, I think from various dependable sources, that the G* Zenit-2 launches should be relatively event-free. A Smith Barney analyst, who never spent a day in the satellite industry, wrote a report last week where he questions Loral's use of the Zenit-2 as a G* launch vehicle. Space Systems Loral has been in existence since 1957, has manufactured 111 satellites in a 40 year period. Its President (Robert Berry) is
the former undersecretary of Defense under then Defense Secretary Donald Rumsfeld. His area of responsibility was rocketry. I have been told by non-Loral satellite people that he is one of the most knowledgeable individuals in the United States on the Russian rocket systems, of which the Zenit-2 is a paradigm. And yet an analyst from Wall Street, who has never spent a day in the satellite industry, pretends to a level of competence, it appears to me,
to question the use of the Zenit-- in the teeth of the 40 year experience of SSL and the background of its President. I find that remarkable.
In the recent Loral China fiasco, I might add as an aside, it was never mentioned that the individual (Robert Berry) who runs SSL, the division that allegedly abbetted China's weapon interests, was a former US undersecretary of Defense under a Republican Administration with highest security clearance, and an individual with an impeccable reputation. But who cares, right?
I have gone on way too long, opinionating. I do not see the competition issues you do as far as ICO relates to G*. I would hesitantly opine that marketplace uncertainty about demand outcomes relative to system supplies might be an issue causing the recent price decline of G* and Iridium. However, after watching the markets for two years now, I am not certain that any reason drives short-term pricing at all-- it appears more to be rumor, fear,
and innuendo that do. That, combined with the unalterable demand of many for instant wealth "now", may be the phenomena one needs to examine as far as G* and Iridium's present pricing is concerned. (In this regard I am reminded of the old saw, "money easily made is money easily lost"). The thought of some suggested to me that G* was being sold to buy into ICO seems to me to assume that those selling G* for ICO are thinking ICO will appreciate in
price in the same way as Iridium and G* have since their Wall Street debut.
However, sometimes "familiarity breeds contempt"-- in this case, familiarity with the satcom telephony stories may have taken some enthusiasm out of "expectations" (discounting) for a system (ICO) that is much more distanced from its actual operatinal date than G* and Iridium are.
We will see.
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