**DJ SmartMoney: Street Smart: Ready For Liftoff
May 18, 1999
Dow Jones Newswires
This story appears in the June issue of SmartMoney magazine.
By Ken Brown
When Bernard Schwartz, the chief executive of Loral Space & Communications
and one of the most successful corporate leaders of the past 25 years, addressed
investors recently, he decided to speak broadly about the satellite industry
rather than his own company.
"Who wants to hear about Loral," he asked, "when our stock is sitting at $15?"
Schwartz was only joking, sort of. The stock got pummeled last year, down more than 50 percent off its
$33 high. The problems were both Loral's and the industry's. Almost every satellite company had its share
of exploding rockets and malfunctioning satellites. And Loral was involved in a well- publicized
government investigation of its dealings with China.
But the bad news masks both a potential blockbuster investment and Schwartz's solid track record. In his
24 years as chairman of Loral Corp., the predecessor to his current firm, Schwartz built the company from
a puny $7.5 million defense contractor to a $15 billion powerhouse.
With the Cold War over, Schwartz sold Loral's defense business to Lockheed Martin in 1996 and kept
the satellite operations. Three years later, following a wave of acquisitions, Loral is a $4 billion company
that is a leader in nearly every facet of the satellite industry.
But to see Loral's overall potential, you have to understand its parts. First, Loral is the No. 2 satellite
builder, behind Hughes Electronics. The division generates $1.4 billion in revenue, giving Loral a 30
percent share of the market. But building satellites is a competitive business, so profit margins are thin at
best. Far more lucrative is Loral's satellite-leasing business, which sells space on its satellites to
broadcasters and the like. Leasing profit margins are a stunning 85 percent. The math is simple: It costs
about $225 million to build and launch a satellite, and each one can generate between $60 million and
$100 million in annual revenue, meaning you get your investment back in two to four years. The remaining
11 or 12 years of a satellite's life is pure profit. "It's just going to be a cash machine over the next two or
three years," says Phil Schettewi, a money manager at Loomis Sayles. And Loral itself expects cash flow
to double from that division by 2001.
Loral's other main business is riskier, but has real shoot-out-the-lights potential. Globalstar, the satellite
phone system that is 42 percent owned by Loral (Schwartz is also CEO), is expected to be up and running
in September. Until recently Globalstar has been the company's main headache. First, a Ukrainian rocket
carrying 12 satellites blew up last September. (Schwartz has since sworn off Ukrainian rockets.) The
accident allowed Iridium, Globalstar's main competitor for launching a satellite phone system, to hit the
market first.
But first is not always better. Iridium charges about $5 a minute and requires a bulky phone that costs
about $3,400. Globalstar is expected to offer service for about $1 a minute, and its streamlined phone
will cost about $1,000. "Iridium is dead," says Robert Kaimowitz, an Institutional Investor All-American
Analyst for ING Barings Furman Selz. "I have a long- standing short call on Iridium." But he has a strong
buy on Loral.
And Globalstar service will be sold by some of the world's biggest cellular companies, including Airtouch
in the U.S. and Vodafone in Britain. Andrew Radlow, Airtouch's director of marketing, says the company
has a good idea which of its 9 million customers will most likely go for a Globalstar phone. They are the
people who spend upwards of $10,000 a year on cell-phone service. If Globalstar signs just 1 million
new users, the company expects to be profitable by the fourth quarter of next year. And if that happens,
says Schwartz, "Loral is going to get a $400 million or $500 million cash dividend in two years." Although
Globalstar shares trade on Nasdaq (GSTRF), buying the company through Loral's back door means
investors can get a lot of upside while cushioning the risk with Loral's strong core business.
Loral's other big problem last year: Congress questioned Loral's technology transfers to China. The
investigation could jeopardize Loral's Chinese contracts, but in reality Congress is unlikely to do anything
that would cut American jobs, especially since China could buy satellites from Europe.
Because Loral is spending so much money on building satellites and developing Globalstar, the company
is not posting any profit -- another reason the stock dropped. Analysts and the company expect real
profits in 2001. Meanwhile, revenue is expected to grow 30 percent this year, to $1.6 billion, and Ebitda
-- earnings before interest, taxes, depreciation and amortization, the traditional measurement used to value
satellite firms -- should nearly triple this year, to $294 million, and rise another 50 percent in 2000. "At
some point investors are going to wake up and say, 'Holy smokes, how did we let this one get away?'"
says Schettewi.
Copyright © 1999 Dow Jones & Company, Inc. All Rights Reserved.
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