To all-
This is from Individual Investor. I received an e-mail from them with the following headline:
DON'T BOTTOM FISH HERE
Iridium's already down 56% from its 52-week high. It's not time to
bottom fish though. The worst is yet to come.
iionline.com
I am not long or short IRIDF, I just want all of you to ba aware of what is being said. But if it falls much lower, I'll probably pick some up. I was involved in the original bank financing and believe in the concept, however, with any large project, execution is key. My two main concerns are the continued loss of "birds" and generating sufficient subscriber demand.
Full text of the II article is below.
Grabs
SELL SIGNALS: Iridium Falling From the Sky <Picture>
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. |
