Individual Investor mag negative article on IRIDF [GSTRF/LOR references]
[Jack, I'm just posting everything relevant. I'm glad you're back in the SI saddle...]
iionline.com
Industry Analysis Telcom
SELL SIGNALS: Iridium Falling From the Sky
Director of Online Research: Dave Sterman
In their efforts to find stocks that may be headed for a fall, most investors
head right for the financials. Bulging receivables and choking debt loads are
often seen as possible harbingers of tough times ahead. There are times,
though, when rigorous financial analysis does not do the trick. Sometimes
a more philosophical approach is required.
Merely assessing the validity of a business model can help spot
companies that may be headed for a fall. One high profile company that
has been on my mind these last few months is Iridium World
Communications (NASDAQ: IRIDF). I believe that it may never deliver on
its grandiose promises.
Pricey Proposition
Iridium has just launched a global wireless telephone system that is geared
towards free-spending corporations and extremely wealthy individuals. At
$3 a minute, this is not a service for the masses. And with a lower-priced
competing service set for launch later this year, even the elite may soon
balk at paying through the nose.
Over the course of 1998, many investors began to express doubts that
Iridium's system actually worked. A series of glitches delayed a full-scale
launch. But those problems are now in the past, and the system is up and
running. Now that it's up, though, management is pushing very hard to
boost subscriber levels before the company runs out of money.
To hit break-even, Iridium would need to grab 600,000 subscribers. As of
the end of December, only 3,000 paying customers had signed on. That
helped the company to post a $440 million loss for the quarter on just
$186,000 in sales!
By the end of this quarter, Merrill Lynch's Thomas Watts figures 50,000
subscribers will be enlisted. By this time next year, he figures that the
company can hit that 600,000 subscriber target. Lehman Brothers' John
Bensche is even more bullish, expecting 625,000 users on board by the
end of this year.
Trouble is, company guidance on this front has been too optimistic all
along. Quarter after quarter, analysts have been ratcheting down their
expectations. The company's ambitious guidance also almost caused the
company's lenders to call in their notes. The debt covenants attached to
more than $1 billion in loans stated that the company needed to garner a
specific minimum level of cash flow and subscribers by the end of 1998.
Luckily for Iridium, those lenders loosened the restrictive covenants, but are
no doubt watching the matter closely.
Realizing that aggressive cash flow and subscriber targets would not be
met, Iridium executives have been scrambling to lock-in additional sources
of cash. Just last week, the company was able to line up another $250
million through a secondary offering. Funny thing is, that money actually
goes to Motorola (NYSE: MOT), which has a controlling interest in Iridium.
Motorola, it seems, is also looking to cover its bases, just in case this
business doesn't ever reach profitability.
And what about impending competition? Globalstar (NASDAQ:GSTRF),
which is backed by satellite titan Loral (NYSE: LOR), is currently setting
up its network. To capture market share, Globalstart plans to undercut
Iridium's prices while offering more features, such as reduced rates for local
and national calls. "Iridium holds a one year monopoly in the industry,"
says Lehman's Bensche.
Despite its staggering $3 billion debt load, the company is poised to lose
another $2.2 billion this year. Bensche sees the company's till emptying
out by the end of the fourth quarter. At that point, will the company be able
to come back to the market for another barrelful of cash? Not if it hasn't
been able to sharply boost the number of subscribers.
Bottom Line:
At a recent price of $31.91, the stock has already become a "show me"
stock, trading at 56% below its 52-week high. I'm guessing the company,
as has been the case in the past, won't have much to show for all of its
efforts.
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