MotleyFool. Coming Down to Earth: Satellite Valuations
fool.com
By Alex Schay (TMFNexus6@aol.com)
ALEXANDRIA, VA (March 5, 1999) -- Friday
has turned into the "satellite report" recently, and
thanks to all the activity in the segment over the last
couple of days, this week will be no different. As a
group, the "little LEOs" (Low Earth Orbit) as they're
known, have really been beaten down.
For Orbital Sciences (NYSE: ORB), the underlying
"infrastructure" business is doing well, but the potential
legal hassles continue to mount. My colleague Brian
Graney (TMF Panic) was humming "Blood in the
Water" as I reviewed the growing list of legal teams
pursuing class action suits against Orbital (seven as far
as I can tell -- but thanks to some law firms
re-releasing announcements it's hard to be sure). Even
though Congress tightened up the filing laws in 1997
to prevent "greenmail" settlements, it's still pretty easy
for shareholders to sue a firm. Even though most
companies know that proving "intent" in a financial
fraud case involving flexible Generally Accepted
Accounting Principles (GAAP) accounting is very
difficult, they will usually settle in order to forego the
hassle of a protracted legal battle. My guess is that
Orbital is eventually going to have to go this orbit, er...
route.
This week Iridium (Nasdaqa: IRID) had its secured
bank loan debt dropped to B- and its unsecured debt
lowered to CCC+ by Standard & Poor's, thanks to a
warning that Iridium issued concerning its ability to
meet loan covenants tied to its business plan. The
company might miss its subscriber and revenue targets
for the first quarter. The problem has been laid at
Motorola's corporate feet, and Kyocera's as well,
with all the shipping difficulties pertaining to the handsets. However, Iridium
still maintains that its goal of bringing on 500,000 - 600,000 subscribers by
year-end is not in jeopardy. An expanding aeronautics market, coupled with
the fact that many of these phones are currently in trials at various
government agencies (and having spoken with a really pleased trial user at
the General Services Administration), lends some credence to this view.
It might be instructive to get into a little bit of satellite history, before we get
into the current valuation issues. Although commercially viable satellite
operations providing maritime navigation and communications services were
introduced by COMSAT (NYSE: CQ) in 1976, most public satellite
companies have seen less than a decade of exposure to the markets. The
momentum of technology offerings over the last five years has been on a
decided upswing, laying the psychological groundwork for acceptance of
satellite services as something more tangible than science fiction. However,
over the last couple of months, spectacular failures like the Globalstar
(Nasdaq: GSTRF) launch vehicle explosion, delays in Iridium's service
rollout, and potential legal difficulties at Orbital Sciences' have hit the "little
LEOs" hard.
A whole host of issues related to the coming rollout are now working
themselves out. Satellite systems are burdened by horrendous start-up costs,
but the promise of low operating expenses and significant cash flow once the
systems are in place act as financial balm to both investors and financiers.
The proven market success of Direct Broadcast Satellite systems (DBS),
such as DIRECTV, has been a boon to potential voice and data offerings in
the last year, with industry pundits proclaiming a broad consumer and
investor appetite for satellite services. DBS exemplifies more of an appetite
for 500 channels of television than for anything related to satellites. This
highlights an essential element of the satellite picture: consumers aren't going
to be as forgiving as engineers and technophiles if satellite phones and data
devices do not provide reliable, quality connections. A factor that seems
self-evident, but is often overlooked in the technology frenzy.
Mobile satellite services were initially conceived to provide telephone service
in areas where the cost to build-out terrestrial wireline or wireless networks
was not economically justified -- in other words, areas where traditional
telephone service just wasn't worth it due to poor population density or
"topographically challenged" conditions. Toward this end, satellite services
were seen as complementary to land based networks by filling in existing
gaps in service provision (a service that virtually all maritime industries
embraced).
Some observers feel that the addressable market for satellite telephone
booths in the Amazon is rather small, but the important point to remember is
that four billion people do not have access to wireline or wireless services.
For those with a taste for more substantial demand forecasts, India is often
pointed to as a prime example of pent-up demand. Existing networks in India
are concentrated in urban areas. With 75% of the population living in
villages, and those villages maintaining only 10% of the country's access lines,
clearly there is a need for an extension of the network. The demand for lines
has been short-circuited by the costly nature of network build-outs into rural
areas. The average cost of adding a telephone line is $1500, but the cost of
providing equivalent capacity on a satellite network has been estimated at
$300 to $400. Industry observers argue that these infrastructure dynamics
exist all around the globe, making a compelling case for satellite
communications.
Despite these forecasts, present subscribers, like those at at Iridium are
primarily high-end business clients that can afford to shell out $3000 for a
handset and more for the subsequent voice packages. Fierce retail price
competition is years away -- possibly a year or so after Middle Earth Orbit
(MEO) operator ICO Global (Nasdaq: ICOGF) gets up and running (in
August 2000). A little sooner than that we'll take a closer look at the
valuation on the various LEOs -- like sometime next week. Until then, see
you on the message boards. |
