GeoEye: Sell Alert on Satellite Troubles

Wednesday I sold my full position in GeoEye, Inc. (NASDAQ: GEOY), a provider of space-based and aerial imagery and geospatial information, at $20.75 per share.

The total amount in my portfolio was was for a 3/4 position out of a full position, accounting for about 25% of my portfolio.

Those that follow me on Twitter received this update as I made the transaction.

Why

As I recently wrote, GeoEye threw investors a bombshell on their latest quarterly earnings and conference call when management acknowledged that their latest satellite, and the main basis for my investment thesis in GeoEye, GeoEye-1, was experiencing some mechanical/technical difficulties in one of its modes, and it was very possible that while that mode didn’t account for a large portion of revenue for the company, that the satellite might never be able to recover.

This sent the stock down 15% that day, and it has yet to recover.

In my earnings post, I reiterated how this changed things for GeoEye and our investment in the company, and how I was placing GeoEye on a cautious outlook and “Hold” stance.

Since that time the stock has continued to crater.Wednesday it sold off again on heavy volume, and broke through key support and technical levels that I found too risky to ignore any longer.

Those that have been reading my blog and following me for quite some time know that GeoEye has been a stock that I have recommended for over a year now, and while I sold Wednesday at $20.75, I still eked out a small profit on the company despite its recent turmoil.

I am loathe to turn a small gain into a big loss, and am going to take my medicine like a man and measure GeoEye’s risk/reward more objectively from afar now.

What Will Change My Mind?

It’s quite possible that I will revisit my position and advocate buying shares of GeoEye again in the near future, but it all depends now on the company’s outlook for GeoEye-1, current market conditions, the stock’s relative strength and patterns which look very bearish now, and other factors.

Bottom Line

I advocate you sell your entire GeoEye position right now and wait until further notice from the company as to whether or not GeoEye-1 is reparable, whether or not GeoEye can sustain their high level of revenue if in fact they cannot fix GeoEye-1, and watch the company’s stock price movement relative to the market and its trends that show institutional money quickly vacating the stock.

Accordingly, if you choose to remain invested in GeoEye, note that I am raising my risk rating to my highest level possible, a 10 because of all the risk factors now involved.

New to the GeoEye story?

• Read: my breakdown of GeoEye’s last quarterly conference call and earnings update.
• OR: read my latest buy recommendation for GeoEye.
• OR: listen to my EXCLUSIVE interview with GeoEye’s management team here.

Comments

[User 418199:]

"...whether or not GeoEye can sustain their high level of revenue if in fact they cannot fix GeoEye-1..."
I believe they can. There are several modes of data collection, and they've lost one (temporarily or permanently... who knows). Even if it's permanent, this company has proven they can survive much worse. I believe that their management team will be able to not let this affect (much) revenue generation.

May 22 06:18 AM

[User 418343:]

www.marketwatch.com/st...

Implies the problem may hit revs 5% at most - suggest contacting author or GEOY CEO to verify. If this is correct, a complete sell is probably an over-reaction.

May 22 10:00 AM

[Jim H.:]

I don't think it is an overreaction. The company has not been willing to fully disclose the extent of the problem. I am not aware of any independent analysis of the problem being provided. The CEO is from CREST and doesn't have a space background so his generalizations don't mean too much.

A credible independent technical review of the problem and its impact on their operation will be the only way investors can fairly evaluate what the impact may be on their future revenue stream.

May 22 10:31 AM

[Chris Ferna...:]

I agree with Jim,

Until I see something official, not some CEO interview on the internet somewhere, I maintain that my sell was warranted for all the reasons that I mentioned, today's stock price rise notwithstanding.

I can always reenter the position later, so selling the entire position now and hanging back isn't the worst thing in the world, considering I was still able to get out with a gain in the face of such risk and uncertainty.

I'll put it this way:

GeoEye's risk/reward proposition no longer favors the investor.

That's when I tend to exit a position as I have.

Chris

May 23 04:28 AM

[User 418343:]

IMO, the risk/reward proposition was hugely more unfavorable when the satellite hadn't been fully built/launched - but back then you were recommending GEOY at these prices! This basing your status change from hold to sell on chart-reading seems silly. That said, I've very much enjoyed your columns and wish you the best!

Andrew

May 25 12:52 PM

[China Expert:]

How many investors here realize that GeoEye was once called Orbimage ? Orbimage filled Chapter 11 after a satellite launch failure and then exited bankruptcy as a new company owned by the former high yield bond holders. These $500 million satellites have a finite life and the hopes are that the satellites work beyond their life expectation. Nonetheless, the cash flow generated from these satellites must be saved and then spent for a future satellite. I simply wonder where the shareholders value is being created when all the earnings simply get recycled into another satellite which again has a finite life ! The real winner here is not the shareholder, but the manufactureres of the satellites themselves.


On May 22 06:18 AM User 418199 wrote:

> "...whether or not GeoEye can sustain their high level of revenue
> if in fact they cannot fix GeoEye-1..."
> I believe they can. There are several modes of data collection, and
> they've lost one (temporarily or permanently... who knows). Even
> if it's permanent, this company has proven they can survive much
> worse. I believe that their management team will be able to not let
> this affect (much) revenue generation.

May 26 08:57 AM

[Chris Ferna...:]

Hey Userxxx,

I completely disagree with your assessment that the risk/reward was worse before the satellite was launched.

You see, back then, the stock was LOWER than where it trades at today, and let's say for the sake of argument, that it was trading for about the same price.

Well, even at the same price, with what we know today, the risk/reward has changed and is no longer in our favor based on the knowledge that we possess right now.

I won't back down from my sell of GEOY, and from the looks of the market, DGI is getting a higher valuation right now, with both properties undervalued if you ask me, while at the same time factoring in the higher risk premium on GeoEye.

China: I understand where you are coming from, but within the boom and bust times of the satellite construction cycle, there is a sweet spot in there (the government subsidies notwithstanding), where the company would generate huge amounts of free cash flow sufficient for continuing operations and satellite build out.

With the government subsidies, we can see that things look much brighter, especially within the context of future deals as the US looks to continue to outsource their satellite imagery needs to commercial players.

Chris

May 28 01:08 AM

[eatme:]

your logic makes total sense - they have not disclosed the nature of the problem and its impact in too little detail and secondly, the extent of the damage or if it is repairable or not. without any communication or disclosure, i would not recommend this stock now. I would put a strong sell on this untill they articulate *and* address this issue.

damaged bird in the air

May 29 09:58 PM

[copper candy:]

I believe that GeoEye can weather the storm. There is no better group of professionals out there than the one's that put this whole thing together. When you can launch a satellite, complete four ground stations and get cash flow going with the budget and time line these people had to work with anything is possible...

Jun 02 10:16 PM