Eutelsat, ISAT.L, PA, NSE, WRSP

Eutelsat Communications, after first lowering the price range of its planned initial public offering (IPO), decided to withdraw the IPO altogether Oct. 27.

“Despite support of a substantial number of institutional investors leading to an over-subscription of the order book, Eutelsat Communications and its shareholders have decided to withdraw its initial public offering as a result of adverse market conditions,” the company said in a release. “In particular, they were concerned that the after-market performance would not, in light of the volatile market environment, reflect the fundamental value of the company.”

Eutelsat’s initial IPO announcement was met with criticism, a a UBS equity research report suggested that the offering range of 15.25 euros to 17.75 euros ($18.51 to $21.54) would place the stock’s value at a premium compared to SES Global (SN, Oct. 21). What is interesting to note is financial institutions traditionally do not initiate coverage of a stock until after it has been trading for a period, making the pre-IPO coverage stand out.

Others noted that Eutelsat’s business was showing strong potential for growth and is a likely takeover target, suggesting the stock may have held onto its value in spite of volatile market conditions.

Seemingly in reaction to that report (and possibly others that may not have been publicly distributed), Eutelsat announced Oct. 25 it was lowering the IPO price range to 12 euros to 13.80 euros ($14.56 to $16.75).

It comes as a surprise that Eutelsat did not follow through with the IPO, especially after going through the process of getting the reduced IPO ranges formally approved. The performance of Inmarsat, traded on the London Stock Exchange, may have been a contributing factor.

Inmarsat became the third satellite operator to go public when its stock began trading July 25. The stock opened at 3.30 pounds ($5.88) and lost 2 pence (4 cents) by the time the trading day was completed. After climbing in the first few trading days following the IP, Inmarsat’s share price has since been creeping downward. On Oct. 18, it dropped below 3 pounds ($5.35) and has not climbed back over that mark since. Inmarsat’s stock hit a historic low Oct. 25, closing at 2.86 pounds ($5.10) before recovering some of those losses and closing Oct. 26 at 2.8975 ($5.17).

While Inmarsat shares have struggled, the performance of the satellite operators that went public on U.S. exchanges, provide a different story. Both Panamsat Holding Corp. and New Skies Satellites Holding Ltd. continue to trade above their respective IPO price.

In the case of Panamsat, the stock took a hit following its $18-per-share IPO in March. It took about six weeks before Panamsat began trading above its IPO price and the stock was trading near the $20 mark prior to the announcement that Panamsat would be acquired by Intelsat. Currently, Panamsat shares are hovering around the $24 mark, which is expected given the per-share value of the transaction is $25. It would take a significant catastrophe to force that price lower. The U.S. Department of Justice has requested more information from Intelsat relating to its acquisition of Panamsat, but many industry observers have speculated that this transaction ultimately will be approved, though the companies may be required to divest some satellite assets. With news swirling about the request for additional information, Panamsat shares dropped 7 cents to $23.81 Oct. 27.

New Skies also has been trading above its IPO price of $16.50, topping out at $23.64, when speculation reached its height regarding what then was believed to be an imminent acquisition announcement from Intelsat. Even after the rumored Intelsat takeover was replaced by the Intelsat-Pansamsat transaction, New Skies shares did not take a dramatic hit and managed to climb as high as $22.47 Oct. 25. New Skies will report its fourth quarter results Nov. 9, and those numbers should set the tone for how New Skies shares will perform in the coming months.

This varied performance of the satellite operators that have gone public leads one to question whether European investors are not seeing the same growth potential as American investors, giving Eutelsat another reason to delay its IPO.

XMSR

XM Satellite Radio lost $131.9 million in the third quarter 2005, up from a loss of $118 million in the same period in 2004, the company reported Oct. 27. The increased loss was in spite of revenue growth of 134 percent, from $64 million in the third quarter 2004 to $153 million in the most recent quarter. During an Oct. 27 conference call with investors, XM management attributed the third quarter loss to the costs associated with the subscriber gains as well as other semiannual payments.

Revenue gains were driven by subscriber growth, as XM finished the third quarter 2005 with 5 million subscribers, doubling the 2.5 million subscribers at the end of the third quarter 2004. XM added 617,000 net new subscribers during the third quarter 2005. Subscriber acquisition costs fell from $57 million a year ago to $53 in the most recent quarter, while cost per gross addition remained flat at $89.

XM still expects to end 2005 with more than 6 million subscribers. During the call, the company also reiterated its forecast of reaching cash flow break even by the end of 2006.

XM officials noted the Delphi bankruptcy filing (SN, Oct. 17) will not have any impact on supply, but declined to discuss whether issues between Delphi and General Motors (GM) might impact subscriber growth if those issues turn into automobile production slowdowns at GM. For the moment, General Motors is the largest automotive manufacturer to deliver XM receivers. GM said Oct. 26 it would factory-install 1.55 million XM receivers in GM automobiles in 2006, up from 1.4 million in 2005. The 1.4 million factory installs is less than the target of 1.5 million GM announced in January 2005, SG Cowen & Co. analyst Tom Watts said in an Oct. 28 research report.

XM’s stock plummeted $3.14 Oct. 27 to close at $28.07, meaning that key positive financial metrics such as subscriber growth, reduced subscriber acquisition costs and increased revenues did not draw attention away from the fact that the XM reported a wider net loss for the quarter.

Watts also attributed the decrease to the lower-than-expected GM install rate for 2006. However, Watts downplayed the 2006 GM install rate, noting that XM should still reach SG Cowan’s net add forecast of 3.094 million in 2006, based on increases in factory installed receivers by other automobile manufacturers, “as well as continued growth in after- market sales.”

Another thing to note about the stock price is the Oct. 27 closing is the first time since May 18 that XM stock closed under $30. Since that May 18 date, the stock reached a peak of $36.93 and flirted with the $37 mark a few more times, most recently when it closed at $36.41 Oct. 4. We would expect the fluctuations to cease as XM draws closer to cash flow breakeven and reports a net income.

LMT

Lockheed Martin‘s Space Systems segment posted a sales increase of 17 percent in the third quarter 2005, while operating profit jumped 36 percent, the company announced Oct. 25.

Space Systems sales improved from $1.4 billion in the third quarter 2004 to $1.7 billion in the third quarter 2005, which ended Sept. 30. Lockheed Martin attributed the gains to sales growth in Satellites and Strategic & Defensive Missile Systems, mainly driven by higher volume on government satellite programs. The gains offset declines in Launch Services due to lower volume on the Titan program, which performed its final mission in October, and NASA‘s external tank program.

Operating profit in Space Systems was $154 million in the third quarter 2005, compared to $113 million in the third quarter 2004. In Satellites, higher volume and improved performance on government satellite programs offset declines in commercial satellites, while Launch Services contributed to the gain in operating profit due to improved performance on the Atlas and Proton launch vehicle programs.

For 2006, Lockheed Martin officials expect to see more launches from its Atlas and Proton vehicles, which the company markets under its International Launch Services joint venture. Lockheed Martin expects to perform seven to 10 missions in 2006, up from six to seven launches in 2005, company officials said during an Oct. 25 call with investors. The 2006 target could be adjusted when the formation of the United Launch Alliance joint venture with Boeing Co. is finalized. Officials also mentioned that Lockheed expects to deliver between five and seven commercial satellites in 2006, up from “basically zero” in 2005.

Overall, Lockheed Martin Corp. posted a $427 million profit in the third quarter 2005, up 39 percent from third quarter 2004 earnings of $307 million. Sales improved 9 percent throughout the same period, from $8.4 billion to $9.2 billion, with all five of the company’s operating segments posting gains.

Given Lockheed Martin’s diverse business operations, it is hard to link the activities of one unit to overall performance of the stock. That being said, Lockheed Martin shares dropped $1.12 to $61.23 Oct. 25. Shared continued falling throughout the next two trading days, closing at $59.82 Oct. 27

BA

The sale of Rocketdyne helped Boeing Co.‘s Launch and Orbital Systems post an operating profit of $633 million in the third quarter 2005 despite a revenue decline of 19 percent, Boeing announced Oct. 26.

Revenue for Launch and Orbital Systems, part of Boeing Integrated Defense Systems, fell from $822 million in the third quarter 2004 to $669 million in the most recent quarter, which ended Sept. 30. Boeing blamed the decline on the sale of Rocketdyne and reduced space shuttle work for NASA.

Without the gain from the $700 sale of Rocketdyne to United Technologies Corp., which Boeing completed in August, segment operating margins would have been 9 percent, boosted by improved satellite program performance and higher values for Delta 4 launch contracts. In the third quarter 2004, Launch and Orbital Systems posted an operating loss of $153 million.

Overall, Boeing reported a profit of $1 billion in the third quarter 2005 on revenue of $12.6 billion. A year ago, Boeing earned $456 million on revenue of $13.2 billion.

Boeing shares lost ground following the quarterly earnings report, dropping $1.87 to $65.10 Oct. 26 and continued the decline to $64.05 Oct. 27.

NOC

Northrop Grumman Space Technology posted sales of $842 million in the third quarter 2005, up from sales of $823 million a year ago, the company announced Oct. 25. Operating profit improved from $57 million to $67 million over the same period.

Higher sales and improved performance in the Civil Space and Intelligence, Surveillance & Reconnaissance business areas drove the gains. Civil Space revenue increased 23 percent due to higher volume from NASA and U.S. National Oceanic and Atmospheric Administration programs. Intelligence, Surveillance & Reconnaissance revenue rose 6 percent due to higher volume in classified programs. The growth offset lower sales in the Missile & Space Defense and Satellite Communications areas.

Overall, Northrop Grumman Corp. reported a profit of $293 million in the third quarter 2005 on sales of $7.4 billion, which ended Sept. 30. Damage to the company’s Ship Systems facilities on the U.S. Gulf Coast caused by hurricanes hampered Northrop Grumman’s overall performance. In the third quarter 2004, Northrop Grumman reported a profit of $278 million on sales of $7.4 billion.

Northrop Grumman also announced a share repurchase program of up to $1.5 billion of the company’s common stock. As of Sept. 30, Northrop Grumman had approximately 355 million shares outstanding and expects the complete the buyback, which represents nearly 8 percent of outstanding shares, throughout the next 12 to 18 months.

Like Boeing and Lockheed Martin, Northrop Grumman also dropped following its earnings announcement, falling 98 cents to close at $52.92 Oct. 25 and closing at $52.33 Oct. 27.