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Satellite and Communication Industry's Prospects Look Bleak
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The Zacks Satellite and Communication industry comprises vendors of satellite service operations, broadband satellite technologies, broadband Internet services and video delivery services for varied clients across the world. The industry participants provide avant-garde network technologies, managed services and allied communication solutions for aeronautical, enterprise and government customers.
Some of the firms provide satellite voice and data services to commercial and recreational users. They offer network services comprising transponder services, video distribution services, hybrid satellite, fiber and teleport managed services to media companies, fixed and wireless telecommunications operators, data networking service providers, Internet service providers, military and government sectors.
Let’s take a look at three major themes in the industry —
• In order to cater to the increased data demand for mobile connectivity, global satellite service players made steady investments in R&D activities to be on par with emerging technologies and keep their product lines updated. However, the industry’s growth prospects are hindered by factors such as high cost of manufacturing, delay in signals and need for replacements. Markedly, the cost of satellite communication technology comprises the cost of satellite manufacturing, the launch of satellites through a space shuttle and investments in a ground segment or base stations to manage and control a satellite. All these factors have increased the operating costs of the industry participants, contracting bottom-line growth.
• Wireless backhaul services have generated additional revenues for satellite operators as consumers desire extensive coverage with the expansion of mobile Internet connections. However, development and launch of satellites take years to complete, and it is completely dependent on the successful launch of space shuttles. Moreover, during bad weather conditions such as storm and heavy rain, satellite connections are likely to face delay in receiving or sending signals. Also, standard satellites have a longevity of 12 to 15 years, which means that these need to be replaced at steady interval of time. These lead to soft margins for most of the firms and bring volatility in earnings.
• The global satellite communication technology market has gained traction with the expansion of satellite broadband Internet services, arrival of direct-to-home TV offerings and advancement of digital technology, while fostering demand for commercial and government welfare schemes. Rising demand for small satellite constellations with increased deployment for commercial end users, easy accessibility and progress in satellite miniaturization are fueling market growth.
Zacks Industry Rank Indicates Weak Prospects
The Zacks Satellite and Communication industry is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #167, which places it at the bottom 35% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Interestingly 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.
Now, the industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it seems that analysts are losing faith in this group’s earnings growth potential. The industry’s earnings estimates for the current fiscal have decreased 47.3% over the past year, while the same for the next fiscal has declined 36.9%.
Before we present a few satellite and communication stocks that are well positioned to outperform the market based on a healthy earnings outlook, 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 over the past year.
The industry has declined 17.2% over this period against the S&P 500’s rise of 3.6%. Meanwhile, the broader sector has gained 1.5%.
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 8.75X compared to the S&P 500’s 10.86X. It is trading below the sector’s trailing 12-month EV/EBITDA of 10.92X.
Over the past five years, the industry has traded as high as 19.12X, as low as 2.96X with the median of 7.92X, as the chart below shows.
Enterprise Value-to-EBITDA Ratio (Past Five Years)
Bottom Line
Although the industry is expected to witness higher demand for small satellites across different geographies, firms need a combination of factors to succeed over the long run. These include reliable technologies, government policies that encourage industry competitiveness, a strong international presence and sound business plans to ensure their competitiveness in both the domestic and international marketplaces.
Further, the government’s policymaking process is yet to achieve the degree of predictability, timeliness and transparency that the firms require to operate effectively in a highly competitive and rapidly changing global marketplace.
None of the stocks in the space currently carries a Zacks Rank #1 (Strong Buy) or #2 (Buy). So, we are presenting three stocks with a Zacks Rank #3 (Hold) that investors may consider betting on now due to healthy fundamentals. You can see the complete list of today’s Zacks #1 Rank stocks here.
Inmarsat Plc : Shares of this London-based satellite and communication firm have gained 38.2% over the past year. The Zacks Consensus Estimate for the current fiscal-year earnings has remained stable in the past 60 days. The company has long-term EPS growth expectation of 18.9%.
Price and Consensus: IMASY
Iridium Communications Inc. (IRDM - Free Report) : The consensus estimate for this McLean, VA-based satellite and communication firm’s earnings has been revised 14.3% upward in the past 60 days. The stock has returned 85.8% over the past year. The company delivered average positive earnings surprise of 38.6% in the trailing four quarters.
Price and Consensus: IRDM
Globalstar, Inc. (GSAT - Free Report) : Shares of this Covington, LA-based satellite and communication firm have rallied 51.4% over the past six months. The Zacks Consensus Estimate for the current fiscal-year earnings has remained stable in the past 60 days.
Price and Consensus: GSAT
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Satellite and Communication Industry's Prospects Look Bleak
The Zacks Satellite and Communication industry comprises vendors of satellite service operations, broadband satellite technologies, broadband Internet services and video delivery services for varied clients across the world. The industry participants provide avant-garde network technologies, managed services and allied communication solutions for aeronautical, enterprise and government customers.
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Some of the firms provide satellite voice and data services to commercial and recreational users. They offer network services comprising transponder services, video distribution services, hybrid satellite, fiber and teleport managed services to media companies, fixed and wireless telecommunications operators, data networking service providers, Internet service providers, military and government sectors.
Let’s take a look at three major themes in the industry —
• In order to cater to the increased data demand for mobile connectivity, global satellite service players made steady investments in R&D activities to be on par with emerging technologies and keep their product lines updated. However, the industry’s growth prospects are hindered by factors such as high cost of manufacturing, delay in signals and need for replacements. Markedly, the cost of satellite communication technology comprises the cost of satellite manufacturing, the launch of satellites through a space shuttle and investments in a ground segment or base stations to manage and control a satellite. All these factors have increased the operating costs of the industry participants, contracting bottom-line growth.
• Wireless backhaul services have generated additional revenues for satellite operators as consumers desire extensive coverage with the expansion of mobile Internet connections. However, development and launch of satellites take years to complete, and it is completely dependent on the successful launch of space shuttles. Moreover, during bad weather conditions such as storm and heavy rain, satellite connections are likely to face delay in receiving or sending signals. Also, standard satellites have a longevity of 12 to 15 years, which means that these need to be replaced at steady interval of time. These lead to soft margins for most of the firms and bring volatility in earnings.
• The global satellite communication technology market has gained traction with the expansion of satellite broadband Internet services, arrival of direct-to-home TV offerings and advancement of digital technology, while fostering demand for commercial and government welfare schemes. Rising demand for small satellite constellations with increased deployment for commercial end users, easy accessibility and progress in satellite miniaturization are fueling market growth.
Zacks Industry Rank Indicates Weak Prospects
The Zacks Satellite and Communication industry is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #167, which places it at the bottom 35% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Interestingly 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.
Now, the industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it seems that analysts are losing faith in this group’s earnings growth potential. The industry’s earnings estimates for the current fiscal have decreased 47.3% over the past year, while the same for the next fiscal has declined 36.9%.
Before we present a few satellite and communication stocks that are well positioned to outperform the market based on a healthy earnings outlook, 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 over the past year.
The industry has declined 17.2% over this period against the S&P 500’s rise of 3.6%. Meanwhile, the broader sector has gained 1.5%.
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 8.75X compared to the S&P 500’s 10.86X. It is trading below the sector’s trailing 12-month EV/EBITDA of 10.92X.
Over the past five years, the industry has traded as high as 19.12X, as low as 2.96X with the median of 7.92X, as the chart below shows.
Enterprise Value-to-EBITDA Ratio (Past Five Years)
Bottom Line
Although the industry is expected to witness higher demand for small satellites across different geographies, firms need a combination of factors to succeed over the long run. These include reliable technologies, government policies that encourage industry competitiveness, a strong international presence and sound business plans to ensure their competitiveness in both the domestic and international marketplaces.
Further, the government’s policymaking process is yet to achieve the degree of predictability, timeliness and transparency that the firms require to operate effectively in a highly competitive and rapidly changing global marketplace.
None of the stocks in the space currently carries a Zacks Rank #1 (Strong Buy) or #2 (Buy). So, we are presenting three stocks with a Zacks Rank #3 (Hold) that investors may consider betting on now due to healthy fundamentals. You can see the complete list of today’s Zacks #1 Rank stocks here.
Inmarsat Plc : Shares of this London-based satellite and communication firm have gained 38.2% over the past year. The Zacks Consensus Estimate for the current fiscal-year earnings has remained stable in the past 60 days. The company has long-term EPS growth expectation of 18.9%.
Price and Consensus: IMASY
Iridium Communications Inc. (IRDM - Free Report) : The consensus estimate for this McLean, VA-based satellite and communication firm’s earnings has been revised 14.3% upward in the past 60 days. The stock has returned 85.8% over the past year. The company delivered average positive earnings surprise of 38.6% in the trailing four quarters.
Price and Consensus: IRDM
Globalstar, Inc. (GSAT - Free Report) : Shares of this Covington, LA-based satellite and communication firm have rallied 51.4% over the past six months. The Zacks Consensus Estimate for the current fiscal-year earnings has remained stable in the past 60 days.
Price and Consensus: GSAT
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