This Government Contractor Is Already Flying Above the Stratosphere

 |  Includes: DGI, GEOY
by: Andy Obermueller

What do penguins in Antarctica and a company in Colorado have to do with the profits you can make on the New York Stock Exchange?

More than you might think.

Antarctica's clusters of emperor penguins are spread across the 5.4 million square miles of ice on the frozen continent, which makes counting them a challenge. Previous attempts to enumerate the flock have been either imprecise or cost-prohibitive. Now, a British scientist has been poring over satellite images of the ice to look for penguins the same way an intelligence analyst might look for signs of Osama bin Laden in Afghanistan.

As a matter of fact, the images the scientist is using come from the exact same place the CIA gets its pictures. While most Americans would logically assume these images come from highly classified military spy satellites hundreds of miles above the earth, the fact is the satellites really aren't much of a secret at all and are, as it turns out, owned by private contractors.

The British scientist, Philip Trathan, is using images from the National Geospatial Intelligence Agency. The US government currently spends about $300 million a year, nearly a million dollars a day, buying images from two companies, Digital Globe (NYSE:DGI) and GeoEye (NASDAQ:GEOY).

These satellite images are usually used by CIA or the Department of Defense to guide national security decisions. Typically, of course, these agencies are scanning the world's hot spots for hostile military or terrorist actions, not surveying the polar ice cap for entirely peaceful but seemingly overdressed fowl. These unclassified images, though, are invaluable to scientists, who, until last year, had a better set of maps for Mars than for Antarctica.

The barriers to entry in the satellite imagery business are high: 423 miles above the earth, to be exact. That's where the satellites hover, and a prospective competitor would need a stack of cash almost that high to gain a toehold in the market.

Click to enlargeDigitalGlobe and GeoEye have already used rockets to put a flock of satellites in space. Both companies have ground-based crews to run the satellites and send the right images to the right agencies and to other customers. Most important, however, these companies have a long history with the buyer, Uncle Sam. That's their most important asset.

Consider DigitalGlobe, a company I shared with readers of my premium Government-Driven Investing newsletter a year ago. This $1.3 billion company based in Longmont, Colo., has returned +28.9% in the past 12 months and trades at a strong 33 times earnings. That valuation is supported by the company's strong financial results: Since 2006, it has increased revenue +157.7% while growing its profits a remarkable +415.2%.

The world has not grown any safer in that time period. Intelligence analysts still need all the data they can get to peer into the remote corners of the globe to protect our country. From North Korea to Darfur, from Iran to Venezuela and a dozen other potential flash points around the world, including the volatile Middle East, our national defense agencies have to keep a vigilant watch. Business, alas, is booming for these satellite image providers.

DigitalGlobe's net margin in 2009 was an enviable 16.8%, though it can do better and has: In 2007, for example, it booked an amazing 63.2% net margin, earning $95.8 million on $151.7 million in revenue. There's no reason it can't achieve that kind of earnings again.

One thing that will drive that level of profitability is its growing base of commercial customers. The company's most recent quarterly filing shows its government business grew +9.3% year-over-year, to $62.6 million, while its commercial revenue shot up +46.5%, to $14.5 million.

DigitalGlobe is a vibrant company in a growing space with a very profitable business that is protected by a very wide moat and serves a customer, Uncle Sam, that always pays the bills. DigitalGlobe is a good company for long-term, growth-oriented investors to consider adding to their portfolios.

(In case you were wondering about the penguins, the biologists doing the census estimate the satellite-assisted total will be in the neighborhood of 200,000 and 400,000 pairs.)

Disclosure: No positions