Gilat Shares Still Have Higher To Go
Feb. 19, 2014 10:34 AM ET | About: GILT
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
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Executive summary:
Gilat Satellite Networks (GILT) remains an attractive investment with a strong $51 million net cash balance (23% of the market cap) and numerous growth opportunities.
Significant cost restructuring is in place which should improve profitability beginning in Q1 2014.
Sequestration issues should become less salient as Gilat expands its revenue base to adjacent markets.
Recent sale of SpaceNet subsidiary allows Gilat to focus on core competencies with higher margins, and galvanizes the balance sheet.
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Shares of Gilat Satellite Networks ("Gilat") have performed well (+20.5%) since I recommended them in December, handily outpacing the S&P 500 Index (+3.5%) over the comparative time frame, providing 17% of "alpha."
In that narrative, I suggested that Gilat sold off primarily due to delayed, but not lost contracts, and that certain divestitures and restructuring efforts would drive profitability.
I understand Gilat sold off in Q3 generally due to missed revenue guidance. However, two equipment projects and a services contract worth over $33 million were delayed but should be recognized in the financial statements by the first half of 2014. Therefore, the sell-off appears to be short term in nature, meanwhile the underlying business remains healthy.
After reviewing the most recent results and reviewing the conference call, investors should continue a certain amount of lumpiness in Gilat's revenue stream going forward. Having said that, backlog more than doubled to $228 million indicating healthy demand for Gilat's products and services.
Specifically, management announced:
$99 million project from Colombia's Ministry of Information, Technology and Communications for internet connectivity infrastructure. Revenues are expected to begin in second half of 2014.
$30 million project from Peru's Ministry of Transportation and Communication to provide internet connectivity infrastructure in rural geographies.
Expansion to Adjacent Markets
Due to the coming ubiquity of satellite broadband connectivity, Gilat is positioned well to take advantage of the large capital investment required to support global networks. To that end, one area that is an exciting area of growth is Gilat's growing revenue stream with respect to in-flight WiFi infrastructure. CEO Erez Antebi made the following remarks regarding this growth opportunity (transcript courtesy of Seeking Alpha)
Chris Quilty - Raymond James
And final question, I know you had at least one win on some of the Wavestream amplifiers for the aviation market and that market seems to be taking off in the last year or two here. Have you seen any follow up order activity and perhaps what your outlook for that particular market?
Erez Antebi
Yeah. We've had actually quite a few wins I would say and we have continuing follow on orders for those. We're providing the amplifiers for T-Com who is then providing the terminals to Row44 and we're providing them to Aerostat who is then providing their terminals to Gogo. Both of these are on KU and we've had a very significant win with Honeywell for the Global Express project which as you know is not yet launched and we expect it to be launched in about a year.
Chris Quilty - Raymond James
And is that then one of the stronger growth areas for the Wavestream business or are there other pockets of strength?
Erez Antebi
I think there are definitely other pockets of strength, but that should be a nice growth area. We definitely expect commercial aviation -- oh sorry, internet for commercial aviation to be a growth area as we've mentioned and we expect Wavestream to grow with that.
We know from recent commentary that Gogo (GOGO) is rapidly expanding its network, thereby creating significant demand for Gilat's products as it ramps up its in-flight WiFi aircraft counts. And in 2014, Gilat should start generating revenue on the back of the Honeywell (HON) and Inmarsat agreement to build out Global Xpress, a venture to modernize in-flight WiFi capabilities. I understand that Gilat was selected to provide transceivers and onboard antennas. The Honeywell/Inmarsat contract is valued at $2.8 billion, meanwhile Gilat will get at least some portion of that contract.
Valuation
Gilat's revenue lumpiness remains problematic. For investors willing to take the long-term view, it shouldn't matter much given Gilat has solid growth prospects in global markets ahead of it. However, investors should expect the lumpiness to equate to an erratic stock price. For nimble traders looking to pick their spots, Gilat will probably remain a solid trading stock for the foreseeable future.
That said, I still think the shares are attractive here at a $220 million valuation on account of the strong balance sheet, robust backlog and an industry which should continue to benefit from secular tailwinds.
Management is guiding to $240 to $245 million in revenue at a 9% EBITDA margin, valuing Gilat at about 7.5x forward EV/EBITDA. While less upside remains relative to my prior $6/share valuation, I think investors can still own these shares here for the reasons cited above.
Conclusion
Gilat remains an attractive investment opportunity.
While some of the asymmetry in this opportunity has evaporated with the appreciating share price, I still think there is another 15% upside here. However, I continue to believe this stock will remain a high "beta" name given the lumpiness in the revenue stream. That said, given the strong balance sheet and growing backlog, I think the risk of a permanent impairment of investment capital is muted.
