Iridium’s stock price offers investors a unique opportunity to profit from a mobile satellite operator whose seasoned management team has positioned it to provide capital appreciation and to start producing significantly increased cash flows after completing the launch of a new constellation of 66 in-orbit spacecraft.
Unlike sectors of the satellite industry that are served by formidable competitors, Iridium Communications Inc. (NASDAQ:IRDM) delivers broadband services, tracks the internet of things (IOT), fulfills the communication needs of the Department of Defense (DoD) and hosts the payloads of others with its in-orbit satellites. Income investors also may find the company’s expected rise in cash flow enough to support the future payment of dividends, the repurchase of shares or even to fund a strategic acquisition.
“We’re optimistic we will remain a growth company,” Matthew Desch, Iridium’s CEO told me recently during an exclusive interview on the same day he was named “Satellite Executive of the Year” by a vote of attendees at the Satellite 2019 Conference in Washington, D.C. “We have a long history in our niche and know what our competition looks like for the next 10 years.”
Iridium CEO Matthew Desch wins the “Satellite Executive of the Year” award
Freedom from Taxes Through 2023 and Capital Expenditures Until 2030
The company’s past financial losses also are expected to give it a break from paying any taxes through 2023, Desch told me.
Completion of the launch of $3 billion Iridium NEXT satellites on February 2, 2019, via Elon Musk-led SpaceX, should allow the satellite operator to enjoy freedom from capital expenditures for about the next 10 years, Desch said. Additional revenue streams with the new generation of satellites will include $1 billion from hosting the payloads of others on its newly deployed satellites and the introduction of Iridium Certus to pursue a $700 million broadband market opportunity and a narrowband business for telephony and IOT, he added.
Iridium NEXT replaced the company’s original constellation by launching 75 satellites into low-Earth orbit on a SpaceX Falcon 9 rocket for eight different missions. SpaceX, created in 2002 by entrepreneur Elon Musk, helped Iridium, of McLean, Virginia, place its new satellites into orbit by using his company’s reusable boosters to halve the launch costs.
Iridium’s business fundamentals include its global coverage, one-of-a-kind network architecture, 1.1 million users and a 9 percent operational earnings before interest, taxes, depreciation and amortization (OEBITDA) compound annual growth rate between 2009 and 2018, Desch said.
Iridium’s Stock Price Offers Further Growth Prospects with DoD Services
Iridium also has served the DoD for more than the past 15 years by providing critical, encrypted communications and its recently expired five-year contract will result in increased revenues when the next five-year pact is finalized.
On April 22, Iridium announced that the Defense Information Systems Agency (DISA) committed to maintain its support of the U.S. Department of Defense (DoD) Enhanced Mobile Satellite Service (EMSS) gateway that uses Iridium services. The contract, valued at $54 million over 4.5 years, includes the Gateway Maintenance and Support Service (GMSS) to ensure the site continues to operate at peak efficiency and in optimal condition for essential DoD missions.
Iridium’s Deep Ties to DoD Grow Further
The gateway provides satellite uplink and downlink communications capabilities for the DoD through the Iridium network. The number of subscribers operating under DISA’s Iridium EMSS program have more than doubled during the five-year period between 2013 and 2018 to 113,000 for a 17.25% compounded annual growth rate.
The surge in growth has occurred under the current flat-rate contract program that provides unlimited voice and data services to U.S. warfighters and other government users, Iridium officials said. One of the services provided by Iridium is the Distributed Tactical Communications System (DTCS), a push-to-talk voice and data service that can be used beyond the line of sight, rather than within the direct line of sight of an in-orbit satellite and a handheld device, for U.S. troops when they are on the move.
The just-ended DoD contract with Iridium averaged $88 million a year and the new one is expected to increase the annual revenue received by Iridium. A temporarily extension of the extending contract is in place to continue the arrangement until a new deal is finalized, Desch said.
Race for Space Sets Up ‘Warfighting Domain’
President Trump has said America is going to be as dominant with its security in space as on Earth, Vice President Mike Pence recently told attendees at the Satellite 2019 conference.
To meet emerging threats, ever since the first days of the Trump administration, America has been rebuilding the military and restoring the arsenal of democracy, Pence said. President Trump, last year, signed the largest investment in U.S. national defense since the Reagan administration, including new resources to enhance the resilience of U.S. national defense systems, Pence said.
To carry out that mission, the United States Space Force soon will become the sixth branch of the U.S. military to safeguard America’s ideals and interests, as well as protect freedom, Pence said.
“America will always seek peace in space and here on Earth,” Pence said.
The United States also is preparing to mark the 50th anniversary of the Apollo 11 moon landing on July 20, 1969.
Iridium NEXT features a next-generation, 66-satellite constellation.
Other Additional Revenue Sources Could Grow Significantly
Iridium Certus is expected to provide the fastest L-band broadband service in the world, which will let the company’s customers use smaller and more cost-effective terminals, Desch said.
In addition, a new aviation communications service offered by Iridium NEXT will assist with tracking airlines. For example, Malaysia Airlines Flight 370, which went missing in 2014 when it veered off course never to be seen or heard from again, could become a rare occurrence in the future with the use of Aireon, a new service supported by Iridium NEXT.
After departing from Kuala Lumpur for Beijing and reaching a cruising altitude of 35,000 feet, or 10,700 meters, the Boeing 777 disappeared with 227 passengers and 12 crew members on board. A search that stretched from the Indian Ocean west of Australia to Central Asia failed to find the lost aircraft. Aireon would be intended to solve the problem of missing aircraft.
Iridium currently has more than 60,000 subscribers for its aviation services by focusing on cockpit communications, not the hotly competitive spectrum used by passengers, Desch said. Iridium helps pilots communicate with air traffic controllers, he added.
Analysts See Rising Prospects and Cash Flows for Iridium, Amid Risks
“As the world moves more information to mobile and wireless networks, the business of building and operating satellite networks stands to benefit greatly for years to come,” said Bryan Perry, who leads the Cash Machine, Premium Income, Hi-Tech Trader, Quick Income Trader and Instant Income Trader investment advisory services.
The completion of the Iridium Next constellation frees the company’s future cash flow to “accelerate earnings growth,” Perry told me.
“While the stock has traded to a new all-time high of $28.24 and is now pulling back to the $25 level with the China trade-related sell-off, it is offering investors an attractive entry point,” Perry said.
Iridium Could Be a Long-Term Holding for Investors
Iridium probably is going to require a longer time horizon before it really “comes into its own,” said Hilary Kramer, a Wall Street money manager who leads the Value Authority, GameChangers, Turbo Trader , High Octane Trader and Inner Circle advisory services for individual investors. “That’s all right.”
Kramer continued, “Investors should have a few long-term positions that can look a little slow or even speculative today but have extremely high-impact potential for three or even four years. That’s this company. It’s not that the operation is inefficient because it isn’t. According to my math, it can break even below a $55 million monthly run rate, which is a lot better than plenty of start-up technology stocks I could name.”
Kramer said she is “thrilled” to see a push toward more focused satellites that will support the Internet Of Things in 2021 and beyond.
“Billions of devices are going to need spectrum and IRDM is making a conscious choice to open new horizons there,” Kramer said. “For now, demand is steady but below that magic $55 million a month, so the company is burning cash.”
Chart courtesy of stockcharts.com
With $275 million in cash holdings right now, Iridium has time to build its business to attain the cash flows it needs for consistent profitability, Kramer added. The company has the potential to “change the world” of communications in the years ahead, she added.
Armand Musey, who heads Summit Ridge Group, a boutique satellite investment consultancy in New York, said the key for Iridium will be to generate sustainable cash flow and growth each year.
“People have made a lot of mistakes in this industry by thinking that the future will be an extrapolation of the past,” Musey told me in a phone interview. “But now technology is changing faster than ever.”
Iridium, now successfully restructured after failing financially in the 1990s, offers investors a chance to ride a rocket of success in the future. However, competition never stands still, and Iridium and its shareholders will need to beware of proposed new low-Earth-orbit rivals roughly 485 miles above the ground that could begin to enter the market in the coming years.
Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is the editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. Follow Paul on Twitter @PaulDykewicz.