Before Friday's Earnings, GeoEye Presents an Immediate Buy Opportunity

I was going to wait before recommending my next addition to the portfolio until I had finished my full research report, but seeing where things stand today, the valuation combined with the business prospects make this one too juicy to pass up at today’s price.

The company is GeoEye, Inc. (GEOY), a small/medium-sized business that provides space-based, and aerial imagery and geospatial information through high-resolution and low-resolution imagery, imagery-derived products, and image processing services to customers worldwide.

GeoEye is the leader in a niche field with high barriers to entry, has nice growth prospects ahead of it, and several upcoming catalysts that I believe put us in a highly advantageous position.

Normally I would wait until I have finished my full research report before sending out a formal recommendation of a company that I have been following and intended to recommend, but the current share price and valuation and the company’s strong niche and leadership within their field, lead me to make this recommendation now.

What follows is a brief description of the company, market, risks, and catalysts.

Geospatial and Aerial Imagery Solutions

Look, up in the sky, it’s a bird, it’s a plane, it’s…ok, sorry about that.

Seriously though, have you ever wondered where commercial and government agencies get all their satellite imagery from?

What about some of those cool images that you see on certain websites, or news stories that sometimes show a picture from outer space showing large scale damage from fires, hurricanes or tornados?

And what about scientists that rely on theses type of images for studies ranging from fishing data, to deforestation and even urban planning?

Well, you’ll be surprised to know that there is indeed a company out there that provides these images and data on a commercial level to not just our own government, but also to commercial clients and other governments all over the world.

The name of this company is of course, the aforementioned GeoEye, Inc. (Nasdaq: GEOY).

The global space-based and aerial imagery that GeoEye produces is used by all sorts of companies and government agencies from intelligence agencies, to researchers and even oil and fishing companies that need detailed aerial and geospatial images to perform basic tasks like surveillance, data mining and research to determine the feasibility of certain projects or tasks.

In fact, to get an idea of the types of images GeoEye provides, take a look at their image gallery on their website. Some of these images are truly impressive.

Tons of Customers Span The Globe

GeoEye operates two Earth-imaging satellites, IKONOS and OrbView-2, with a third new satellite scheduled to launch later this summer, GeoEye-1.

They also operate two mapping aircraft, possess an international network of regional satellite receiving ground stations and have advanced geospatial imagery processing capabilities as well as proprietary software and solutions that allow them to interpolate and export their image data in ways that best suit their client’s needs.

Satellite imagery and geospatial and mapping capabilities are used for a broad spectrum of applications both foreign and domestic and include:

• Intelligence Gathering
• National Security
• Homeland Defense
• Precision Mapping Capabilities
• Oil and Gas Exploration
• Mining Exploration
• Environmental Monitoring
• Insurance and Risk Management
• Urban Planning/Assessment
• Construction Planning
• Emergency Preparedness
• National Disaster Assessment

This kind of data can be used for a whole slew of applications such as monitoring borders, gathering intelligence on potential conflicts, planning air, ground and naval missions, deploying resources, and to assess battle damage.

GeoEye’s key customers include both U.S. and international resellers and commercial customers, in addition to U.S and foreign governments. This list includes:

• U.S. Defense Department
• U.S. Intelligence Department
• Law Enforcement Agencies
• Department of Agriculture
• Department of Commerce
• Department of Interior
• Department of State
• Department of Transportation
• Department of Treasury
• EPA, FEMA, NASA
• International Defense and Governments
• Commercial Customers (Telecommunications, Oil and Gas, Airline industry, other utilities, etc.)

International customers represent a substantial portion of GeoEye’s revenue.

Since most countries don’t have satellite collection programs as sophisticated as those in the United States, they tend to rely on limited aerial imagery collection for border surveillance and related national defense programs or purchase imagery from reliable existing commercial satellites, like those from GeoEye.

In addition, the U.S. Government is GeoEye’s largest single customer.

As we can see from this less-than-exhaustive list of applications and customers that use GeoEye’s products and services, the sky’s the limit, no pun intended, in terms of future potential applications for GeoEye and their customer base, as well as current applications and usage.

Why buy now?

1) Valuation

I’ll start with GeoEye’s cheap valuation.

According to my research and calculations, GeoEye trades at about 1/2 where it should be, with an easy argument that it could be MUCH higher than that.

Here are some quick hits:

• Discounted Cash Flow (DCF): GeoEye should be at least DOUBLE from where it sits today using even anemic assumptions.
• Enterprise Value to EBITDA: (EV/EBITDA): Using this metric, GeoEye is at least 145% undervalued.
• Trailing Price to Earnings (P/E): Using this metric, GeoEye is at least 125% undervalued.
• Forward Price to Earnings (P/E): Using this metric, GeoEye is at least 60% undervalued.
• Price to Forward Earnings to Growth (PEG): Using this metric, GeoEye is at least 80% undervalued.

Some quick notes about valuation:

These valuation metrics are based on GeoEye’s competitive sphere and industry, and did NOT include GeoEye’s chief and only rival in this space, DigitalGlobe (NYSE: DGI) that just filed to go public a few weeks ago.

The reason I cannot use any metrics involving DigitalGlobe is because they have not declared an offering price or size, and therefore, there are no valuation parameters that can be drawn until they make their IPO effective, choose a price, and declare the number of shares outstanding, and then we’ll be able to do an apples to apples comparison.

In my upcoming research report, I do a detailed analysis between DigitalGlobe and GeoEye with the various metrics that are possible via their IPO Prospectus, which shows that GeoEye is still the superior company.

2) Upcoming Catalysts

The timing for my buy recommendation is based on the fact that GeoEye has many upcoming catalysts that will more than likely, influence the stock in a positive way.

I would usually wait until my full research report was available before fully recommending a stock, but in this case, I believe that timing is of the essence.

While I don’t like to “time” the stock market or individual stocks, these types of small and underfollowed companies usually need catalysts to move because they are largely unknown in the marketplace, don’t get as much press coverage, and therefore, rely on catalysts to initiate price movement in their stocks, and bring attention to their companies.

Here are some of the catalysts that I think are crucial to GeoEye in the next few weeks/months:

• Earnings Release Friday, May 9th: GeoEye will be releasing their earnings for Q1/2008 while the market is open on Friday. I expect these earnings to be in-line with past quarters because GeoEye’s latest revenue driver, the GeoEye-1 satellite has not yet been launched, but nonetheless, I expect earnings to be decent to pretty good.
• DigitalGlobe IPO: As I previously mentioned, DigitalGlobe has filed to go public, and can actually be brought to market in as little as a few weeks, to as much as 12 months. When and if they do finally price their shares and decide on their shares outstanding structure, it will bring more visibility to the sector, and to GeoEye, as I believe that GeoEye will rise with the pricing of DigitalGlobe’s IPO offering.
• Launch of GeoEye-1: Part of the reason we are getting GeoEye’s shares at a discount (off from about $35 earlier in the year), is because the launch of their next satellite GeoEye-1 has taken longer than expected, but is nonetheless expected to launch in August, 2008. It takes 4 years from conception, to building, to launch of a satellite, so this is a HUGE deal. Once this satellite launches successfully, GeoEye will realize increased revenues, and Wall Street will breath a sigh of relief that the satellite launched without incident.

Potential Risks

Here’s a VERY brief and quick rundown of some of the possible risks with investing in GeoEye both now, and for the longer term.

I will detail in depth all possible risks in my upcoming research report.

• Earnings disappoint: This is a very short term risk. As you know, all my selections are meant to be made for long term purchases. So while there might be short term volatility in the stock, in our favor I will argue, realize that this can work the other way too, but longer term, we’ll be fine.
• GeoEye-1 Launch Problems: If the launch of GeoEye-1 is further delayed, or if it fails to launch, or has some other complications after launch, GeoEye’s stock will plummet.
• DigitalGlobe IPO: If DigitalGlobe prices their offering BELOW GeoEye’s valuation, or if DigitalGlobe fails to come public, this potential catalyst could become a negative one quickly.
• Other Business-Related Risks: Things like one of GeoEye’s current satellites failing or becoming inoperable (as has happened in the past), the loss of significant contracts from the US Government, increased competition from foreign companies launching their own satellites, accounting irregularities in addition to the ones GeoEye already found (more below), and many others.

This list is by no means exhaustive, so please don’t take it as such! These are just the primary short- and intermediate-term risks that will affect us now.

You can read the rest of the risk factors and what I think their impact could be on GeoEye in my upcoming research report.

Bottom Line: High Risk, High Reward

This is one of those companies and stocks that makes me rub my hands together quickly when thinking about…you know, like when you are getting ready to eat a good meal, and right before someone says “dig in”?

At any rate, with our portfolio being sufficiently built up to this point, I feel a little bit of short to intermediate term risk is warranted, and I can think of no other “sure thing” than GeoEye.

The stock has been unfairly punished lately because of the delay in launching of their latest satellite, GeoEye-1 (which is an expected watershed moment), as well as GeoEye filing their last 10-K late because they had to recalculate certain tax loss carry-forwards that led to a restatement of their earnings per share last year in a negative way.

The tax loss carry-forward doesn’t bother me at all, it’s a simple accounting presumption that GeoEye was mistaken about, and had to later add to their earnings release from Q3/2007 to cover taxes that they didn’t feel they owed at the time.

Because of these 2 events, the stock has fallen from $35 earlier this year to about the $25 level where it sits now.

I have been waiting and watching GeoEye for a better entry point to assure us of the best possible risk/reward proposition.

I believe we’ve reached that level, and it’s time to start scaling in at today’s prices with additional purchases if GeoEye dips any further.

As my detailed and thorough analysis will show, GeoEye could easily see its shares double from this point forward within 1 year’s time, and just be trading in-line with its “fair” value.

Like one of GeoEye’s high-flying satellites that most don’t even know about, GeoEye’s stock also flies “under the radar” of analysts and Wall Street, but I expect that to change rather quickly.

Don’t wait until after that has happened, start your position now!

Comments

[Daryan]

Any thoughts on the recent price action in the stock...it's horrendous considering there is no news or filings to speak of. Also, they have warrants that trade geoyw.ob, 10 exercise price in 2010.

[Gramps]

At present this stock has no support level. Also, me thinks DigitalGlobe is a better company since it is leaner, meaner, and supplies imagery to Google, hence, a better foothold in the commercial sector. The stock may have slipped in recent weeks based solely on the IPO news.

[BorisinCincy]

Well "immediate buy opportunity" it wasn't. LOL

Glad I didn't read this till now. I do believe the share price will jump after a sucessful launch......hopefully in August. Since they will also do another quarterly filing before the launch, by a few days, it should get interesting in the early fall.