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Iridium Communications: A Great Company at a Great Price (NASDAQ:IRDM)

Satellite network on earth

Evgeniy Shkolenko

Very few investment opportunities are, literally, out of this world. But it is one satellite operator that investors should consider for their watch list Iridium Communications (NASDAQ:IRDM) with continuous growth of space Economy, this particular player is well positioned for the future. Growth has been consistent for both the upstream and downstream segments of the business and management continues to lock in growth-oriented opportunities. Unfortunately, the company’s shares are not as attractive as they used to be due to some significant share price appreciation. It has downgraded the company from ‘buy’ to ‘hold’. But for those focused on the long term, the outlook is still positive and stocks don’t need to fall much further to continue upside.

The film continues to improve

In May of this year, I wrote a bullish article about Iridium Communications. At the time, the company experienced some difficulty in its share price, which was prompted by concerns about the economy. However, the firm continues to grow both its top and bottom lines, leading to what it calls a good prospect for long-term investors. The company’s strong fundamentals, along with how the stock was priced at the time, led me to rate it a ‘buy’, indicating my belief that it will outperform the broader market for the foreseeable future. To be honest, the company significantly exceeded even my own expectations. The S&P 500 has risen 2.7% since the article’s publication, while shares of the satellite business are up 30.9%.

This high move for shareholders was not without reason. For starters, on May 26, management announced significant growth to investors. That development was a contract awarded jointly by Iridium Communications and General Dynamics Mission Systems (GD) by the Space Development Agency. The total size of the contract is estimated at $324.5 million, of which approximately $163 million is in the form of base costs and the remaining $161.6 million is attributable to contract options. The terms of the contract include the parties establishing a ground operations and integration division for Part 1 of the ongoing National Defense Space Architecture initiative. It’s unclear how much of this will go directly to Iridium Communications, but it’s certain that the company can expect a pretty hefty payday from the deal.

Historical finance

Author – SEC EDGAR Data

Along with landing this deal, the industry also reported some positive results. In the second quarter of the firm’s 2022 fiscal year, the only quarter for which new data is available, which was not available when I last wrote about it, revenue came in at $174.9 million. This was a 16.7% increase over the $149.9 million generated in the same quarter a year ago. This increase in sales was driven in large part by an increase in the number of billable subscribers using the Company’s platform. This number increased from 1.616 million in the second quarter of 2021 to 1.875 million in the most recent quarter. As a result, total revenue for the first half of fiscal 2022 came to $343.1 million. That’s up 15.7% from the $296.5 million generated in the first half of 2021.

As the income increased, so did the profit. Net income of $4.6 million in the most recent quarter was up from $3.8 million reported in the same period a year ago. Operating cash flow in the most recent quarter came in at $99.8 million. That’s up 32.7% from the $75.2 million generated just a year ago. Meanwhile, EBITDA for the company expanded from $94.8 million in the second quarter of 2021 to $105.9 million at the same time this year. Naturally, this strong bottom line performance had a positive impact on the company’s results in the first half of the year as a whole. This data can be seen in the chart below.

Historical finance

Author – SEC EDGAR Data

Due to how things have been turning out so far this year, Iridium Communications’ management team recently decided to raise their guidance for the current fiscal year. Previously, he had expected service revenue, which comprises the bulk of the company’s sales, to increase between 5% and 7% in 2021 compared to what the firm achieved. They now expect growth between 7% and 9%. Based on the $492 million in service revenue achieved last year, meeting the midpoint of this range would indicate $531.4 million in sales from services. The company expects profitability to come in strong with EBITDA between $410 million and $420 million. This is $10 million higher than the previous expected range. The company has not provided any guidance when it comes to other profitability metrics such as operating cash flow. But if we assume that EBITDA will grow at the same rate it should, we should expect $332.4 million in operating cash flow and $270.4 million in free cash flow.

It is also worth noting the company’s debt position. As of the end of its 2021 fiscal year, its net leverage ratio is 3.4. Management’s long-term goal is to keep this figure between 2.5 and 3.5. This should not be difficult because with year-end profitability using current data, the net leverage ratio should drop to 3.3. It is worth noting that after the company bought back $600 million worth of stock under its share buyback plan, $267.5 million was still available at the end of June this year. In the second quarter alone, the company bought back 1 million shares for $35 million, so it is actively working on this initiative.

Using the profitability data provided earlier, we can look at the stock price today. The firm is trading at a forward price to free cash flow multiple of 21. That compares to the 23.2 reading we get if we use the 2021 results. The price to operating cash flow multiple should be 17.1, down from the 18.8 reading we get if we use 2021 figures. Over the past year, the EV to EBITDA multiple has also fallen from 18.6 to 17. As the table below illustrates, the company’s price, certainly not bad for a quality operator, is slightly higher than the last I wrote about the firm.

Trading multiples

Author – SEC EDGAR Data

take

Based on the data provided, Iridium Communications itself is doing well. The future of the business has never looked brighter and fundamental performance is likely to continue well. In the long run, I have no doubt that the company will create additional value for its investors. But given the recent run-up in price we’ve seen, and despite the improved profitability forecast, I think the stock is more or less undervalued at this point. Because of that, I have decided to downgrade my rating on the firm from ‘Buy’ to ‘Hold’.

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