U.S. Government Cancels BASIC Program; GeoEye to Benefit

Well, it looks like our current economic climate was good for something.

The AP has reported that the U.S. government, feeling the pressure of the current economic crisis and as a result of the their need to bail out and possibly fund over $700 billion in debt, has canceled their proposed Broad Area Space-Based Imagery Collection satellite system, or BASIC, which would have launched two commercial grade satellites similar to the ones already in use by GeoEye (NASDAQ: GEOY), and its only U.S. based rival DigitalGlobe (NYSE:DGI).

I hate to say that I am happy for the way things are going right now, but if it had to happen, it looks like PeakStocks.com recommendation GeoEye is going to be a beneficiary of the downturn, and the government’s latest announcement, which would have put the U.S. government in direct competition with these two satellite providers, in a move that was widely controversial and was perceived to have directly violated previous presidential directives.

New to the GeoEye Story?

GeoEye provides space-based, and aerial imagery and geospatial information through high-resolution and low-resolution imagery, imagery-derived products, and image processing services to customers worldwide.

This capability benefits a broad array of industries including national defense and intelligence, online mapping, state and local governments, environmental monitoring and land use management, oil and gas, utilities, disaster management, insurance and others.

How Did We Get Here?

As I wrote previously, it appeared that the U.S. government couldn’t leave well enough alone, and for some strange reason, was actually considering spending BILLIONS of dollars, to do the exact same thing that was already available to them for a fraction of the cost.

Government efficiencies huh?

The sad part in all of this is that the government actually tried this before with stinging failure.

In 2005, after many years of bumbling and stumbling, the government canceled a project called the Future Imagery Architecture (FIA), after indecision over what kind of capabilities it should have, skyrocketing costs, constant delays and general incompetence by the government and their building partners.

The project was canceled even before a single satellite was launched, wasting billions of dollars.

In fact, the primary contractor, Boeing (NYSE: BA), ran into technical problems developing the satellite and spent nearly $10 billion, blowing its budget by $3 billion to $5 billion before the Pentagon pulled the plug.

You can read all about that fiasco here.

Violation of  Presidential Directive

In 2003, president George W. Bush issued a directive to “rely to the maximum practical extent on U.S. commercial remote sensing space capabilities.”

This meant that the government should do what it has been doing since that time in aiding companies like GeoEye and DigitalGlobe with the build-out, launch and imagery purchases from these company’s satellites.

This directive asks that the government buy as much commercial imagery as possible to help these companies withstand competition from subsidized foreign satellite companies.

It seems that government officials wanted to build their own satellites instead of relying almost entirely on GeoEye or DigitalGlobe for imagery because they wanted to make sure that they were always first in line when trying to collect imagery and that the images collected for intelligence purposes could never be improperly diverted.

This is a concern recently as GeoEye has signed deals with Google (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT) to supply them with the latest imagery from both their IKONOS satellite, as well as their latest and greatest satellite, GeoEye-1 which recently launched successfully and is awaiting its final diagnostics and check-out to begin providing usable imagery to GeoEye’s customers.

If you would like to learn more about GeoEye’s satellite constellation and their capabilities, click here.

So Now What?

The National Reconnaissance Office was supposed to buy and launch two commercial-style satellites around 2012, directly competing with GeoEye and DigitalGlobe.

With all the problems that are facing the U.S. economy and the budget crunch that the government is staring down, Congress almost had no choice but to slice any extraneous expenses from the budget.

House and Senate defense appropriations committees cut all funds for the BASIC program during a conference to work out differences in the classified 2009 bills that approve intelligence spending.

They also erased the remaining 2008 funds.

Congress “zeroed” the budget, cutting about $1 billion, said an industry official with direct knowledge of the program.

The exact budget is classified, but the program was expected to cost about $1.7 billion according to previous reports.

The cut means the next administration will not be locked into an expensive and potentially controversial program to buy new satellites while paying for wars in Iraq and Afghanistan as well as the $700 billion national financial rescue.

The AP is reporting that approximately $350 million of the $1.7 billion,  has been set aside for the Pentagon to study whether it needs more satellite imagery, and if so, to begin a new satellite program with the funding.

The study is expected to be completed this spring.

Does that sound wasteful to you? It sure does to me…but whatever, right?

Bottom Line

So that brings us to our investment thesis in GeoEye.

As I wrote previously, the BASIC program, even if it had been implemented and the government had launched 2 satellites successfully by 2012, would not have impacted GeoEye in the near to mid term, say for a few years, so either way our investment thesis for GeoEye remained intact.

This just brings us one step further away from this ever happening, and might directly impact GeoEye in a positive way if the government steps up their plans to purchase more satellite imagery from these two companies in the absence of additional imagery that would have been filled via their own satellite launches.

What remains to be seen however, is how the cutbacks in the BASIC program affect GeoEye in the near term, as it isn’t abundantly clear one way or another, if the cancellation of the BASIC program means that the funds that were originally set aside for additional commercial satellite imagery purchases from GeoEye and DigitalGlobe will now be either scaled back or cut.

Part of the original package called for $1 billion to be spent purchasing imagery from GeoEye and DigitalGlobe.

I am still trying to get clarification as to whether that amount is now off the table, and the government and GeoEye have to negotiate new service level agreements, or if that $1 billion, which was earmarked under the NGA under the NextView program, which would make it separate from the BASIC program, is still in play.

From what I have gathered so far, it appears that the BASIC cuts are not mutually exclusive and therefore, it appears that GeoEye will still benefit from continued support and large scale purchases of their imagery from the U.S. government through their NextView program.

If that is indeed the case, then GeoEye at today’s prices still represents one of the best bets in a turbulent marketplace, and in fact my initial recommendation of GeoEye has soundly beaten the market and is one of the few stocks in any sector, to show a positive gain in that time-frame.

With the BASIC program out of the way for at least one more year, and perhaps for good, the U.S. government will rely on GeoEye more and more, especially in light of the fact that GeoEye is now in possession of the highest resolution commercial satellite available today, GeoEye-1.

Want more? Read my initial buy recommendation here or listen to my exclusive interview with GeoEye’s management team here.

Disclosure: Author holds a long position in GEOY