Economic

Iridium Communications: An Even Better Way To Play The Space Economy Today (NASDAQ:IRDM)

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Beyond any doubt, one of the most interesting investment opportunities on the market is Iridium Communications (NASDAQ:IRDM). In an era where more and more companies are dedicating resources to outer space, you would think that this prospect, which owns its own constellation of satellites encircling the globe, would be a hit with investors. This is especially true when you consider the extreme stability and consistent growth that the company has seen on both its top and bottom lines in recent years. Despite all of this, the market has investors scared and even a quality prospect like this has been hit in a bad way. But given the recent drop in prices that shares have seen, now is definitely an opportune time for investors to consider a stake in the enterprise.

Performance continues

Back in February of this year, I published an article about Iridium Communications wherein I changed my assessment from the company being a ‘hold’ to being a ‘buy’ prospect. Shares had already dropped nicely from where they were previously and the company continued to generate consistent growth on its top and bottom lines. Admittedly, even then, shares were not exactly cheap. But they weren’t far off. Since then, the stock has fallen further, dropping by 10.6%. By comparison, the broader market, as measured by the S&P 500, dropped a more modest 7.6%.

Historical Financials

Author – SEC EDGAR Data

Based on this return disparity, it would make sense to think that may be the fundamental condition of the business or send. But that could not be further from the truth. In the latest quarter for which data is available, the first quarter of the company’s 2022 fiscal year, revenue came in at $168.2 million. That represents an increase of 14.8% over the $146.5 million generated one year earlier. During the quarter, the number of billable subscribers for the company stood at 1.78 million. That represents a year-over-year increase of 17.3% compared to the 1.52 million the company reported during the first quarter of 2021. We also saw ARPU for the company increase across two of the three categories of services. For voice and data, this number increased from $39 to $40. And for broadband, the number increased from $265 to $288. Only in the IoT category did we see a decrease, with a number dropping from $8.39 to $7.78.

User Data

Iridium Communications

What was particularly interesting was the surge in revenue associated with subscriber equipment. Though not a large portion of the company, it can serve as a leading indicator because individuals and organizations that acquire the company’s equipment are very likely to ultimately use the services that comprise the bulk of the company’s sales. During the quarter, subscriber equipment revenue totaled $33.7 million. That is 40.4% above the $24 million reported for the first quarter of 2021.

User Data

Iridium Communications

On the bottom line, the picture also came in quite strong. Net income totaled $2.8 million. Though not much, that does represent a significant improvement over the $5.2 million loss the company reported for the first quarter of 2021. Other profitability metrics also came in strong. Operating cash flow, for instance, rose year over year, climbing from $50.8 million last year to $65.8 million this year. Meanwhile, EBITDA increased from $89.8 million to an impressive $103.2 million.

When it comes to the company’s 2022 fiscal year as a whole, management has provided some really good guidance. At present, they expect total service revenue to rise by between 5% and 7% compared to what the company saw in 2021. At the midpoint, that would imply sales of $521.5 million associated with the company’s services. That compares to the $492 million reported for 2021. Profitability is also expected to improve, with EBITDA coming in at between $400 million and $410 million. By comparison, EBITDA for 2021 was $378.2 million. On top of all of this, the company also announced, in March of this year, the addition of another $300 million of authorization to its share buyback program, increasing its buyback plan to $600 million in all. The company’s goal is to exhaust this plan by the end of 2023 which, at current prices, would reduce the number of shares outstanding by about 13.7%. Even while this is happening, management expects leverage to fall, with the net leverage ratio ending in 2023 at between 2.5 and 3.5. That assumes the aforementioned share buyback plan is exhausted in its entirety. By comparison, the current net leverage ratio is 3.9.

Trading Multiples

Author – SEC EDGAR Data

In terms of pricing the company, the data we have makes the process simple. Based on my calculations, using our 2021 results, Iridium Communications is trading at a price to operating cash flow multiple of 14.5. This compares to the 15.5 the company was trading at when I last wrote about it. The price to free cash flow multiple should be 17.9. That’s down from the 18.4 estimate that I calculated for 2021 in my prior article. And the EV to EBITDA multiple should drop from 15.8 to 15.2. If, instead, we rely on 2022 estimates, shares look cheaper still. The price to operating cash flow multiple should be 13.5. That compares to the 14.5 when I last wrote about the firm. The price to free cash flow multiple should be 16.5, down from 17.9. And the EV to EBITDA multiple should be 14.2. That stacks up favorably against the 14.7 I calculated in my aforementioned article.

Takeaway

Based on all the data provided, Iridium Communications strikes me as an incredibly stable company that should hold up well even if the economy takes a big step back for a time. Either way, shares have gotten cheap and the business looks to offer strong upside moving forward. While not the highest prospect on my list, it is definitely worthy of a ‘buy’ designation at this time in my opinion.

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