Hilary Kramer's GAMECHANGER Weekly Update: November 2, 2011
GeoEye (GEOY) fell nearly 15% yesterday after reporting disappointing third-quarter earnings of $0.51 a share, a nickel short of expectations and well below the $0.61 earned a year ago. Revenues of $85.8 million were just about even from a year ago and also fell shy of the expected $93 million.
Management cited various reasons for the shortfall, including a slowdown in the U.S. government adopting a budget for 2011, which led to delays in orders for the company’s production business. That’s the part of the businesses that takes the high-resolution imagery and turns it into customized products, such as mapping and terrain databases. Unlike GeoEye’s imagery business, production orders take weeks to compile and deliver, so although the delayed orders were eventually received, their recognition will be delayed until future quarters when they are delivered and the company can collect the revenue.
Government budget delays played a role in the company’s analytics business as well. In addition, a contract that GeoEye expected to receive from a European country was delayed indefinitely, so it’s possible it will never be received. Finally, there was a shortfall in commercial imagery orders, perhaps reflecting orders being pushed ahead to earlier in the year. I was happy to see that GEOY controlled costs tightly and margins remained over 50%, which helped support the bottom line. Another bright spot was business with Google Earth, which remains strong.
One of the big long-term catalysts for GeoEye is its GeoEye2 satellite, and it remains on budget and on schedule. The company expects to be collecting revenues from the enhanced Service Level Agreement (SLA) by mid-2013, when the service will become operational. As we talked about in the monthly issue, management confirmed that while government budget cuts bear watching, there is a lot of agreement in Congress that intelligence spending should not be cut, so I don’t believe this will ultimately be a big risk for GEOY.
In the near term, management gave guidance that left open the possibility for further disappointments here in the fourth quarter. Forecasted revenues of $348 million–$355 million were well below current expectations of $369.5 million. Earnings are now forecast to be $1.95–$2.15, compared with the expected $2.19. On the conference call, management said it is looking for a 5% increase in revenues in 2012 but did not set guidance for next year’s earnings.
The report was disappointing to be sure, but looking ahead, the stock is attractively valued at less than 6X enterprise value/earnings, and it remains a solid Top Buy as we discuss in the new issue. The weakness in the quarter was magnified by governmental delays and the loss of a single contract, which are more short-term blips than long-term warning signs.
We also have to factor in the possibility that GeoEye will be acquired, which is another big reason we own the stock. While management did not discuss whether they have hired a financial advisor to seek a sale of the company, as reports have indicated, I continue to see GEOY as a takeover candidate based on valuation, future free cash flow generation, and their unique franchise. Use this pullback to buy GEOY under $37.
