Iridium Communications Inc. (NASDAQ:IRDM) recently dropped 24 percent over a period of two days after a poor earnings report, and now looks to offer value.
Iridium earnings growth
Before the decline, Iridium Communications Inc. (NASDAQ:IRDM) was only trading at a TTM P/E ratio of 10, despite notching up earnings growth of 170 percent during the last three years.
Now trading at a TTM earnings multiple of 7.8, the company looks cheap both for its historic earnings growth and compared to the value of its assets – Iridium is currently trading at a price-to-book ratio of 0.6, (net-asset-value of $11.80 per share or, $10.60 excluding intangibles).
Having said that, one of the key points to take away from Iridium’s second quarter results, (which missed both on revenues and earnings by $4.6 million and $0.05 respectively) is the company’s next stage of development, Iridium NEXT, a capital project that is adding a lot of uncertainty to the mix.
Iridium’s NEXT satelite
NEXT is Iridium Communications Inc. (NASDAQ:IRDM)’s next-generation satellite constellation, which, when completed will be linked with an updated ground network infrastructure. Nonetheless, NEXT is still 18 months away from launch and costs are building. Capital spending on NEXT-related assets has cost the company $150 million so far this year, according to CAPEX outflows, exceeding cash from operating activities by $50 million. Unfortunately, this is set to continue as NEXT is not set for its first launch until early 2015 and costs are set to rise significantly into the launch date.
Management has stated that to get NEXT fully operational, an additional $2 billion in finance will need to be raised, that is on top of the company’s existing net debt position of $575 million. Moreover, NEXT is not expected to be cash generative until five years from now.
Iridium misses revenues
All of this adds together to form a very gloomy picture. Furthermore, and what was potentially more important than the miss on revenues for the second quarter, was the company’s revision of its long-rang outlook from now until 2016. According to management, costs are rising rapidly and net leverage at year end 2015, is expected to be 6x, revised upwards from the expected 5x leverage at the end of 2015 that was forecast at the beginning of this year. The company expects to deleverage at a rate of 0.5 to 1 times operational EBITDA per year starting 2016.
Unfortunately, management was also forced to revise long-range earnings forecasts down and now expects service revenue to grow between 8%-10% per year until 2015, previous guidance was for growth of 9%-11% per annum. Operational EBITDA margins were also revised down to 55% from the 60% forecast at the beginning of the year.
Forecast for operational EBITDA
Iridium Communications Inc. (NASDAQ:IRDM) currently forecasts that operational EBITDA will be $210 million for 2013, factor in growth of 10% per annum (at the high end of estimates) until 2016, when deleveraging is expected to begin and it can be assumed that Iridium will achieve an operational EBITDA of around $280 million during 2016. If de-leveraging is set to occur at 0.5 and 1 times operational EBITDA per annum after 2016, with more than $2.5 billion in debt it is likely to take Iridium more than a decade to pay off its loans, excluding any other negative or positive surprises that may occur during the period.
Overall, Iridium Communications Inc. (NASDAQ:IRDM) may look like a value opportunity right now after the recent sell-off, but the rapidly rising debt could quickly erase any discount to book value as liabilities swallow up assets. With the future so uncertain and earnings forecasts being revised to the downside, Iridium could be too much of a risk to take on.