GeoEye Poised to Go Higher Even as Main Competitor Goes Public

Includes: DGI, GEOY
by: Chris Fernandez

GeoEye Logo

GeoEye (NASDAQ:GEOY) 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.

GeoEye operates in what in essence is a duopoly with only one other U.S. competitor, DigitalGlobe (NYSE: DGI), and just recently launched and certified their latest satellite, GeoEye-1, which is the most accurate and detailed commercial imagery satellite available today.

DigitalGlobe Files Its IPO

GeoEye’s only U.S. competitor set to come public May 14th

As readers of my Twitter feed already know, DigitalGlobe made it official this week, setting their filing with the SEC to price 14.7 million shares of DGI stock at between $16-18 per share in an effort to raise between $235.2 million and $264.6 million.

If there was ever a sign that the IPO market may finally be thawing for all kinds of companies, this is it.

Part of the proceeds are going to be used to pay for the launch and final payments for DGI’s 3rd satellite, WordlView-2, set to launch sometime in September or October.

If you’ve been following the GeoEye satellite launch delays, you’ll be highly skeptical as I am, that this launch window will come to fruition, so let’s say for the sake of argument that it won’t take place until late in the year, or early next year.

All but 1.3 million of the DigitalGlobe shares to be issued next month are being sold by the company’s investors, the largest of which is Morgan Stanley & Co., which holds a 36 percent stake in DigitalGlobe

Morgan Stanley also is handling Digital Globe’s stock offering and owns debt used to finance WorldView-2 that will be paid off by satellite company going public.

The number of shares outstanding after the IPO is going to be approximately 44.87 million, giving DGI an initial market cap of $762 million, if we use $17 per share.

This compares to GeoEye’s market cap of $476 as of this writing, indicating, at least initially, that GeoEye is trading at an over 50% discount to its only rival.

Granted, DGI reported revenue of $275 million in 2008, an 81% increase over 2007, vs. GeoEye’s $146 million (projected to be $260 million this year), but we cannot compare the 2 results because of GeoEye’s latest satellite now up and running, and contributing massively to the company’s top and bottom line, which wasn’t the case last year.

I’ll be looking into the valuation and doing a comparison of the 2 companies as we get closer to the IPO date and most likely after it, but my initial glance seems to be that DGI might receive a premium valuation by the market for now, but GeoEye will not lag much if at all in the coming months due to the revenue and profit acceleration as a result of a fully operational GeoEye-1 satellite.

Bottom Line:

This is my third and final investing catalyst playing out.

The first was the launch and check out of GeoEye-1, the second was GeoEye’s increasing revenues and profits pushing the company up on Wall Street’s radar screen.

With the IPO of DigitalGlobe now coming to fruition, it won’t be long before more attention is garnered for this sector (in fact a new analyst started coverage of GeoEye last week with another “Buy” rating), and because the IPO pipeline has been so dry, folks will be looking at DGI with eager eyes, which will in turn bring up GeoEye’s stock as well.

Patience has indeed paid off with our investment in GeoEye, and the stock is now up about 30% from my cost average basis, and beating the overall market by an astounding 60+% overall since my first buy recommendation.

The best part?

We have a ways to go yet as the stock’s valuation is just now coming into line with where it should have been long ago, and we are poised to rocket higher with the increased comps based on year over year comparisons that GeoEye will blow away, as well as increased attention paid to the sector with the DigitalGlobe IPO, and the increased scrutiny on the apples to apples stock price valuation comparison which upon my first inspection, shows that GeoEye is undervalued by a wide margin.

So my fellow investors, if you’ve held and bought GeoEye shares, I sincerely hope you are enjoying the fruits of your labor, and the research and time that has gone into uncovering a true hidden gem in the marketplace, and a stock that more than qualified for my doube thesis, and gave us a chance to truly crush the market as a result of a long term investing approach that allows us to wait things out, and let our research do the talking for us.

New to the GeoEye story?

  • Read my latest earnings post about GeoEye’s continued execution and rising stock price here.
  • OR: read my latest buy recommendation here.
  • OR: listen to my EXCLUSIVE interview with GeoEye’s management team here.