I Went From Short To Neutral On Iridium

| About: Iridium Communications (IRDM)

Summary

Previously I held a short position in Iridium.

However, I am always open to reasonable arguments.

These arguments swayed me to neutral, even though many of the elements of my short thesis remain in place.

I have published two recent articles ("Iridium Is About To Stop Paying Dividends," "New Thesis Regarding The SpaceX Explosion Impacts Iridium") on Iridium (NASDAQ:IRDM), where I stated I was short the name and talked about the reasons for being so. I actually expect the theses explained in those two articles to come to fruition, namely:

  • Iridium will indeed stop paying dividends on its preferred stock.
  • Iridium might see further launch delays for its Iridium NEXT constellation.

However, me being negative on Iridium had to do with a broader thesis, especially in what concerned Iridium's ability to launch its Iridium NEXT constellation in time to avoid service disruption.

The disruption could come from either failing satellites or having to decommission the existing constellation. Additionally, Iridium already trades at a valuation, which assumes a near-perfect future, it counts on cash inflows that might never happen, and it has restructuring risk if it cannot get further financing down the road.

All of that said, the main reason was the risk of service disruption. Well, as I've often said, I am open to valid arguments from those holding the opposite opinion. In this case, the arguments swayed me. This was for two reasons.

The First Reason - The Deadline Might Move

As member Bing Bong stated in a comment to my last article, Iridium addressed the deadline as follows in its Q1 2016 earnings call:

Andrew Degasperi:

First, there seems to be some confusion as the timeline on de-orbiting satellites you're your current constellation. Can you comment on that?

Matt Desch:

That obviously comes from that same piece and it's surprised a heck out of us. No type of the orbit mandate from the FCC exists. I think that was conflated as best as I can do is taking from the fact that our existing license was extended back in 2010 or 2012 to an arbitrate date of January 31 2018 with the FCC. And because we thought that was a reasonable date to just pick at that time and still is a good date but really we want to extend that data further. We just put some paper work and that's a normal routine operation for a satellite operator. And given everywhere we're at, we're going to do that. So that FCC license that we have has absolutely nothing to do with any kind of the orbit or actually any kind of operational aspects of our existing network which we control independently. And we have lots of fuel and frankly to go a number of years beyond even after 2018 if we wanted to with those satellites but really have no desire or interest to so. When the appropriate time comes that we choose to de-orbit those, we'll choose to de-orbit those on our time schedule. And we'll try to by the way de-orbit those quite quickly because that's just business practice and the right thing any satellite operator should do once they're finished with their assets in space, so absolutely no truth or relevance to that statement that was made in some forums.

I was aware that the FCC had already denied other changes to the de-orbit plan. However, upon further research, I could not put away the notion that if denying an extension would put the service into danger, the FCC wouldn't allow it. I thus now go from the working principle that under such circumstances, the FCC is more likely to allow than not.

Furthermore, Iridium has already asked for such an extension, so it being granted could constitute a positive catalyst for the stock. This is a good reason to go neutral.

The Second Reason - To Keep The Existing Constellation Going Does Not Require All Launches To Happen

Iridium NEXT is backwards compatible with the existing constellation. Indeed, it is to be deployed, as the satellites in the existing constellation are de-orbited. Furthermore, there's the chance that old satellites will remain in place to be used as spares to Iridium NEXT.

What this means is that just achieving 1-2-3 launches would likely be enough to keep the existing constellation working even in the face of some de-orbiting requirements (for satellites which already need to go to the 600km orbit if they are to de-orbit in time) as well as further failures. This also affects the core of my thesis.

Conclusion

Upon further analysis and what I consider valid arguments from long holders, I changed my opinion (and position) from short to neutral.

This is not to say Iridium will be a good long. Its valuation continues to reflect a best-case scenario. It will indeed stop paying dividends. It might suffer further delays. It might see more business erosion. It might need to restructure if it can't find new financing. Government business won't grow any more until 2018, and during 2018, the renegotiation terms might be worse because of the MOUS constellation.

However, losing the central piece of my short thesis means that I lose the amount of certainty I had. It becomes a worse short, and thus, I closed it (both personally, and in my Idea Generator subscription service).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.