3 Satellite Stocks That Hold Promise Amid Industry Challenges

The Zacks Satellite and Communication industry has been battered by the COVID-19 pandemic. The industry players are concerned not only about technological advancement but also regulatory decisions, standards and protocols, capital financing, and consumer-oriented digital market forces that tend to dominate the direction of change.

Nevertheless, Iridium Communications Inc. (IRDM), EchoStar Corporation (SATS) and Maxar Technologies Inc. (MAXR) are likely to benefit from growing market penetration of small satellites into disaster management. They should also gain from evolving satellite applications, development of Global Navigation Satellite System, progress in satellite structure and increase in low-cost launching sites for small launch vehicles.

Industry Description

The Zacks Satellite and Communication industry comprises providers of satellite service operations, broadband satellite technologies and Internet services. These companies offer an array of communications services to media firms, fixed and wireless telecommunications operators, data networking providers and Internet service providers. They also provide commercial satellite communication services to government and military organizations.

The industry participants offer satellite-based consulting and technical services that include the lifecycle of satellite operations along with infrastructure ranging from satellite and launch vehicle procurement through telemetry and commanding services. Some of the firms provide satellite voice and data services to commercial and recreational users. They also deliver various on-network services. These include transponder services, managed services, teleport facilities and other ground facilities to provide monitored broadband, video and private network services.

3 Trends Shaping the Future of Satellite and Communication Industry

High Costs Make Headwinds: The companies can’t escape the key restraints of the satellite industry, high CapEx requirements. It needs innovation in a programmatic style, which requires huge R&D expenses to realize the benefits of a small satellite approach. Small satellite programs can be costly or slow to implement, and with longer development cycles, the total system costs increase. The companies face challenges like inefficient cost structure and increased lead time associated with obtaining spectrum licenses, leading to a decline in revenues and delays or cancellations of future implementations of products and services. They are expected to face key challenges that pose a high potential risk of failure. An initial success factor will be the ability to secure the right funding. Therefore, securing capital investments is a key aspect of ensuring cost-effectiveness and market success. Due to the increased number of natural disasters and other calamities, companies are also facing the risk of a complete breakdown of communication devices and services. As a result, a lack of demand has weighed on prices. The business is highly capital intensive, which requires long-term capital expenditure decisions.

Policies and Regulatory Issues: Satellite data will become increasingly crucial over the next few years for transportation, communications and a host of other tools and services. As the reliance on satellite services increases, the risk of disruption needs to be minimized. Satellite communications have made it easier to exchange messages and accessing the Internet, even in the most remote locations. However, threats like security barriers and cyber-attacks continue to be the major flaws in the mobile and satellite communication used worldwide in aeronautics, energy and maritime industries, emergency services and by government agencies and the military. It is quite possible that people who bypass stringent security measures can illegally access confidential information, leading to a widespread security breach, which ultimately results in reduced demand for products and services, in turn compromising the network integrity. The issue of space security is a global concern necessitating a common and international alignment.

Technology Development: There’s been a shift in highly specialized satellite manufacturing patterns. More emphasis is placed on the use of common buses and computer-aided design tools to customize the communications payloads. A mass produced system is adopted and many satellites are manufactured at once in an assembly line. Integration and testing are extremely automated. The extent of testing is reduced after prototyping and initial production is completed. As such, countries with comprehensive space programs have distinct military, economic and scientific advantages, but complexity and barriers to entry into space have allowed only a few to develop significant capabilities. The demand for small satellites across different geographies should increase, with North America having the bulk of the market share followed by the Asia Pacific, Europe and the Rest of the World. North America is expected to maintain its dominance on account of the maximum number of small satellite launches by government end users.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Satellite and Communication industry is housed within the broader Zacks Computer and Technology sector. It currently has a Zacks Industry Rank #219, which places it at the bottom 14% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates weak near-term prospects. Interestingly, our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of a negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. The industry’s earnings estimates for the current year and the next have decreased 181.8% and 39.4%, respectively, over the past year.

Before we present a few satellite and communication stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Underperforms Sector, S&P 500

The Zacks Satellite and Communication industry has underperformed both the broader Zacks Computer and Technology sector and the S&P 500 composite in the past year.

The industry has lost 13% over this period compared with the S&P 500’s rise of 16.4% and the broader sector’s rally of 40%.

One-Year Price Performance

Industry’s Current Valuation

Enterprise Value-to-EBITDA (EV/EBITDA) ratio is commonly used for valuing satellite and communication stocks. The industry has a trailing 12-month EV/EBITDA of 9.4X compared with the S&P 500’s 15.28X. It is also below the sector’s trailing 12-month EV/EBITDA of 15.23X.

Over the past five years, the industry has traded as high as 22.36X, as low as 5.22X with the median of 15.44X, as the chart below shows.

Enterprise Value-to-EBITDA Ratio (Past Five Years)

3 Satellite and Communication Stocks to Keep a Close Eye on

Iridium Communications: This McLean, VA-based company provides mobile voice and data communications services and products to businesses, the United States and foreign governments, non-governmental organizations and consumers worldwide. The Zacks Consensus Estimate for its current-year earnings has been revised 10.4% upward over the past 90 days. The stock has added 17.5% in the past year against the industry’s 13% decline. Despite the headwinds caused by the pandemic, Iridium continues to see growth in subscriber base, service revenues and cash. It offers mission-critical services across a broad array of industries, which has allowed its business to remain resilient in the current environment. It is expected to continue generating significant free cash flow in 2020 and beyond. Iridium carries a Zacks Rank #3 (Hold), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: IRDM

EchoStar Corporation: This Englewood, CO-based company provides broadband satellite technologies and broadband Internet services worldwide. EchoStar carries a Zacks Rank #3. The Zacks Consensus Estimate for its current-year earnings has been revised 31.7% upward over the past 90 days. The stock has lost 28.3% in the past year. Hughes Network Systems is a wholly owned subsidiary of EchoStar. Hughes recently launched its AI for IT operations solution for enterprise Wide Area Networks (WANs). The technology automatically predicts and self-heals undesirable network behavior, preventing service-disrupting symptoms in 70% of cases. This is likely to aid the company’s performance going forward. Hughes is the first managed services provider to deliver a self-healing WAN edge capability to enterprise customers.

Price and Consensus: SATS

Maxar Technologies: This Westminster, CO-based company’s growth strategy is focused on providing leading capabilities in Earth Intelligence and Space Infrastructure. The stock carries a Zacks Rank #3. The Zacks Consensus Estimate for its current-year earnings has been revised 36.7% upward over the past 90 days. The stock has skyrocketed 268.7% in the past year. Maxar is seeing strong demand as customers continue to rely on it for national security and commercial missions. It has hired space industry veteran Jim McClelland to lead its newly established Mission Architecture function. McClelland will play a key role in Maxar’s initiative to diversify the Space Infrastructure business and further penetrate U.S. civil and national security markets. The company is making progress on a multi-year strategy to position itself for sustained revenue, earnings and cash flow growth.

Price and Consensus: MAXR

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