If Globalstar benefits from Iridium's trials, then perhaps ICO benefits from not only Iridium's difficulties, but Globalstar's education at Iridium's expense. John Coates from Solomon SB on ICOGF:
Satellite Services
ICO Global Communications# (ICOGF-$9.13) Rating: 1S,
Price Target: $23
John Coates, CFA
Incomplete terrestrial coverage, low telephony penetration rates, and a growing need for mobility have created a favorable demand outlook for the mobile satellite providers. ICO Global Communications, scheduled to begin providing mobile and fixed voice services via its satellite-based network in the third quarter of 2000, presents an excellent opportunity to take advantage of the industry's robust growth prospects.
We like ICO for several reasons. First, the company has arguably the most impressive lineup of investors, including British Telecom, Deutsche Telecom, Hughes, TRW, and numerous PTTs (national telecom authorities). Solid strategic backing is particularly important for mobile satellite service providers because it enhances their market access and distribution capabilities. Second, ICO is the lowest-cost provider in the sector, as its system design requires fewer satellites, each with longer lives, than its Low Earth Orbit (LEO) competitors, allowing the company to spread the cost of the system over a greater number of years. Finally, ICO's management team has extensive experience providing mobile satellite services. ICO's long-term success should be driven by its broader investor/marketing presence and its apparent ability to offer service at lower pricing than its two earlier competitors (owing to the low-cost design of its total system architecture) while still maintaining EBITDA margins in excess of 70%.
In terms of valuation, ICO presents the industry's most compelling
investment opportunity. At 0.8x PP&E, the company trades at an
unjustifiably steep discount to Globalstar and Iridium, both of which trade at 3.0x PP&E although they face (particularly Globalstar) similar financing risks. ICO's current valuation implies zero probability that the company will finish its network, which is mind-boggling given ICO's low-cost structure and investor backing. Our DCF analysis yields a price target of $23, almost three times current prices.
Chief among the risks is tight liquidity; the market float is 10 million shares. This issue, in our opinion, is short term in nature and should improve as the company injects more equity into the float. Another consideration is financing. ICO is in the process of arranging a $2 billion bank facility that would complete the company's funding needs.
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