April 10th, 2014
Investing Daily Article of the Week
by John Persinos, InvestingDaily.com
Looking for new growth opportunities in an overbought market? Look to the stars.
When seeking aerospace plays, investors tend to focus on the commercial or military aircraft segments and ignore the satellite industry. However, the accelerating commercialization of outer space for navigation and telecommunications should afford continued growth for the companies that develop, build and operate satellites.
This 21st century space race makes satellite leader DigitalGlobe (NYSE: DGI) a compelling long-term play on both technology and aerospace. Colorado-based DigitalGlobe owns and operates a constellation of satellites that provide high-resolution space imagery and geospatial content to commercial and military customers.
DigitalGlobe’s sophisticated capabilities are increasingly vital to commercial aviation. Case in point: During the global search for missing Malaysian flight 370, DigitalGlobe launched a “crowdsourcing” campaign that enabled anyone to help look for the aircraft by poring over satellite images for clues of its whereabouts.
The company reported last week that two of its commercial satellites had collected images encompassing nearly 2,000 square miles around the South China Sea, where the Beijing-bound aircraft went missing.
Through acquisitions, DigitalGlobe has emerged as a near monopoly that leaves its peers on the ground in terms of size and capability. The US government is the company’s biggest customer of satellite imagery, a huge advantage because of Uncle Sam’s deep pockets and constant need for weather, intelligence and navigational data.
The boom in satellite demand is borne out by new statistics from Virginia-based Teal Group, a market research firm that serves the commercial and military aerospace sectors.
Teal Group’s latest satellite survey, released in late 2013, identified 3,164 space payloads proposed for development and launch to earth or deep space orbits between 2013 and 2032. Teal estimates the value of these satellites and other space payloads at more than $235 billion.
The survey includes not only planned payloads but those that Teal determines will need to be developed and launched to replenish aging operational systems now in earth’s orbit.
In addition to the initiation of brand new systems, the worsening decrepitude of satellites already aloft will provide plenty of demand for years to come, in the form of replacements.
Among the payloads surveyed by Teal, the company forecasts that roughly 830 of them will be built and launched from now until 2017, with commercial satellites making up 40 percent of the total.
Commercial payloads include direct TV broadcasting, digital radio, broadband and mobile communications, and earth imaging satellites. They account for 42 percent of payloads, as compared to 37 percent for civilian government, 17 percent for military, and 4 percent for university and other.
Dozens of avionics-related GPS replacements are anticipated for the rest of this decade. There also has been a significant boost during the past two years in orders for new geostationary commercial communication satellites.
Fueling this trend is the fact that the North American Terrestrial System is nearing its termination, forcing avionics engineers and flight departments to search for alternatives to their companies’ airborne telephone systems. Stepping in to fulfill much of this need will be “NextGen,” the Federal Aviation Administration’s blueprint for modernizing the National Airspace System from now until 2025.
Through its ambitious NextGen plan, the FAA is developing an integrated grid of new technologies and procedures to enable higher traffic capacity and less congestion. That’s in large part where the expected need for new space payloads comes in. Meanwhile, increasing numbers of high definition television and cable distribution channels continued to propel revenues for satellite pay TV.
As the chart below shows, satellite demand will remain in an upward trajectory for years to come:
With a market cap of $2.25 billion, DigitalGlobe is in the best position to benefit from the satellite surge. DigitalGlobe’s primary satellite is QuickBird, launched in 2001. Two of the company’s existing five satellites, WorldView-2 and GeoEye-1, offer sharper imagery than available for general commercial use.
In February, the company announced that its more advanced WorldView-3 satellite is scheduled for launch aboard a United Launch Alliance LLC Atlas 5 rocket in mid-August from Vandenberg Air Force Base, CA. The satellite is scheduled to be fully operational by mid-November. United Launch provides spacecraft launch services to satellite companies and the US government.
DigitalGlobe’s major clients include urban planners; civilian, military and intelligence agencies; NASA; and companies in the aviation, telecom, broadcasting and Internet sectors. In 2012, DigitalGlobe acquired its major competitor GeoEye for roughly $900 million, to forge the world’s biggest commercial-imagery satellite company.
DigitalGlobe also has moved into the technology sector’s fast-growing cloud-based segment. Through cloud computing, end users leverage a network of remote servers hosted on the Internet to store, manage and process data. The company’s cloud services grant clients worldwide access to up-to-date, high-resolution imagery and geospatial data from desktops, portals, intranets, and mobile devices.
The barriers to entry in the satellite industry are formidable. By purchasing GeoEye, DigitalGlobe adopted monopoly-like dominance of its industry. In February, DigitalGlobe strengthened its grip on satellite activity by acquiring Spatial Energy, a major provider of digital imagery and geospatial solutions to the global oil and gas industry.
In February, DigitalGlobe reported fourth-quarter 2013 revenue of $169.7 million, a 35 percent increase compared with the same period last year. Earnings for the fourth quarter were $15.1 million, or $0.18 in diluted earnings per share (EPS).
Fourth-quarter revenue from the US government grew 29 percent to $97.1 million compared with the same quarter a year ago. Commercial revenue grew 45 percent year-over-year to $72.6 million.
Full-year 2013 revenue was $612.7 million, a 45 percent increase compared with 2012. The company reported a net loss of $68.3 million, largely from restructuring costs that will pay off in future quarters. For 2014, management expects to report revenue in the range of $630 million to $660 million.
In February, DigitalGlobe signed a new multi-year imagery agreement with Google (NASDAQ: GOOG) to provide high-resolution satellite imagery in support of Google Earth, Google Maps, and other Google products and services. Similar navigation-oriented deals are in the works with other companies.
To profit from the long-term commercialization of space, you can’t find higher prospects than DigitalGlobe.