WorldlyInvestor. Hidden Value Stocks: Flying High with Globalstar
worldlyinvestor.com
April 19, 1999 7:14 AM EDT
By David H.M. Baker CFA
Analyst for worldlyinvestor.com
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I have discussed a number of beneficiaries of
the global telecommunications boom currently
underway in this column yet I have neglected
one of the potentially most exciting sectors,
satellite communications providers.
Bermuda-based Globalstar
Telecommunications (quote, chart, profile)
represents the best long term play in the
industry resulting from its superior technology,
strong strategic partnerships and relative
strategic position in the rapidly expanding
marketplace.
The company utilizes CDMA technology as I
have previously stated is the best wireless
delivery medium. It has partnerships with an
array of the leading communications
companies for distribution of signals that
include AirTouch Communications (quote,
chart, profile), France Telecom (quote, chart,
profile), Alcatel (quote, chart, profile),
Vodafone (quote, chart, profile) and Loral
Space & Communications (quote, chart,
profile).
Those firms together with franchise partners
have agreed to act as Globalstar service
providers in 117 countries. That's allowed
Globalstar to maintain the lowest fixed cost in
the industry.
Satellite telecommunications services are
designed to fill the holes in the global
telecommunications infrastructure that cannot
be addressed by traditional land based
services (landline, cellular, microwave, PCS)
due to limited population density, geographic
location and cost of delivering the service.
To be honest, at first I was very skeptical of
the opportunity offered by this industry as it
did not appear to me to represent a
reasonable opportunity given the significant up
front investment required to launch these
services. However, after I examined the
potential numbers (customers) the business
model is actually quite compelling.
ING Barings Furman Selz projects that the
mobile satellite service industry's sales will
increase from its 1998 base of $411.6 million
to over $15.2 billion in 2008 or 43.5% on an
annualized basis.
That will include an expected 2008 user base
of 36.4 million from 1998's 116 thousand
users. Recent statistics show that there are
42 million households on the waiting list for
telephones that could afford service, 244
million households without telephone service
that could afford service and 676 million
households without telephones that could not
afford service. The key is this affordability,
which is defined as the service costing
between 1-2% of annual family income.
GSTRF has assembled a fairly powerful
investment group in its quest to become the
leading service provider. Shareholders in the
firm include Loral, General Electric (quote,
chart, profile) and investment guru George
Soros, who holds a 10% stake in the firm.
Although Globalstar has some formidable
competitors, including Iridium World
Communications (quote, chart, profile),
GSTRF has a considerable edge over its
competitors - affordability of service.
GSTRF estimates that its cost of service will
vary between $0.45-$0.55 per minute versus
IRID's $3.00-$7.00. This is a vast disparity that
provides GSTRF a considerable advantage out
of the gate.
GSTRF is utilizing CDMA technology versus
the less functional TDMA technology which
offers GSTRF's customers greater capabilities
(bandwidth) which provides GSTRF with seven
billion minutes of annual capacity versus 1.5
billion for IRID.
Another advantage of CDMA, as in the
terrestrial world is that it provides superior
clarity, greater security and a broader array of
services. Further, aside from the fact that
GSTRF is utilizing superior technology its cost
structure is vastly better than its competitors.
For example, GSTRF's required wholesale
charge per monthly user to cover all costs is
$0.14 per minute versus $1.37 for IRID. This is
very bad news for IRID and this company is
DEAD in my opinion and any holders should
seriously consider swapping into GSTRF
before the markets realize IRID's vast cost
differential relative to its peers.
Last Thursday GSTRF announced the
successful launch of an additional four
low-earth orbiting (LEO) satellites into space,
bringing the total number of Globalstar
satellites that have been successfully
launched to 20.
GSTRF plans to have at least 32 satellites in
orbit in order to start commercial service by
the fiscal third quarter of 1999, and to have 52
satellites in space by the end of 1999,
including four in-orbit spares.
This will mark the completion of the
company's complete network and allow it to
focus on marketing its full communications
capability. This is a very important point as the
greatest risk associated with the satellite
companies while they are building their
network is launch failure.
Each successful launch dramatically reduces
the single greatest risk associated with
owning these shares and move it that much
closer to becoming a full service enterprise.
There are approximately 15 analysts following
the stock and there continues to be a great
degree of skepticism surrounding the industry
given its uncertain future (to most investors -
who do not understand dynamics of the
opportunity).
GSTRF is projected to lose money for the next
several years and most analysts expect the
company to generate positive earnings per
share by 2001 in the $0.50-$0.60 range.
This is considerably better than any of its
competitors and is a greater justification for its
$1.6 billion market capitalization versus IRID's
$377 million.
Overall, I would be a buyer of GSTRF
especially on any weakness as these shares
have run up approximately 50% in the last
month. However, as the investment
community begins to comprehend the market
opportunity (this realization should crystallize
once its network is fully in place by the end of
this year) I doubt these shares will see $20
ever again.
The current valuation, although seemingly
quite rich, may in fact represent a real
opportunity given the expected take-up of the
company's communications services over the
next decade and given expected future
earnings performance.
Investors probably have six months to buy
these shares before others fully understand
the opportunity as I have presented in this
column and for this reason it may make sense
to be a buyer sooner than later.
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