Dollars And Sense: Eclipsed–Loral Still In Globalstar’s Shadow
By Marc Crossman And Aileen Chen
Even after reporting second quarter results that showed improvement from a disappointing first quarter, the stock of Loral Space and Communications still trades more like a penny stock than it does a large (the third largest, in fact) satellite manufacturing company and fixed satellite services operator. The deeply discounted stock price does not seem to account for the company’s healthy, revenue generating businesses or its initiatives such as the development of a satellite-based broadband data transmission network. Investors’ focus on Loral, and the main reason for the stock being weighted down, seems to be Loral’s 40 percent ownership of Globalstar.
Loral has been trying to convince investors that the company will not sacrifice itself to save Globalstar. During the second quarter earnings conference call, CEO Bernard Schwartz assured listeners that the company would continue to focus on Loral’s businesses and would not jeopardize itself for funding Globalstar. This message has temporarily sunk into the minds of investors, resulting in a rise in the stock to more than $6 on the day of the conference call, from a 52-week low of $5.25 a couple of days earlier.
Despite this affirmation and the subsequent share price increase, Loral’s stock price still appears to be vastly undervalued. At the date of publishing, Loral was trading around $7.88 per share. The market is still over-penalizing Loral for its balance sheet exposure to Globalstar, and overlooking the value in Loral’s core businesses. The only way to justify the current stock price would be to assume that Globalstar goes bankrupt.
Globalstar, however, still has another nine months of cash available to prove its business model, assuming that no additional funds are raised. Unfortunately, the global mobile satellite services company has repeatedly missed its own and the Street’s expectations so far. During the first half of 2000 (its first six full months of operation), Globalstar acquired only 13,000 subscribers, versus the 500,000 subscribers that the company had expected last year. Gross service revenues (not counting royalty revenues) for the second quarter increased from $177,000 to $483,000.
Considering that Globalstar only really operated for one full month during the first quarter due to a slow start, its second quarter results are hardly impressive. Royalty revenues, which are tied to phone sales by manufacturers, added another $318,000 to Globalstar’s second quarter revenues; this is versus royalty revenues of $470,000 in the first quarter. However, these revenues will drive growth in Globalstar’s future revenues.
The company still expects to break even by year-end 2001 with a total of 500,000 customers, which means the company will need to acquire customers extremely aggressively next year and during the remainder of this year. It also means the company may need more funding to continue running its business past March of 2001 if it does not receive more financing or generate more revenues before then. Despite its rollout of services in more parts of the world, there is no solid evidence (in terms of growth in subscribers or minutes of use) yet to prove that Globalstar will be successful or unsuccessful. The next two to four quarters should shed more light on this matter. In any case, Loral expressed that its contribution to Globalstar’s future funding should be insignificant.
Meanwhile, Globalstar’s lackluster performance has overshadowed Loral’s core businesses, which have more value than the market is giving them. Loral is one of half a dozen global satellite operators, with a fleet of 10 satellites and a healthy funded backlog of $1.9 billion as of the end of June. In addition, Loral is experiencing strong demand from the Asian and Latin American markets and increasing capacity utilization. Further, Loral’s satellite manufacturing unit, Space Systems/Loral (SS/L), continues to be the strongest contributor of total revenues (making up 68 percent of Loral’s total operating revenues before intercompany and affiliate eliminations), generating $298 million in revenues during the second quarter.
Despite lower year-over-year revenues, primarily due to contracts being booked later than expected, SS/L shows a healthy backlog of $1.6 billion. In addition, SS/L successfully launched two satellites it built and won a handful of contracts during the second quarter, including one for the design and construction of a high-powered broadband satellite for Shin Satellite of Thailand.
Another unit of Loral–Cyberstar, the company’s data services business–is contributing more to the company’s top line but also being overlooked. During the second quarter, Cyberstar announced a strategic alliance with Akamai, whereby Loral will provide transponder capacity to deliver streaming media services to Akamai’s customers (mostly Internet service providers). The streaming media market appears to be taking off, with satellites being used as the most cost-effective way to push content to the edge of the Internet.
The idea is catching on with the content providers, as is evidenced by the strong increases in customers each month for companies like Akamai and IBeam. It is also catching on with investors as both companies trade at 20 to 50 times revenue. Loral, however, has not been awarded a higher trading multiple for Cyberstar because it is not a pure play like Akamai or IBeam. Nonetheless, we believe data services is an area of growth for Loral.
With all of this potential present in Loral’s other units, it is truly unfortunate that Globalstar is weighing down an otherwise promising stock.
Marc Crossman and Aileen Chen are satellite analysts at J.P. Morgan in New York City. These views are those of the authors and do not necessarily reflect the views of the Via Satellite editors or J.P. Morgan.