CSFB report from meeting:
AM CALL: GSTRF: Globalstar Holds Investor Meeting-Pt 1- CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research
U.S./Wireless Telecommunications Services
BUY
MID CAP
Globalstar (GSTRF)
A Tale of Two Companies-Globalstar is not Iridium.
Summary
Loral and Globalstar held their annual investor meeting on
May 18, 1999. Overall, Globalstar is making progress
Loral and Globalstar held their annual investor meeting on
May 18, 1999. Overall, Globalstar is making progress with
marketing, network testing, gateways, launch schedule, and
handset availability.
Globalstar is expected to turn EPS positive by the fourth
quarter of 2000, and have 94% EBITDA margins by 2002.
Although they always have concerns, management is very
pleased with Globalstar's progress. However, the Iridium
situation may affect the cost at which they raise the $600
million they need this summer.
We believe Globalstar has a very different model, and is in a
very different position than Iridium. Although it is natural
to have concerns about the industry in light of situation, we believe investors should differentiate between
Globalstar and Iridium, because we believe Globalstar's
chances of success are significantly higher.
Price Target Mkt.Value 52-Week
5/18/991 (12mo.) Div. Yield (MM) Price Range
$19.56 $33 NA NA $4,557.5 $32.31-8.31
Annual Prev. Abs. Rel. EV/ EBITDA/
EPS EPS P/E P/E EBITDA Share
12/99E $(1.81) NA NA NM $(0.64)
12/98A (0.68) NA NA NM $(0.65)
12/97A (0.43) NA NA NM $(0.43)
March June Sept. Dec. FY End
1999E $(0.19)A $(0.15)$(0.67) $(0.79)
1998A (0.15) (0.18) (0.18) (0.17)
1997A (0.11) (0.11) (0.12) (0.10 ROIC (12/98) NM
Total Debt (3/99) $1.73 bil.
Book Value/Share (3/99) $3.86
WACC (12/98) 11.7%
Debt/Total Capital (3/99) 65.8%
Common Shares* 233 mil.
EP Trend2 Negative
Est. 5-Yr. EPS Growth NA
Est. 5-Yr. Div. Growth NA
1On 5/18/99 DJIA closed at 10836.9 and S&P 500 at 1333.3.
2Economic profit trend. *Common Stock
Equivalents NASDAQ
NM = Not meaningful.
Globalstar is a satellite-based wireless company that expects to launch commercial service in the
third quarter of 1999. The system will initially utilize 32
low-earth-orbiting satellites and numerous gateway stations.
Globalstar expects to provide mobile and fixed
communications services worldwide.
Investment Summary
Loral and Globalstar held their annual shareholder meetings
on May 18 at the Essex House in New York City, and then held
an investor meeting to talk about the different business
segments and progress each is making. Although there were
four main topics including: Satellite Manufacturing, Fixed
Satellite Services, Data/Broadband Services, and Mobile
Satellite Services (Globalstar), in this note, we will focus
on the area that relates to our recommended stock, Globalstar
, which we rate a Buy with a $33 twelve month target price Overall, we were very pleased with what we heard during the
meeting. Chairman and CEO, Bernard Schwartz, Vice Chairman,
Gregory Clark, and acting President, Anthony Navarra provided
comments on the progress Globalstar has made with regard to
its marketing program, its network testing, gateway
operations and testing, launch schedule, and handset
availability. Further, Navarra reviewed some of the
company's expectations for subscribers, EBITDA, and earnings
in the period through 2002. Overall, while they are being
conservative with 1999 forecasts and are considerably below
original expectations in terms of subscriber and revenue
growth in 1999, they expect to exceed our earnings in all years,
and all of our forecasts in 2000 and beyond.
A Tale of Two Companies: Globalstar is Not Although the main topic of the day was the progress of the
segments, when it came time for Navarra to make his
presentation on Globalstar, he wasted no time in getting
right to the main point; his first slide was entitled "How
Globalstar differs from Iridium."
Iridium Snapshot
Much has been written about Iridium's recent woes, and this
review is certainly not meant to pile more on top of
Iridium's already challenging situation-we think the troubles
that have befallen the company are very unfortunate. Some of
the problems probably could have been avoided; some of them
probably could have been mitigated by simply being the second
or third player out of the gate (versus the first player who
encounters all of the hard issues, from which every successor
thereafter learns lessons); and many of them, are simply a function of the more difficult model with which
Iridium must work (i.e., the costly nature of the network
given the intelligent satellites that only last five years).
However, we believe to truly appreciate what Navarra said,
one should be familiar with some of the issues that have
challenged Iridium over the past few months.
As a review, Iridium delayed its initial launch by a few
months to November 1998. They were the very first mobile
satellite service provider up and running in the world. To
their credit, they never experienced a failed rocket launch,
and managed to get the entire 66 LEO satellite constellation
up and running by November 1998. Unfortunately, they had
difficulties obtaining enough handsets from Motorola until
early 1999, and the second vendor, Kyocera, had software
problems with its handsets until February 1999. While the
company had conducted an extensive marketing campaign ( $150 million) in mid 1998, and thought they had generated
sufficient interest in the product (at one point, inquiries
were stated to be about 1.3 million, and qualified leads were
supposedly 130,000), much of the marketing was likely wasted
by the time they had sufficient handsets in early 1999 to
satisfy demand. Additionally, because of the lack of handsets
, large corporate and government organizations could not test
the phones, and hence, could not place orders. Meanwhile,
the service providers were said not to be adequately training
sales personnel to sell the product, and all of this led to
the company not making its March covenants on subscriber
growth and revenues. Although they received an extension
until May 31on the covenants, in the meantime, the CEO, CFO,
and Chief Marketing Officer all resigned. Indications from
Motorola and other service providers regarding their long-
term commitments to the Iridium project have been mixed.
Iridium then announced it was planning to review a business
plan with Motorola and other strategic investors, and we are
still waiting to hear about progress on a new business plan.
The most recent announcement was that the company will not
make its May debt covenants and has hired a financial advisor to
restructure the debt with the banks.
Globalstar-Why is it different from Iridium?
Although the reasons noted below do not come as a surprise to
us, we liked the fact that Globalstar was up front about
addressing the market's major concern with the stock.
Globalstar has lower pricing. Globalstar's wholesale costs
will be $0.35-$0.55 per minute or $0.47 on average. The
retail price is expected to be $1.00 to $1.25 per minute,
versus the $1.89-$5.00+ per minute for the Iridium call;
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