DigitalGlobe IPO: How Will It Affect GeoEye?

Includes: DGI, GEOY
by: Chris Fernandez

Thursday will mark an important day, not only for the IPO market, but more so for the company that is riding the recent deal pipeline to come public at a time when having access to the public markets is critical.

DigitalGlobe (NYSE:DGI), one of only 2 U.S. companies that offer commercial satellite imagery (GeoEye (NASDAQ: GEOY) is the other), to both the U.S. government via the National Geospatial-Intelligence Agency (NGA), as well as commercial and business customers such as Google (NASDAQ: GOOG), will trade Thursday in a heated rush to take advantage of the window that has opened in the IPO market for established companies with real revenues and prospects.

There is some scuttlebutt around that DigitalGlobe is purposefully underpricing their offering, which I hear is way oversubscribed, so that they get a nice first day pop, as comparisons to GeoEye will surely abound in terms of market cap, P/E ratios, P/S ratios, etc.

As I reported on my Twitter feed, DigitalGlobe just priced their IPO at $19 per share, above their expected range of $16-18.

In fact, as you read the headlines Thursday and listen to the chatter, you're sure to come across many who feel that DigitalGlobe is the far superior company to GeoEye.

One thing that you have to be very careful about when comparing the two companies is that an apples to apples BACKWARDS analysis is almost futile, as GeoEye was not garnering any revenue from their latest satellite GeoEye-1 until April, among a whole host of other lacking comparisons such as satellite construction cost timing (making CAPEX look daunting), timing of deferred revenue, depreciation and amortization costs, etc.

In addition, most analysts and commentators will fail to detail GeoEye's production and services division which is hiring 120 additional staffers this year and is able to manipulate and fine tune imagery from ANY source, not just their satellites, for all types of customers.

This is something that DigitalGlobe doesn't do.

Also, GeoEye's MJ Harden division that uses local aircraft and cameras to do corridor mapping closer to the ground, just purchased another airplane and camera because demand was exceeding supply. This segment is producing higher revenues for the company and is expected to do so again this year.

As far as revenue diversification and product offerings, GeoEye is head and shoulders above DigitalGlobe.

With the ramp up in revenues from GeoEye-1 (which only in April started delivering a full slate of imagery), the revenue gap will close, and we'll see things much closer to par for both companies, with the edge going to GeoEye because of the aforementioned product and diversification offerings.

One look at analyst's estimates for this year shows that the revenue gap is closing fast so comparisons now become more germane, and we won't know until a few days/weeks after DigitalGlobe's IPO, how those comparisons start to look.

Until that happens, I'm not going to try and guess about what valuation should be bestowed upon each company, but once things have settled down, I'll be looking into a detailed analysis and breakdown of both companies and their "apples to apples" valuation metrics, as well as future prospects such as satellite launches, government contracts, etc.

As forward looking investors, that's what we need to focus on.

==> Click here to read my analysis and breakdown of GeoEye's latest earnings release and conference call.