PSB Monthly Issue April 2013

However, there are still several areas of the world that have no access to traditional forms of telecommunication.

Lack of telecom access could be due to the remoteness of a location, such as in the middle of the ocean or a mountain range.  It could be due to lack of infrastructure, like in rural areas or developing nations.  Or it could even be because of political conflict or natural disasters.

Basically, there is a significant market for alternative forms of communications for situations with no standard telecom access.

One solution to this kind of situation is mobile satellite services operators.  That is, voice and data communication over a satellite network, typically accessed using a satellite phone.

Now, satellite phones have been around for a while.  But, they’ve never really taken off outside of a few niche players – like oil and gas drillers.

But times are changing.

Mobile phones have become vital to many people and businesses.  And that trend will only continue to develop.  Having guaranteed access to voice and data communication is more important than ever.

What’s more, as satellite phones become more affordable, the market for the once specialized product is rapidly expanding.  In 2011, there were an estimated 700,000 land-based handsets in operation.

That number could easily skyrocket over the next decade.

And who better to capitalize off that growth than a leading mobile satellite communications company – one that’s been around for over a decade.

Introducing Iridium Communications (NASDAQ: IRDM).

THE SATELLITE COMMUNICATIONS BUSINESS

Iridium provides mobile voice and data communications services through satellites to businesses, governments, and consumers. The company offers mobile telecom solutions for industries such as aviation, government, military, mining, forestry, oil and gas, utilities, maritime, and more.

IRDM’s products include phones, accessories, tracking and monitoring devices, Wi-Fi solutions, broadband services, and more.

There are several reasons why Iridium makes a great investment opportunity.

First off, IRDM has the world’s largest commercial, fully networked satellite constellation.  They boast 66 in-orbit satellites which provide 100% global coverage.  Not to mention, with that kind of healthy satellite network already in place, barriers to entry for competitors are about as strong as they come.

Even better, the company has a fully funded business plan for a next-generation satellite constellation, called Iridium NEXT.  The new constellation will offer new and enhanced services to customers.

And that’s not all…

Iridium is on the verge of releasing a whole new product line that could transform the aviation industry.  The company’s Aireon products will offer air traffic surveillance that can continuously track aircraft anywhere in the world.

This is a huge deal because current surveillance systems cover only 10% of the Earth’s surface and typically don’t work over oceans or in remote locations.  Being able to track an aircraft anywhere in near-real time will be a major upgrade for air traffic management.

You’d have to expect there will be massive demand for this ground breaking technology.

Finally, IRDM’s earns impressive operating margins… and they should continue to expand.

You see, the company has operating leverage created by generating recurring service revenues but having mostly fixed costs.  Basically, the infrastructure (satellites) is already in place and it doesn’t really cost more to add more and more clients to the network.

In the most recent quarter, Iridium’s operating cash flow margin increased to 54%.  It’s hard to argue with those kinds of margins.

That being said, let’s take a closer look at the company’s financials…

THE NUMBERS

In the most recent quarter, IRDM pulled in $92 million in revenues, a 3% decline from the same period last year.  However, the small decline was due primarily to a reduction in low-margin government engineering projects.  Meanwhile, the vastly more important (and higher margin) service revenue category grew from 70% to 72% of total revenue.

Net income increased to $0.19 per share from $0.11 per share a year ago.  The 99% jump was due mostly to a sizeable reduction in depreciation expense.

Perhaps more importantly, total billable subscribers climbed from 523,000 to 611,000.  That’s a substantial increase and great sign the company is headed in the right direction.

In addition, Iridium has a solid balance sheet.

The company has $254 million in cash compared to $752 million in debt.  That’s not bad for a company with very expensive capital equipment.  Plus, current assets are a strong 4.1x current liabilities.  And, IRDM generates plenty of operating cash flow.

INVESTMENT RISKS

As with any investment, IRDM does have a few risks.

Cutbacks in government spending could hurt IRDM’s revenue potential if certain government/military projects get cut.

Alternative forms of communication technology could be developed and offer competition to satellite communications.

Finally, if interest rates move higher, it could impact the company’s debt payments negatively and hurt profits.

POTENTIAL RETURN OF 140% OR MORE

Iridium has the largest commercial satellite communication network in the world.  The company is on the cusp of offering new, innovative products and services.  And, mobile satellite communication services are growing in popularity.

Yet, despite all the positives, IRDM shares are trading at just 7.7x earnings and 5.3x projected earnings.  A price to earnings ratio that low would show an undervalued stock in any industry.

But even more compelling, IRDM’s industry trades at a far higher 18.8x earnings on average.  If the shares just trade up to the industry average, we’d be looking at gains of over 140%.

With return potential like that, now’s the time to add IRDM to your portfolio.

Based on our analysis, we see IRDM trading up over $8.80 a share.  Buy IRDM shares now for potential gains of 140% or more!

ACTION RECOMMENDATION

BUY Iridium Communications (NASDAQ: IRDM) up to $6.90 per share.

Don’t forget your position sizing and stop-loss rules.