Don't show againNews Bites for Thursday December 11th: GeoEye Wins Large Contract, AAR Earnings Preview
I wanted to update you on 2 of the companies in the PeakStocks.com portfolio that have had developments in the last few days that you should be aware of.
This includes:
- GeoEye Inc. (NASDAQ: GEOY), which announced on Wednesday December 10th after the market closed that they have secured a very important Service Level Agreement (SLA) with the National Geospatial-Intelligence Agency (NGA) and
- AAR, Corp. (NYSE: AIR), which is set to release their Q2/2009 earnings early next week.
Let’s get right to it.
New to the GeoEye story?
GeoEye 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.
This capability benefits a broad array of industries including national defense and intelligence, online mapping, state and local governments, environmental monitoring and land use management, oil and gas, utilities, disaster management, insurance and others.
Want more?
- Read my initial buy recommendation here.
- OR: listen to my EXCLUSIVE interview with GeoEye’s management team here.
- OR: Read my latest update on the company’s Q3/2008 earnings release and conference call here.
GeoEye Lands New Deal With NGA
Service level agreement increases and steadies revenue flow
GeoEye announced today after the market closed that they have finally secured the much talked about Service Level Agreement (SLA) with the National Geospatial-Intelligence Agency (NGA) that would help them smooth out order flow and revenue and allow them to better utilize their latest and greatest satellite, GeoEye-1.
GeoEye will provide satellite imagery products to the NGA under this agreement beginning with the commencement of commercial operations of its GeoEye-1 satellite.
GeoEye-1 is undergoing final calibration and alignments and GeoEye expects to start selling GeoEye-1 products “soon”, but wouldn’t actually specify a target date for that to happen.
The SLA also includes imagery from GeoEye’s IKONOS satellite.
From what I understand, this imagery SLA is a baseline figure and amount, and the NGA is likely to order additional imagery on top of this SLA, in addition to GeoEye garnering revenue from all its other customers including Google (NASDAQ: GOOG), and foreign governments that account for about 35-45% of revenue.
The value of the SLA is $12.5 million per month for a period of one year, which would equal about $150 million over a 12 month period, or greater than all of GeoEye’s sales the entire year of 2008.
Again, this value doesn’t even include additional sales from the NGA, retail customers and foreign governments which would push GeoEye’s revenues much higher (analysts are expecting $255 million in 2009).
The SLA takes affect December 15th, which would mean that GeoEye and/or the NGA expect GeoEye-1’s imagery to be approved sometime around then as well, although they aren’t committing to anything.
So what does this mean?
Essentially what this does is create a smoother and more predictable stream of revenue for GeoEye which has long been a problem for them from quarter to quarter.
This will also increase their margins and profitability as they will be able to assign certain predictable amounts of manpower to the tasks at hand, know when and where certain jobs need to be accomplished and better utilize their infrastructure.
For the NGA, this agreement also provides them with a predictable stream of new imagery that they can count on getting BEFORE GeoEye goes off and sells additional imagery, or takes new imagery for other partners whether commercially or for foreign governments.
This is essentially a win-win for both parties, actually for all parties involved either directly or indirectly, and will go a long way towards securing GeoEye’s promise for increased fundamentals next year.
One more quick note:
It was also announced today that current CFO Henry Dubois will be resigning from the company effective immediately, but stay on as a consultant at his current salary through early next year.
No reason was given for the departure, and I wouldn’t be surprised if Henry was pushed out as a result of the last few quarter’s worth of financial and accounting mess that GeoEye has had to deal with including various restatements, late filings, etc., that surely would fall at the foot of the CFO in terms of reporting parameters and such.
I will be sad to see Henry go, and wish him the best in his new endeavors.
Bottom Line
GeoEye remains my #1 pick, and today’s news only bolsters that fact.
The stock was trading up in after hours, and I know that this is just the kind of news and validation that Wall Street was looking for before purchasing more GeoEye shares.
All that being said, there is still one more thing that I want to see before I could recommend additional purchase of GeoEye for those like me that already are fully invested: the successful check out of GeoEye-1’s imagery at a satisfactory level for the NGA such that GeoEye can finally begin selling this imagery to the NGA and all its other partners.
There must be some serious delays in calibrating the satellite and some serious bugs that needed to be ironed out.
Let’s hope that final piece of the puzzle gets solved sooner than later, but otherwise, GeoEye is a go.
Now let’s turn our attention to AAR Corp. and their upcoming earnings release…(next page)
New to the GeoEye story?
- Read my initial buy recommendation here.
- OR: listen to my EXCLUSIVE interview with GeoEye’s management team here.
- OR: Read my latest update on the company’s Q3/2008 earnings release and conference call here.
|
*Variables You Should Know About GeoEye, Inc. (NASDAQ: GEOY) |
|
|---|---|
| Current Recommendation: |
STRONG BUY |
| The Company: | GeoEye, Inc. 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. Its imagery information products enable customers to map, measure, and monitor the earth for intelligence gathering, precision mapping, construction planning, and environmental monitoring applications, among others. |
| Why Buy Now: |
|
| Market Cap: |
$346.2 |
| Revenue (TTM): |
$150.93 |
| Cash/Debt: |
$149.9/ $247 |
| Current Price: | $19.00 |
| Risk Rating (?): | 8 (High) |
| Position Size (?): | 1/2 (5-5-08), 1/4 (6-12-08) |
| Buy Around Price (?): | $22.00 (5-5-08), $16.50 (6-12-08) |
*As of 12-10-08. Except share price, all values in millions.
Pages: « previous page 1 2next page »
(No Ratings Yet)
Loading ...
(7) comments to “News Bites for Thursday December 11th: GeoEye Wins Large Contract, AAR Earnings Preview”
Leave a Reply
PeakStocks.com welcomes and encourages reader comments. Add your voice to the discussion whether you agree with me or not.
December 11th, 2008 at 10:06 am
Thanks for your reply the other night.
I am simply shocked by the lack of interest in the GEOY SLA news. Maybe investors are waiting to hear about calibration before they buy but given the volume today there seems to be a lot of selling pressure. Maybe the contract is baked in as the analyst discusses below. I completely disagree that the SLA revenue is baked in and here is what I’m coming up with. Wondering if you are coming up with the same but it all comes down to the flow through of the SLA to the bottom line.
Love to get your value for the company assuming calibration goes as we all hope it will.
I’m running the numbers applying the SLA on a trailing 12 basis assuming a 50% flow through, not including any $ from commercial contracts. GEOY is recognized as having one of the best net margins of its peers at 24%. I’m hoping my flow through is conservative but I’m guessing a % of that $12.5MM from the SLA won’t be incremental revenue. I’m coming up with $61/share based on a 10 P/E (to be conservative). Factoring in the new business model to resell images and then adding the untapped commercial clients to the existing commercial contracts, the P/E should easily be higher. On top of that, the gov’t indicated that it will double the amount of imagry they buy from us and DG.
—
SNPMarketScopeResearchNotes2008-12-11 11:20:55.000GEOYGEOEYE INCR-Khalid-CFAS&P REITERATES HOLD RECOMMENDATION ON SHARES OF GEOEYEGEOY shares are trading up 4% this morning, we think reflecting the company’s new one-year service level agreement with the U.S. government, which is valued at $150M. Revenue from the agreement is based on the operational launch of the GeoEye-1 satellite, which we expect to occur in late 2008. Our sales and earnings estimates for the rest of ‘08 and ‘09 already assume the impact from the new SLA contract. We maintain our target price of $20, blending an enterprise value-to-sales ratio of 2.7X on our ‘09 sales projection of $180M and our DCF analysis that yields $22.|US;GEOY|17381|222770
December 11th, 2008 at 10:29 am
Chris, I am and many in my investor cohort are simply stunned at today’s price action. Since the open, there has been a near 10% correction straight downwards. This after the announcement of one of the most positive developments in company history. I just wanted to get your thoughts on the S&P Hold Reiteration, since to me and the investors I have discussed this, the opinion below is farcical, at best.
They said this, “Our sales and earnings estimates for the rest of ‘08 and ‘09 already assume the impact from the new SLA contract. We maintain our target price of $20, blending an enterprise value-to-sales ratio of 2.7X on our ‘09 sales projection of $180M.”
For one thing, I completely take issue with their contention that the SLA is baked into the stock price already. With the stock moving from 29 after launch to 19 before the announcement, this statement smacks of more than just a mite of mendacious prestidigitation.
For another, their revenue projection is just awful, imo. They see ‘09 revenue at 180 million, including the new SLA. So, ancillary revenue from Google, additional buying from the NGA, contracts with other governments, sales from partners like Telespazio aborad, sales to fishing fleets and commercial entities of that ilk with interest in these images, etc. etc. are only predicted to account for 30m in ‘09 revenue.
Truthfully, that sounds like absolutely atrocious analysis. Assonance aside, what are your thoughts about this? Where do you project revenues at for ‘09? Am I off base in my abject disgust with and wholesale disagreement with this reiteration?
Thanks in advance for your reply. Happy investing!!
December 11th, 2008 at 5:09 pm
Michael,
I am actually quite happy with GeoEye’s move today to be honest.
The Russell 2000 was down about 5%, while GeoEye was up 1.5%, that’s an outperformance of 6.5% in one day. That’s remarkable, and if you extended that out for 10 days, you would be up 65% over the market! When you put it in perspective, it’s a huge move against these heavy headwinds that we face in the market today.
AS for your valuation, I think that it is way too high, because of the mere fact that GeoEye will be amortizing the cost of the GeoEye-1 satellite as a COGS line item, which will crush their EPS, but flow through to their cash flow and free cash flow figures, which is what matters, and why when you value GeoEye you need to look at EV/EBITDA, and not anything else.
On this basis, GeoEye is still dirt cheap, and in fact their market cap is way below the entire cost of GeoEye-1 of $500 million, that’s what I’m looking at currently.
The stock has to get above that before I would even consider it even close to “fair” value.
I also believe that the analyst’s model that you cite are way too conservative, and they are way off base, and should be valuing the company much higher, and their DCF model seems extremely conservative at best.
Chris
December 11th, 2008 at 5:13 pm
Nick,
See my comments to Michale above.
You and I and Mike all agree..this analysis is way off base, and to be honest with you guys, whenever I see any analysis or stock recommendations by S/P I turn my head.
They are usually late to the party, whether up or down, and their analysis is not as good as you or I could dig up on our own, and with a little common sense and a good head on our shoulders.
There is no way that GeoEye’s revenue is only $180 million next year…other anlysts have pegged it to be much higher, whether that sticks or not remains to be seen, but I do know that $180 is way too low.
Something around $200-220 seems more than reasonable with a much higher margin, and cash flow, would yield a huge windfall for GeoEye’s coffers and profits.
Chris
December 12th, 2008 at 7:40 am
Thanks for the response.
Yikes. GEOY is down 6x the market as of this message. I know the market is crazy right now but come on. I guess I’ll be concerned if we continue this trend when the calibration is announced. Not sure what else can be said as once that announcement is made, I couldn’t think of a better company to invest in for 2009 for all the reasons you’ve discussed in your articles.
December 18th, 2008 at 6:23 am
I’m not worried but the activity yesterday in GEOY was crazy. Increased volume with huge selling pressure and then a big buy of December $17.50 calls. Are you worried about the amount of institutional ownership here? It looks like someone is taking advantage of the down days to liquidate part of their position pushing the stock down hard. However yesterday 10K calls were bought at the same time.Interesting.
I don’t see the selling pressure as people nervous about GEOEYE-1. I’m not an expert on the software issues, but from what I read I’m not that concerned.
What is your take on this odd movement in the stock and are you concerned about the amout of institutional ownership?
December 18th, 2008 at 11:59 pm
Michael,
Yea, GeoEye has taken it on the chin here the last couple of days.
If I didn’t already have 3/4 of a position, I would buy more, but like I’ve said before, since I am already fully invested, I won’t commit more capital until GeoEye-1 is delivering usable imagery.
The institutional ownership in GeoEye changes so frequently, that it isn’t even worth tracking.
The selling could be some institutions selling their shares to lock in gains before the new year, or for tax loss selling, bot are possibilities depending on when they bought shares.
Either way, I don’t pay attention to the day to day movement in a stock, unless there is something to pay attention to.
Is the downward movement because someone knows something about GeoEye-1? If they do, it’s illegal.
Chris