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I have been watching GeoEye (NASDAQ:GEOY) for a few months based on a recommendation from my online bud Eric Jackson. He has been a long-time investor in the company - suffering through ups and downs - and highlighted the stock to me when it was in the upper teens. As with the rest of the market, the stock has been running hot and heavy, but after a solid earnings report Wednesday it was trashed - not so much on the earnings but on a potential issue that I'll get into later.

Long time readers will know I like niche / sector growth, with high moats. They are hard to find - GeoEye along with an upcoming IPO called DigitalGlobe (NYSE:DGI) have a duopoly in their field. Per WSJ

  • The Obama administration's plans to use more commercial satellite imagery for intelligence gathering will propel the IPO of DigitalGlobe Inc. into the market this week. DigitalGlobe, which derived three-quarters of its 2008 revenue from the U.S. government, is set to trade Thursday on the New York Stock Exchange under the symbol DGI.
  • The deal languished alongside dozens of others as the IPO market became dormant, but swiftly set an offering date late last month, just weeks after the U.S. intelligence director came out with a plan -- with funding yet to be approved by Congress -- to increase its purchases of images from DigitalGlobe and rival GeoEye Inc.
  • The increased government spending "will benefit both companies. It's not a game of one wins and the other loses. Demand is currently exceeding the capacity available for the government," says Paul Bard, research director at Renaissance Capital, which specializes in IPO research. "There are also huge barriers to entry, and because of that, very high profit margins. You can't just build a satellite in your garage and throw it up there."
  • "The U.S. government is acting like an anchor tenant, creating a sure stream of revenue before it's even launched," Mr. Rousseau says. "That brings down the risk."
  • It is easy to see why the barriers to entry are so high: Satellite development and launch is expensive. DigitalGlobe, of Longmont, Colo., became profitable for the first time three years ago. In 2008, its revenue rose 81% to $275 million and operating income more than doubled to $92 million, compared to a year earlier (tax expenses knocked its net income 44% below 2007's). In the first quarter of 2009, revenue declined 2% as sales slowed in its smaller commercial customer segment, and net income went down 25% as compensation expenses rose compared to the same period a year ago.
  • There is a clear downside to the technical expertise needed for satellites: Their operations can be delayed or completely fail. Of the four satellites DigitalGlobe has launched since its incorporation in 1994, one had its power system fail within days of orbit in 1997, and in 2000, another never achieved orbit. One of its two remaining satellites is approaching the end of its expected life in 2010, while plans to put its newest one into orbit have been bumped from September into October by launch operator Boeing Co. Although the company carries insurance on its satellites, the amounts aren't enough to cover the cost of replacing them.

I've tried to buy a few "government heavy" companies as an oasis of stability but with mixed success - most have been on the defense side. GeoEye

reported earnings Wednesday and initially traded up....

  • GeoEye, Inc. (Nasdaq: GEOY - News) today reported its financial results for the first quarter of 2009. First quarter 2009 revenues were $45.2 million, a 26 percent increase compared to $35.9 million in the first quarter of 2008. The increase was primarily due to our GeoEye-1 satellite beginning commercial operations in February 2009 resulting in increased imagery orders from the National Geospatial-Intelligence Agency (NGA). In addition, we began recognizing deferred revenue related to the cost share from NGA for GeoEye-1.
  • Income from operations was $1.7 million for the first quarter 2009 compared to $5.6 million for the first quarter 2008. The decrease was due to increased costs related to GeoEye-1 becoming operational, offset by our initial revenues from GeoEye-1. Beginning in the first quarter of 2009, operating expenses included operating costs related to the GeoEye-1 satellite including depreciation, satellite insurance and salary costs.
  • Our net loss for the first quarter of 2009 was $1.7 million compared to a net loss of $0.8 million for the corresponding period in 2008.

So the company lost 9 cents on $45M in revenue versus analysts expectation of a 25 cent loss on $42M; a clear beat. Due to a the launch of GeoEye-1 expenses were high in the quarter - the rest of the year should be profitable. However, in the conference call, there was mention of a recently discovered (2 days ago) issue with some of the imagery and investors piled out (shoot first ask questions later). Via Eric's comments to me, management here is ... an interesting bunch.

That said, I see a direct parallel to an investment we laid out a year ago - as an owner ofMastercard (NYSE:MA), the hype around the Visa (NYSE:V) IPO could potentially have helped both names - and you had a duopoly with high barriers to entry. Tonight or tomorrow GeoEye's duopoly partner DigitalGlobe (DGI) goes public and already the drumbeat of hype is buzzing.

GeoEye also announced mid March it is sending images to Google from GeoEye-1; this is part of the the "Google Earth" initiative. Quite striking really how close up these pictures are.

  • GeoEye, Inc. (Nasdaq: GEOY - News), a premier provider of satellite and aerial-based geospatial information, announced today it has started delivering high-resolution, color satellite imagery from its newest satellite to Google. The GeoEye-1 satellite images that are being highlighted by Google were all taken within the last 60 days and include images of the Pyramids of Giza, Mount Fuji, Sydney Australia, and many other recognizable locations. Examples of imagery can be seen at http://earth.google.com/geoeye/.
  • Bill Wilt, GeoEye's vice president of North American sales, said, "Google is a very important customer with a huge appetite for map-accurate satellite imagery. We will work hard to ensure we meet all of their expectations and provide them a continuous stream of the world's highest resolution color satellite imagery."
  • The images were all taken from 423 miles in space as GeoEye-1 moved around the Earth at 17,000 miles per hour. The 4,300-pound GeoEye-1 satellite was launched from Vandenberg Air Force Base, Calif. on Sept. 6, 2008.


I've decided to begin a position here because this name fits a lot of requirements in terms of growth, moat, et al - it is very hard to find true growth niches nowadays frankly, so my universe of potential stocks to fit this criteria is limited. If they can do the $1.50 in EPS projected for 2010 ($0.87 EPS for 2009), these type of companies with both government and commercial (including Google) revenue streams and growth profiles could get a very nice multiple.

Of course, the risk here is the problem laid out in the conference call could prove to be very serious, but I'm willing to take the risk for now. I started about a 2.3% stake in GeoEye; I almost started this position Wednesday as I watched it hit the 200 day moving average in the mid $21s, but I wanted to make sure after Wednesday's swoon there was not a waterfall of panic Thursday morning... there was not. The stock actually opened up and was strong all day - so I lost some profit right off the bat, but I don't like buying knives falling that fast. It is a nice discount from Wednesday's high of $28 and the previous day's peak of $29.


Eric has a piece over at TheStreet.com that hits on similar themes I laid out above: DigitalGlobe IPO Could be Boon for GeoEye. You can read that for a sober analysis as Eric has been a long time investor... he also has a piece from last December found here: Take the Long View with GeoEye

...of if you prefer wild eyed, arm flailing Johnny come lately analysis please see Jim Cramer's theatrics below in regard to DigitalGlobe - again it should price after the close. I'm expecting the underwriters to underprice DGI to create a big boom in the stock price so the carnival barkers can yell at the retail investor crowd: "Look what you're missing! Come on in! The waters fine!! We have some nice bank secondaries for you as well! Everything is normal!" See Carnival Barker in Chief below...

Disclosure: Long GeoEye in fund and personal position

Source: GeoEye Should Benefit from DigitalGlobe IPO Hype