Investors Still Find Safety in Satellite Beginning to Look for Growth Opportunities

The satellite industry remains popular among technology/media analysts at investment banks, and satellite stocks in Europe and North America remain popular with analysts.
    Chris Quilty, a satellite equity analyst at Raymond James, believes that the overall satellite industry held up well. The satellite industry performed well in 2010, experiencing only marginal impact from the global financial crisis that began in 2008. As expected, the FSS industry delivered consistent mid-single-digit growth, powered by consumer demand for video and wireless services as well as an acceleration of demand for mobile satellite services. Speaking to this latter point, the MSS industry also performed well and appears poised for strong growth in the next several years, driven by new product cycles (maritime VSAT, aero broadband and satellite-based M2M) and growing consumer/enterprise demand for anytime, anywhere connectivity.
    Satellite manufacturers and launch providers also maintained a brisk order and delivery rate in 2010, but the outlook for those sectors is somewhat clouded by potential spending cuts by the FSS sector and new launch capacity becoming available, Quilty said. Ground equipment providers rebounded from a period of soft commercial spending, but U.S. government budget issues could present problems for vendors who serve the defense sector, he said.
    Eric Beaudet, a satellite equity analyst at Natixis Securities who covers both SES and Eutelsat, says the satellite industry remains a safe haven for investors. "We have seen their EBITDAs stay relatively stable over the last few years as well as consistent revenue growth. We have clearly [moved] above 5 percent EBITDA margin growth in the medium term. In a portfolio, you want to have some stocks that grow 5 to 10 percent a year in pretty much every given year with dividends of 3 to 4 percent, so overall, for any portfolio manager, they are very good defensive stocks to have in your portfolio. It won’t give you the 30-plus percent growth that an Alcatel or a Technicolor can give you, but [FSS players] constant 5 to 10 percent growth plus dividends with visibility," he says.

United States

Richard Valera, a technology equity analyst at Needham Research who covers companies such as ViaSat and Comtech, also believes that satellite stocks remain attractive to investors. "I think there have been perceptions in the past that ubiquitous wireline broadband was going to obsolete satellite," Valera says. "I don’t think that is true at all. There are too many situations where wires aren’t deployed. In regions like the Middle East, satellite is often the primary mode of communication for U.S. and allied militaries in many areas. I think, generally speaking, the demand for satellites remain healthy. The companies that participate in the market both from a service and infrastructure point of view are going to see ups and downs depending on what programs they are on as well as things like budgetary funding. I do think satellite is still a very viable technology and will remain in high demand for a long time.
    Along with providing the steady returns, Quilty thinks the satellite sector offers investors a moneymaking opportunity with satellite broadband. "Long viewed as an option of last resort, satellite broadband technology is on the cusp of a major technological revolution that promises to drive double-digit growth over the next five to 10 years," he says. "The key technology underlying this transformation is the emergence of high throughput satellites such as those being developed by ViaSat (ViaSat-1) and Hughes (Jupiter). In effect, these satellites are expected to deliver a 100-fold throughput yield as compared to traditional Ku-band services, thus allowing service providers to significantly improve customer download speeds while concurrently slashing the cost of delivering these services from an estimate $30 per sub per month to as little as $1 per subscriber," he says.
    Valera believes EchoStar‘s acquisition of Hughes could have an impact. "The dynamics could have been changed pretty significantly, because you now potentially have Charlie Ergen owning Hughes, and he has the potential to use his Dish Network distribution channel to drive the Hughes consumer broadband business. We think that would be positive for Hughes, but at the margin, negative for ViaSat. Dish Network was one of their distribution partners. If Dish leaves ViaSat and does distribute Hughes, it makes Hughes a more potent competitor than they would have been if they had maintained their largely retail strategy."

Europe
Eutelsat and SES remain solid picks in Europe, says Fabio Fazzari, a satellite equity analyst at Italy’s Equita Sim. "SES and Eutelsat invested a lot in the past two years to grow their position in many developing markets and have increased capacity. They have seen a strong demand for capacity linked to technological innovations like HD. The satellite industry was the only one reporting revenues growth at mid-single-digit level in organic terms during the past two years thanks to the long-term contracts they have and the fact that the service they sell is not linked to consumer trends.‚Äù
    Fazzari agrees with Beaudet that the investment banks have a good overall perception of the industry. "The investment bank community has a very good perception (of satellite operators), because they generate a lot of cash. For this part of business, the only risk is linked to launch delays or failures, which represent a postponement in revenues. During the economic crisis, investors gravitated towards satellite stocks. It was actually very attractive sector during the crisis for investors. It was seen as a defensive sector. Long-term contracts were signed, and really, the most beneficial effect was the low price of broadcasting for pay-TV. In the downturn, pay-TV operators cut many things, such as their marketing costs and set-top box subsidies before reducing their offering. It was seen as a very attractive sector over the last few years," says Beaudet.
    However, as economies around the world begin to pick up, investors perhaps are looking for riskier stocks outside the satellite sector. "Over the past few months, we haven’t seen such great stock performance from SES, Eutelsat and even Inmarsat. That is because the appetite for risk has slightly increased in the market," says Beaudet, who believes the moves in Ka-band and data services will be risks for SES and Eutelsat. "The main risk is that they are diversifying into Ka-band. Eutelsat has invested into a dedicated Ka-band satellite, and SES has invested into O3b Networks. That is the real next challenge for the different companies. There will be some blurring between medium-orbit satellites like O3b and some mobile satellite operators like Inmarsat, and Ka-band will see an intensifying of competition through different actors and players from sectors that were separate until today. It is going to be interesting to see who will be the most aggressive and opportunistic and grab the new possibilities of Ka-band. That is the next uncertainty and the big challenge for the groups."
    Inmarsat’s move towards Ka-band did take him by surprise, Beaudet says. "The group had finished launching a new Ku-band constellation just two years ago that had added a lot of capacity, and is still has a fill rate of 20 percent or less. Everyone saw Inmarsat as having a lot of free capacity, so having a highway of growth over the next two years. Launching a new Ka-band constellation was a big surprise. At the same time, it does underline that they see a really big need in the capacity."