Echostar: A Gift From The Market Gods

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Includes: SATS
by: 1 Main Capital
Summary

Echostar (SATS) is a gift from the market gods.

Forced selling and lack of liquidity have caused the stock to fall significantly despite strong fundamentals.

The company is now valued by the market at 4x EBITDA, with an unlevered balance sheet.

In addition to the low valuation, SATS has several hidden assets with significant value relative to the company's market cap.

SATS provides broadband internet to consumers, which is an economically insensitive service with a diversified customer base and low maintenance capex.

When the company spun out of Dish Network in 2007, it sold set-top boxes to Dish and owned/operated several Dish satellites. Since then, the company has reinvented itself from a declining equipment supplier with significant customer concentration into the rapidly growing, broadband internet provider that it is today.

HughesNet, which is Echostar's core business (>70% of EBITDA), uses satellites that it designs and manufactures to provide broadband internet to rural/undeserved areas that typically have no other broadband alternative. Since launching a new satellite in December 2016, this segment has significantly accelerated its growth rate, with YTD subscriber and EBITDA growth of 20% and 30%, respectively. The company expects to keep adding subs and growing this segment at a healthy clip going forward.

Despite these improving fundamentals, the company has de-rated to under 4x EBITDA and a mid-teens maintenance unlevered FCF yield. At least some part of this de-rating was driven by two hedge funds shutting down in the last 6 months that owned a combined 2 million shares at their recent peak (Fund 1 and its 13F; Fund 2 13F). This pressure was further exacerbated by what appears to be significant forced selling from the company's largest mutual fund holder that owned 11.5 million shares as of June 30th, given its under-performance over the last 1, 3 and 5 years (Mutual Fund 13F and its fund performance A and B).

This past Friday, the company finally stepped in and bought back ~850k shares, showing that they believe the stock is undervalued (8k). Going forward, the selling pressure should hopefully abate and fundamentals should continue improving both of which could drive meaningful upside to the stock.

Additionally, many management teams in the industry have mentioned that consolidation is needed and SATS is well positioned to create shareholder value through acquisitions given its clean balance sheet and large cash position.

ESS, Echostar's legacy segment (<30% of EBITDA), owns and manages a fleet of satellites for Dish Network and other enterprise/government customers. The company's overall Dish concentration has declined from almost 100% of revenue in 2010 to less than 20% today. Importantly EBITDA from this segment is stable. On its most recent earnings call, management has confirmed that their revenue from Dish is not dependent on the number of Dish subscribers: "It's got nothing to do with the numbers of subscribers. There's no variables component to it. It's really just the life of the satellite and the terms of the lease".

Lastly, SATS owns two hidden assets of significant value that are not currently being reflected in the EBITDA generation of the company. The first is its 49% ownership stake in Dish Mexico, Mexico's #2 pay-tv company which has ~4 million subscribers. The second is its European spectrum position that the company is currently in the process of re-purposing for terrestrial wireless use and would have significant value once re-purposed. While the timing for monetizing these investments is unclear, at current prices we are getting them for free.

In summary, SATS is a high quality business that is too cheap, largely due to forced selling. Usually, when stocks are down a lot there is a fundamental reason that makes it difficult for someone new to the story to quickly figure out whether the situation is interesting. This is a gift from the market gods. Happy (early) holidays to all.

Risks: The biggest risk to the thesis is that SATS makes a bad acquisition with its large cash balance - something that is unlikely given its chairman is Charlie Ergen who is a smart capital allocator and has a significant economic ownership interest in the company.

Disclosure: I am/we are long SATS. 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.