Key Assumption for GeoEye: Forward Earnings

Apr.27.09 | About: GeoEye, Inc. (GEOY)

I've written several times in TheStreet.com and RealMoney.com about GeoEye (NASDAQ:GEOY). It's been a long holding of mine since March of 2008 and it's been a big disappointment overall.

It sells its Earth imagery take from its satellites to the US government, foreign governments and to commercial customers including Google (NASDAQ:GOOG) for maps and their mobile apps.

The reason for my heartburn with this stock has been chronic delays of launching GEOY's latest satellite last year and then waiting on its approval by the federal government to begin the $12.5mm a month revenue payments. While the company has waited, its stock drooped.

Now, the satellite is approved and the company has switched on the meter for beginning to charge the government (we should start to hear more about this when the company holds its Q1 call). We also are still in the dark about how much GOOG is paying GEOY for its images (which are currently the state-of-the-art in that industry).

Assumptions about earnings for the next year are key in determining whether to buy in to the stock. At the moment, consensus EPS estimates for 2010 range from $0.78 - $1.84. Yet, analysts appear to be under-estimating how well this company does when revenues are flowing, with historical operating margins of 45%.

Back in 2007, the last time GEOY launched a new satellite, 15% of its $183MM in sales dropped to the bottom line. If GEOY hits its high revenue estimate of $320MM next year (and remember it just switched on a guaranteed contract from about half of that from 1 customer), 15% of that would be $48MM or $2.59 in EPS. That's giving the company an 8.8x forward P/E -- way too low in my book. Other comparable tech companies trade at double and sometimes triple that.

Disclosure: Long GEOY