At the beginning of the third quarter each year, the Washington based Satellite Industry Association releases its State of the Satellite Industry Report – an in depth analysis of the various components that make up the industry. In its 2015 report the association reported that 2014 global revenues of the satellite sector totaled $203 billion, a 4% increase year over year from 2013 and a 130% increase on the $89 billion recorded a decade earlier. The growth outpaced both that of the global and the US economies, and trends suggest this growth will continue across the next ten years. There are a number of options when it comes to picking up an exposure to the space. Here are four stocks that look well positioned to take advantage of the growth. With the target of a balanced satellite portfolio, each is from a different subsector of the industry and each offers a different risk reward profile.
Iridium Communications Inc (NASDAQ:IRDM)
There are four or five key players in the satellite operations space, and Iridium is one of the most attractive given current conditions. The company has a network of 66 satellites in low earth orbit, which combine to cover the entire planet, meaning users of its satellite network can access at least one satellite from anywhere, anytime. Looking at financials, Iridium generated at least $100 million revenues in each of the last three quarters (end Jun 30, Sep 30 and Dec 31 2015) and posted a net income of $22.1 million and $25.6 million during the first two of these quarters. Net loss for the final quarter of 2015 came in at $72.2 million, but this shift from black to red came about as a result of some large expansion projects; projects that serve to underpin the company’s potential going forward.
The first is called Iridium Certus. It’s a global satellite broadband network that seeks to mimic the speed of land based broadband systems, with a target market of aviation and maritime applications. At present, the options are relatively limited when it comes to satellite broadband, and even domestic variations (i.e. rural broadband subscriptions) are expensive and slow. The technology behind Certus allows for speeds of up to 1.4 megabits per second, which brings it in line with ground based systems, and Iridium expects this advance to expand the satellite broadband sector’s total annual revenues to $5 billion across the next decade.
The second is a constellation satellite network called Iridium NEXT that will launch as an update and eventual replacement to the current network. It’s suffered some setbacks and delays as a result of third party manufacturing issues (Thales Alenia is building the satellites out of Europe), but management stated in the latest earnings call that they expect launch before the end of 2016. The new network will further increase the speed potential of satellite broadband, and build on the accuracy and efficiency of currently available asset tracking systems.
As both of these technologies roll out, Iridium should attract a large portion of the growing satellite broadband and mobile tracking/communication space. One thing worth noting, which needs to be considered before an Iridium investment, is that that the Certus technology is reliant (from an optimization perspective) on the NEXT rollout. the company has delayed NEXT a number of times, and while it claims to be set for launch this year, nothing is guaranteed.
Eutelsat Communications (PA:ETL)
While Iridium is an operator and network distributor in the satellite space, Eutelsat is a manufacturer of the hardware that underpins the networks. The company generated €744 million revenues ($845 million) during the first half of its 2015/2016 reporting period, which represented a 7.1% increase over the same period a year earlier. It benefited from currency fluctuation, however, so real term growth was 1.5%. Net income for Q3 and Q4 2015, came in at $94 million for both quarters. The company also has a strong cash position, with $564 million cash and equivalents at December 31 2015 – no change on the figure reported a quarter earlier.
While it does focus on broadband and satellite phones, the company’s primary market is satellite televisions. It just hit 6,000 television channels beamed through its network across a host of pay per view and free to view networks across Europe, Africa and the Middle East, and is seeking the expansion of this channel base to incorporate a further 2,000 before the end of 2017.
The driver behind Eutelsat’s inclusion on this list is its focus on emerging markets. Satellite driven video, and in particular high definition video, is taking off in countries such as Brazil, sub Saharan Africa and MENA nations, and the company is manufacturing and deploying satellites that will allow for HD network deployment in these regions.
There is a risk associated with the focus on these regions, of course. Political and social instability could hamper growth, and in turn, limit Eutelsat’s potential for expansion its its target geos. If the company can navigate this instability effectively, however, there’s some real upside potential in an exposure ahead of the industry expansion expected over the next decade.
Hexcel Corporation (NYSE:HXL)
This one’s a little less direct than the manufacturers and network operators already discussed, but it’s a valid exposure nonetheless. The company produces what are called composites, which are materials designed to be light but strong – essential features on a spacecraft. It is the company that built the support footing for the Apollo II lander craft, but more recently, it has become an approved supplier to Elon Musk’s SpaceX. Hexcel produces and supplies SpaceX with a number of the key components of its satellite launching rockets. SpaceX is poised to become an industry leader in satellite launches, and as the industry expands, it will need to build out its launch fleet. With an expanded fleet should come an increased demand for products from suppliers like Hexcel, and in turn, should inflate the latter’s revenues across the next decade.
Looking at the numbers, Hexcel generated $1.9 billion revenues during 2015 for a net income of $237.2 million. It’s down 22% on 2015 highs against a backdrop of wider market strength in the aerospace sector, making it one of the more attractive allocations from a value standpoint as we head into the second quarter of 2016.
Orbital Tracking Corp (OBB:TRKK)
This one is a retail focus addition to the list. Orbital’s business model involves the large scale purchase of airtime units from the major satellite network operators (of which the already mentioned Iridium is one) and breaks these units into smaller chunks for resale to satellite phone owners. Additionally, it develops and retails its own brand of satellite phones and satellite asset tracking systems. This focus, the mobile satellite services industry, is worth circa $4 billion as things stand, and analysts expect this space to expand to $5.6 billion annual revenues before the close of the decade.
The company has low operational costs as the majority of its retail flows through online storefronts, and has the backing of some household name investors, including billionaire healthcare entrepreneur Dr. Philip Frost.
Given its current market capitalization, and its financial position, it’s a much riskier allocation than some of the large caps mentioned in this list. This said, as part of a broad satellite portfolio it offers plenty of upside potential if it can carve out a sizeable market penetration.