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3 Stocks to Watch From the Satellite and Communication Industry

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Global macroeconomic weakness, inflation and supply chain issues could affect growth prospects of the Zacks Satellite and Communication industry in the near term. Nonetheless, the companies within this industry are well-poised to benefit from a vast proliferation and cheaper access to space technology in the long run. This trend is leading to a diversification in end-market users. Artificial Intelligence, Machine Learning and Big Data have given rise to multiple use cases across industries like oil and gas, agriculture, transportation and non-governmental organizations. Geopolitical competition in space as a contested domain is leading to further investments by global militaries. Iridium (IRDM - Free Report) , Maxar (MAXR - Free Report) and EchoStar (SATS - Free Report) have significant growth potential on global security threats, surging defense budgets and demand for high-quality imagery and value-added services.

Industry Description

The Zacks Satellite and Communication industry comprises space technology companies that provide satellite imagery, intelligence services and spacecraft and robotics for space exploration, research and national security. They help customers understand and navigate the evolving planet, deliver global broadband communications and explore space. The industry players provide communication services to media businesses, fixed and wireless telecommunications operators, data networking providers and Internet service providers. They also offer commercial satellite communication services to government and military organizations. The firms offer satellite-based consulting and technical services, including the lifecycle of satellite operations and infrastructure, ranging from satellite and launch vehicle procurement to telemetry and commanding services.

What's Shaping the Industry's Future

Advancements in Technology Hold the Key: There has been a radical change in highly specialized satellite manufacturing patterns. More emphasis is put on using common buses and computer-aided design tools to customize the communications payloads. A mass-produced system is adopted and several satellites are manufactured in an assembly line. Integration and testing have become highly automated. The extent of testing is reduced after prototyping and initial production is completed. 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 notable capabilities. The demand for small satellites across regions is expected to increase over time, with North America having the bulk of the market share, followed by the Asia Pacific, Europe and the rest of the world. North America maintains its dominance with the highest number of small satellite launches by government end users. The companies continue to align their products and services with the U.S. Department of Defense’s National Defense Strategy needs and growing international defense and intelligence demand.

Subscriber Momentum to Drive Growth: Wide proliferation and cheaper access to space technology have diversified end-market users. The companies share a strategic relationship with various government organizations, including military and disaster response agencies and non-governmental organizations, to provide robust, tactical, real-time voice and low-latency data command and control communications. A wide product portfolio enables companies to expand their customer base and offset the losses from one product category with benefits obtained from another. Also, high product quality increases brand loyalty and enhances performance in a competitive market. For civil customers, particularly NASA, growth is being driven by space exploration programs. For commercial customers, growth drivers include a strong demand for imagery due to new use cases, space-based remote sensing, Geosynchronous Equatorial Orbit replacement demand and Low Earth Orbit communications programs. Also, personal satellite communications are witnessing strong demand leading to subscriber growth.

Spending on Space Infrastructure Could be Affected By Macroeconomic Weakness: With more than half of the revenues coming from U.S. government customers, the industry is likely to benefit from increasing defense and space infrastructure budgets. The proliferation of space-based intelligence, surveillance and reconnaissance and communications is expected to boost government investments in the sector. The companies are developing differentiated capabilities designed for future space exploration, including propulsion, power and robotics. These elements will be critical for helping their customers achieve successful space exploration missions. Focus on research and development and product and service enhancements is a key strategy for innovation and growth. However, weakness in global macroeconomic conditions could compel customers to lower spending, which does not bode well for industry participants. Persistent supply chain issues, component shortages and rising inflation could lead to higher costs and increased lead time, which are major concerns. The inflow of capital investment to this particular industry has been reducing due to interest rate hikes and investor uncertainty amid a broader market slowdown. Many industry participants are likely to find the present investment situation highly challenging.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Satellite and Communication industry is housed within the broader Zacks Computer and Technology sector. It currently has a Zacks Industry Rank #186, which places it in the bottom 26% 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 bleak near-term prospects. 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.

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

Industry Outperforms Sector, S&P 500

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

The industry has lost 4% over this period against the S&P 500’s decline of 8.8%. The broader sector has plunged 17.5%.

One-Year Price Performance

Industry's Current Valuation

The 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 9.61X compared with the S&P 500’s 12.17X. The sector’s trailing 12-month EV/EBITDA stands at 9.44X.

In the past five years, the industry has traded as high as 22.93X and as low as 7.48X, with a median of 10.19X, as the chart below shows.

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

3 Stocks to Watch in the Industry

Iridium Communications: Iridium provides mobile voice and data communication services and products to businesses, the United States and foreign governments, non-governmental organizations and consumers. The company delivers mission-critical services across various industries, allowing its business to remain resilient despite headwinds.

Iridium's performance is benefiting from higher demand in services and engineering and support business segments. Services revenues are driven by a growing subscriber base owing to robust demand for consumer-oriented devices. Iridium expects the voice and data business to gain from the increasing demand for newer services like Push-to-Talk and satellite Wi-Fi for smartphones. Continued momentum in the commercial IoT business (particularly personal satellite communications) and broadband business (especially L-band services) augurs well. Iridium recently announced that it had signed an agreement with Qualcomm Technologies to allow satellite messaging and emergency services in smartphones powered by Qualcomm's Snapdragon Mobile Platforms. The service is expected to be available in premium Android smartphones in select regions starting in the second half of 2023.

Iridium carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The consensus estimate for its current-year earnings is pegged at 8 cents. The stock has gained 75.1% in the past year. The company delivered a trailing four-quarter earnings surprise of 100%, on average.

Price and Consensus: IRDM

Maxar: Maxar is a space technology firm providing satellite imagery and expert intelligence services along with spacecraft and robotics for space exploration, research and national security. The company’s focus on diversifying its products and customer base bodes well and higher demand for the company’s 3D and other innovative geospatial products. There is huge growth potential among three key parts of its addressable market — the U.S. government, other international governments and commercial customers. Recently, Maxar received two contracts worth $35.8 million from the U.S. National Geospatial-Intelligence Agency ("NGA"). The first award, worth up to $22.5 million, is a one-year performance contract. The second award, worth up to $13.3 million, Maxar will provide NGA's Foundation Program with an enhanced application programming interface (API) that can query, discover and download content from Maxar's 125-petabyte high-resolution commercial imagery archive. Investment in differentiated capabilities and expansion of partnerships with large defense companies is likely to act as a tailwind. The company expects total revenues in the range of $1.755-1.805 billion for the full year.

The Zacks Consensus Estimate for this Zacks Rank #3 stock current-year earnings is pegged at a loss of 90 cents. The company delivered a trailing four-quarter earnings surprise of 122%, on average. The stock has gained 97.6% in the past year.

Price and Consensus: MAXR

EchoStar Corporation: Headquartered in Englewood, CO, EchoStar Corporation is a global provider of satellite service operations, video delivery services, broadband satellite technologies and broadband internet services. The company also provides innovative network technologies, managed services, and various communications solutions for aeronautical, enterprise and government customers. It operates through its Hughes Network Systems and EchoStar Satellite Services business segment.

The Zacks Consensus Estimate for this Zacks Rank #3 stock current-year earnings is pegged at earnings of $1.89 per share.

Price and Consensus: SATS



 



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