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When evaluating stocks, many investors consider the dividend yield, but less time is given to the term "earnings yield," although it is an easy calculation to make. For example, if a stock is trading at $10 and it earns $1 per share each year, the earnings yield is 10%. The S&P 500 Index (SPY) currently trades for about 16 times earnings, which means that the stock market in general is offering an earnings yield of about 6.25%. That is not a lot, but in a low rate world, it is enough to beat out bonds in many cases. A high-flying stock like Tesla (TSLA) which trades for about $140, and with earnings estimates of about $1.50 per share for 2014, offers an earnings yield of just over 1%.

However, for me to get interested in and accept the risks of any investment, I want to get more than what current bond yields offer and more than what the average stock offers in terms of earnings yield. In order to find higher yields, it often requires going for lesser-known stocks that might be overlooked and therefore undervalued by the market. While many investors spend time chasing "high-flyers" that sell for rich valuations, investors like Warren Buffett tend to use common sense and often buy out-of-favor stocks that offer value, low price to earnings ratios, and strong earnings yields.

Value investors like Warren Buffett also typically like to buy stocks that are trading below book value, and he prefers to buy companies with a "wide moat" which means it is harder for new competitors to enter the market. One undervalued company that fits this profile is Iridium Communications, Inc. (IRDM). Here's why this stock appears to offer Warren Buffet-like values for stock picking:

As "Wide Moat Investing" points out, Warren Buffet once told his investors:

"I don't want an easy business for competitors. I want a business with a moat around it. I want a very valuable castle in the middle and then I want a duke who is in charge of that castle to be very honest and hardworking and able. Then I want a moat around that castle."

Iridium's Wide Moat:

Iridium operates a satellite communications network, which provides global phone and data services to a wide-range of industries including maritime, military, aviation, emergency/rescue, and governments. The Iridium network was a project that was originally developed by Motorola, which cost billions of dollars. However, Iridium now has patents and other technologies that allow it to maintain its existing network and launch new satellites when needed for a fraction of the original development costs. These patents, systems and technologies keep Iridium as a low cost provider of satellite communications. The initial development costs create a "wide moat" because it would be very expensive for a new competitor to enter this market.

As famed value investors like Warren Buffett and Benjamin Graham has said: "Price is what you pay. Value is what you get."

Iridium's Shares Offer Value:

Analysts estimate that Iridium will earn about 74 cents per share in 2013 and 90 cents per share in 2014. This means the stock is trading for just about 6 times forward earnings. If the company earns 90 cents per share in 2014, and trades for nearly $6, this generates an earnings yield of roughly 15%. Even based on 2013 earnings estimates, the shares offer an earnings yield of about 13%, which is about twice the rate offered by the average stock in the S&P 500 Index.

Iridium shares also appear undervalued when considering book value, which is about $12 per share. The company has roughly $270 million in cash on the balance sheet (which is equivalent to $3.53 per share in cash) and about $936 million in debt, which indicates this company has a solid balance sheet. Famed hedge fund manager Whitney Tilson who has been known for making value investments, is also bullish on Iridium and stated: "I believe this is an excellent company and the stock is significantly undervalued."

Growth Potential and Additional "Hidden" Value:

Iridium is launching a satellite-based aviation tracking network called "Aireon" which could significantly add to revenues in 2014. This division is expected to generate significant data fees each year from airlines, and other private jets and planes as well as a potential $200 million in one-time hosting fees. Glenn Tongue of Deerhaven Capital states that Aireon alone could be worth $4 per share to Iridium shareholders. In a detailed report, he makes the case for Iridium shares to be worth over $30 per share in about three years, based on multiple expansion in the price to earnings ratio and growth prospects from Aireon. This new global service will be the first of its kind and will reduce expenses for airlines, and increase safety. Aireon has already signed a long-term data services contract with its first customer, "NAV Canada" as well as signed a $42 million data processing contract with ITT Exelis.

Warren Buffet has famously said: "Be fearful when others are greedy and greedy when others are fearful."

Thanks to an earnings miss a few weeks ago, wherein Iridium earned $16.6 million or 19 cents per share in the third quarter as opposed to $17.8 million or 23 cents per share in the same period of 2012, the stock has been weak and punished the shorts. The share price decline is way overdone for a company that is estimated to earn nearly $1 in 2014 and actually did earn 19 cents in a single quarter. Because of this price decline, it seems like the perfect time to get "greedy when others are fearful" and buy the stock. The potential downside risks of competitive threats seems limited since it is cost-prohibitive to launch satellites unless you have the technology that Iridium has developed.

The potential expense of replacing satellites seems overblown as explained in this article since Iridium has a special manufacturing system, which allows it to build new satellites for far less than what most companies spend. That is another reason why it makes sense for the company to exploit this technology with Aireon, especially since Iridium has a joint-venture partner to help fund this project. Also, replacing satellites is not something that happens often as a satellite can remain functional in orbit for decades, so these expenses can be amortized over many years. As noted above, Iridium has about $270 million in cash. However, it also has nearly $1 billion available on its credit line, which gives this company considerable resources and liquidity to pursue growth.

Short-term Upside Potential:

With this stock trading near 52-week lows, it is a candidate for tax-loss selling. However, it also was trading around this level at this time last year (as the company coincidentally had a small Q3 earnings miss in 2013 as well) and as the tax-loss selling pressure faded in the final days of 2012, the stock surged (also presumably because some shorts covered). Iridium shares went from as low as $5.60 on December 21st, to over $7, by January 2, 2013. If history repeats, this stock could be poised for plenty of short-term upside potential based on the end of tax-loss selling and a short-covering rally. The fields below are from Yahoo Finance and show (data from around this same time last year): Date, Opening Price, High (for the day), Low, Closing Price, Volume and Adjusted Closing Price.

Jan 10, 20137.067.257.017.131,094,4007.13
Jan 9, 20136.807.206.767.011,315,3007.01
Jan 8, 20136.946.946.696.76645,2006.76
Jan 7, 20136.906.966.846.93630,3006.93
Jan 4, 20136.906.976.856.86478,6006.86
Jan 3, 20136.647.056.646.86854,1006.86
Jan 2, 20137.097.166.636.671,434,7006.67
Dec 31, 20126.346.836.306.721,261,2006.72
Dec 28, 20126.106.386.056.29706,2006.29
Dec 27, 20125.926.075.916.04399,4006.04
Dec 26, 20125.815.935.785.93272,0005.93
Dec 24, 20125.755.805.705.78166,1005.78
Dec 21, 20125.865.865.605.72752,2005.72

Some shorts that have made gains on this stock this year might be waiting until after January 1, in order to cover. By doing this, they can postpone taxes on the gains until next year. However, as was the case last year, this might contribute to a potential short-covering rally in early January, which this price and volume history data appears to support.

Significant Longer-Term Upside Potential:

With Iridium shares offering an earnings yield of around 15%, and having the "wide-moat" and value characteristics that are so often embraced by investors like Warren Buffett, it seems like an ideal buy at current levels. The new Aireon division could add growth potential that is not yet priced into the stock and multiple expansion could also be a significant upside catalyst. Iridium has a $8.50 price target by one analyst firm who sees "multiple growth drivers ahead." That implies substantial longer-term upside of about 50%, with Iridium trading at just about $5.63 per share.

Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Source: Iridium Communications: A $5 'Buffett-Like' Value Stock With A 15% Earnings Yield