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Microcap & Penny Stocks : Globalstar Telecommunications Limited GSAT -- Ignore unavailable to you. Want to Upgrade?

To: brian h who wrote (4009)	4/21/1999 3:21:00 AM
From: djane	Respond to of 29987

Satellite Today. A Heavy Burden for Iridium [Okay, my nomination for silliest valuation of G* yet. I'd like to see ING take a crack at it to embarrass Crossman.] Wednesday, Apr 21 Dollars and Sense satellitetoday.com by Marc Crossman Iridium is writing history for a new breed of satellite operators. The pioneer of mobile telephony satellite services using a handheld device that communicates with nongeostationary satellites, Iridium will set the standard by which all future mobile satellite service providers will be measured. On Wall Street that means investors have been using Iridium's early operational results and its projected ability to generate substantial returns on invested capital to extract a relative value for Globalstar and ICO Global Communications. Unfortunately, Iridium's difficulties in making the transition from a development stage company to an operating company have caused investors not only to place a lower value on Iridium's equity, but also to place a lower value on the equity of Globalstar and ICO. With the announcement of commercial services on November 1, 1998, Iridium made the official transition to an operational company. As a result, the metrics by which the company had been measured in the past changed. Previously, the number of satellites launched, gateways built and licenses signed measured Iridium's health. Now, with 86 satellites launched, 12 gateways built, and almost 200 licenses signed, Iridium's health is measured by the number of subscribers it has using its system. Subscribers have become the most important metric to measure Iridium because without subscribers-and lots of them (hundreds of thousands)-Iridium will not be able to cover its capital costs of $4.5 billion and its operating and financing costs of $1 billion to $1.5 billion. In order to cover its operating costs and break even on its invested capital, Iridium must generate $8.5 billion of revenue and accumulate total profits of at least $4.5 billion during the course of the next four years. It is worth noting again that this is just to break even. This appears to be a rather daunting task given that at the end of February, Iridium had fewer than 10,000 subscribers. At first, the company cited a lack of available handsets from Motorola and Kyocera as the reason for the lower than expected subscriber count. This reason falls under suspicion given that, at the time, Motorola has been manufacturing phones at an approximate rate of 1,000 phones per day and that Motorola had previously manufactured 30,000 phones. We estimate that there were at least 90,000 phones in the distribution channel. As a result, the lower than expected subscriber count can be attributed to either lower than expected demand or a longer than anticipated sales cycle. A longer than anticipated sales cycle would only be a temporary setback; however, lower than expected demand would be devastating. Since Iridium has become a measuring stick in the industry, no other mobile satellite services stock will trade at a higher firm value than Iridium. This means that the equity market value plus debt of no other company will equal that of Iridium. For example, using 178 million fully diluted shares and trading at about $30 per share, Iridium's equity market value is $5.34 billion. Adding Iridium's total debt of $2.5 billion yields a total firm value of $7.84 billion. Until Globalstar and ICO Global Communications start commercial services of their own, it is highly unlikely that either company will trade at a higher firm value than Iridium ($7.84 billion). As a result, it is possible to back into what are the near-term price caps on Globalstar's and ICO's stock prices based on where Iridium is currently trading. Using an implied firm value of $7.84 billion and subtracting Globalstar's debt of $1.8 billion we are left with an equity market value of $6.04 billion. Dividing Globalstar's implied equity market value of $6.04 billion by its fully diluted shares of 247 million yields an implied market price of $24 per share. As long as Iridium trades under $30 per share, Globalstar will most likely not trade over $24 per share. A similar analysis for ICO Global Communications would yield a target ceiling of over $30 per share (Note: the higher target price does not indicate a higher firm value). Neither Globalstar nor ICO Global Communications will trade near their ceilings, since their respective ceilings do not reflect the fact that Globalstar and ICO Global Communications are one and two years behind Iridium. As a result, expect to see both stocks trade well below their respective ceilings. This does not mean that the stocks will not appreciate in value. If Iridium trades above $30 per share, the ceiling for its competitors will be raised and their current stock prices should follow. In the near-term, movement in Iridium's stock price will dictate the direction and movement of Globalstar's and ICO Global Communications' stock prices. Marc Crossman is a vice president at J.P. Morgan in New York City. These views are those of the author and do not necessarily reflect the views of the Via Satellite editors or J.P. Morgan. Back to April 1999 Issue Copyright © 1999 Phillips Publishing International, Inc. All rights reserved. Reproduction in whole or in part in any form or medium without express written permission of Phillips Publishing International, Inc. is prohibited. Phillips and the Phillips logo are trademarks of Phillips Publishing International, Inc.