The global satellite communication space gained traction with the expansion of satellite broadband Internet services, arrival of direct-to-home TV offerings and advancement of digital technology, fostering demand for commercial and government welfare schemes. Notably, wireless backhaul services have generated additional revenues for satellite operators as consumers desire extensive coverage with the expansion of mobile Internet connections.

In order to cater to the increased data demand for mobile connectivity, global satellite service players continued a steady investment in R&D activities to keep up with emerging technologies and keep their product lines up to date. Technological advancements have led to the convergence of terrestrial mobile phones and satellites. Spurred by the increasing demand for Internet of Things, public safety and augmented reality, the market is likely to witness a promising growth trajectory in the coming years.

Growing demand for small satellite constellations with more deployment for commercial end users, easy accessibility and advancements in satellite miniaturization are driving the market. The industry’s growth projections are determined by factors like high cost of manufacturing, delay in signals and need for replacements among others. The cost of satellite communications technology includes the cost of satellite manufacturing, launch of satellites through a space shuttle and investments in base stations to manage satellites.

Industry Falters on Shareholders’ Return

Looking at shareholders’ return over the past year, it appears that heavy capital investment barring entry of infrastructure owners and dependency on successful launch of space shuttles have depleted investors’ confidence in the industry’s prospects.

The Zacks Satellite and Communication Industry within the broader Zacks Computer and Technology Sector has underperformed both the S&P 500 and its own sector over the past year.

While the stocks in this industry have collectively gained 10.1%, the Zacks S&P 500 Composite and Zacks Computer and Technology Sector have rallied 17.8% and 18.6%, respectively.

One-Year Price Performance



It’s worth noting that a large number of firms have entered the satellite industry due to the reduction of manufacturing costs given the invention of small satellites over the past few years. Globally, companies are developing relatively inexpensive small satellites, which facilitate services almost equivalent to the traditional big satellites that serve public sector industries.

Satellite and Communication Stocks Trading Cheap

Thanks to the underperformance of the industry over the past year, the valuation picture looks moderately economical. One might get a good sense of the industry’s relative valuation by looking at its Enterprise Value to EBITDA ratio (EV/EBITDA), which is the most appropriate multiple for valuing satellite and communication stocks.

Satellite communication is a capital-intensive industry, incurring significantly high capital investments for technologically obsolescent products and high R&D expenses. The firms have high depreciation expenses due to a large fixed asset base. The EV/EBITDA ratio essentially measures the value of a company, inclusive of debt and other liabilities, to the actual cash earnings exclusive of the non-cash expenses.

The industry currently has a trailing 12-month EV/EBITDA of 9.1X, which is below the 12-month median of 9.2X. Over the past year, the industry has traded as high as 16.8X and as low as 8.5X.

The S&P 500 Index is currently trading at 11.7X trailing 12-month EV/EBITDA with a high, low and median over the past year of 12.7X, 10.7X, and 11.5X, respectively.

Enterprise Value/EBITDA Ratio (TTM)



Comparing the group’s EV/EBITDA ratio with that of its broader sector also shows that the group is trading at a discount. The Computer and Technology Sector’s trailing 12-month EV/EBITDA ratio of 10.8 is above the Zacks Satellite and Communication Industry’s ratio.

Enterprise Value/EBITDA Ratio (TTM)



Underperformance May Continue on Bleak Earnings Outlook

It is worth noting that what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead. One reliable measure that can help investors understand the industry’s prospects for a solid price performance is the earnings outlook for its member companies. Empirical research shows that a company’s earnings outlook significantly influences the performance of its stock.

One could get a good sense of a company’s earnings outlook by comparing the consensus earnings expectation for the current financial year with last year’s reported number. However, an effective measure could be the magnitude and direction of the recent change in earnings estimates.

The light blue line in the chart below shows the evolution of aggregate 2018 earnings estimates for operators in this space (the red line represents 2019 expectations). The consensus estimate for the Zacks Satellite and Communication Industry of 95 cents implies a year-over-year decline of 15.2% as the trend in earnings estimate revisions continues to remain unfavorable.

Price and Consensus: Zacks Satellite and Communication Industry



Looking at the aggregate earnings estimate revisions, it appears that analysts are marginally gaining confidence in this group’s earnings potential in the recent months, although it has primarily bordered on the bearish stance over the past year.

The consensus EPS estimate for the current fiscal has been revised 22.8% downward since the beginning of this year.

Current Fiscal Year EPS Estimate Revisions



Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term.

The Zacks Satellite and Communication Industry currently carries a Zacks Industry Rank #92, which places it at the top 36% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

In addition to the welcoming valuation picture of the group for investors, the long-term (3-5 years) EPS growth estimate for the Zacks Satellite and Communication Industry appears promising. The group’s mean estimates of long-term EPS growth rate have been raised to reach the current level of 24.4%. This compares favorably to 9.8% for the Zacks S&P 500 Composite.

Mean Estimate of Long-Term EPS Growth Rate



Industry Portrays Improving Gross Margin and Earnings Trend

The satellite and communication firms witnessed an improvement in gross margin (TTM) with a CAGR of 14% from 2012-2017.



Moreover, the group’s non-GAAP earnings have reflected a CAGR of 63.5% from 2012-2017.



Bottom Line

The market of small satellites is expected to show robust growth due to increasing rate of investments in the space industry by government organizations. The demand for small satellites across different geographies in the near future is expected to be promising with North America expected to have the bulk of the market share followed by Asia-Pacific, Europe and Rest of the World. North America is expected to maintain its dominance through the forecast period, owing to maximum number of small satellites launches by the government end user in the region.

Furthermore, increasing market penetration of small satellites into disaster management, an emerging small satellite application, nations developing their own Global Navigation Satellite System, advancements in small satellite structure and increase in the requirement of low cost launching sites for small launch vehicles are expected to create lucrative opportunities for the market in the coming years.

The commercial end user is expected to witness a high growth rate owing to increasing R&D activities to develop small satellite constellation for varied applications such as navigation, provision of global wireless Internet system and telecommunications.

While none of the stocks in our satellite and communication space currently sport a Zacks Rank #1 (Strong Buy), below is one stock that has been witnessing positive earnings estimate revisions and carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Liberty SiriusXM Group (LSXMK Quick QuoteLSXMK - Free Report) : This Englewood, CO-based satellite communication firm has gained 7.3% over the past year. The Zacks Consensus Estimate for the current-year EPS has been revised 7.6% upward over the last 60 days.

Price and Consensus: LSXMK



Investors may also hold on to the following two stocks carrying a Zacks Rank #3 (Hold).

EchoStar Corporation (SATS Quick QuoteSATS - Free Report) : Shares of this Englewood, CO-based satellite communication firm have produced marginal returns over the past three months. The Zacks Consensus Estimate for the current-year EPS has been revised 720% upward over the last 30 days.

Price and Consensus: SATS



Intelsat S.A. : This Luxembourg-based satellite communication firm has gained 497.3% over the past year. The Zacks Consensus Estimate for the current-year EPS has been revised 1.8% upward over the last 30 days.

Price and Consensus: I



The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>