Satellite Phones Head Into Orbit

By Stephen D. Simpson, CFA | June 10, 2010 AAA

Considering all the attention given to iPhones, Blackberries, 4G and other mobile phone topics, investors could be forgiven if they have forgotten that satellite phone systems still existed. Judging by the announcement last week that Iridium Communications (Nasdaq:IRDM) had awarded a major contract to build a new satellite network, the business not only still exists, but has money-making potential ahead of it.

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The New Deal
On June 2, the satellite phone operator announced that it had awarded a contract for its Iridium NEXT project to a consortium led by France's Thales. The deal, which could be worth in excess of $3 billion, calls for the construction and launch of 72 low-orbit satellites starting in 2015.

This new satellite network will replace the company's current system, as it is getting a bit long in the tooth. Careful management by Boeing (NYSE:BA) has kept the system better and longer than originally forecast, but the company knows this cannot last forever. Once completed, the NEXT project will continue the company's ability to give 100% global coverage of voice and data, but with higher capacity and quality.

Winners and Losers
Thales won the contract over a competing bid from Lockheed Martin (NYSE:LMT), but the deal will not be kept solely within France and Italy. Thales has already said that as much as 40% of the contract will be sub-contracted to partners like Boeing and Ball Corporation's (NYSE:BLL) Ball Aerospace. It remains to be seen who else might capture some of this business; will Freescale (NYSE:FSL) chips have a place in the satellites now that Motorola (NYSE:MOT) is not running the show? Will Boeing dominate the launch vehicles, or will a company like Orbital Sciences (NYSE:ORB) have a role to play?

Yes, This Is Still a Business
For Iridium at least, this is still is a growth enterprise. The company boasted double-digit subscriber growth last year and has posted an operating profit for many years running.

Satellite telephony will never be a mass market, but that's okay. Australia's Telstra uses the system to supplement its services to remote customers and there is no shortage of remote locations in the world. Other companies like Continental Airlines (NYSE:CAL) contract with Iridium to cover critical gaps in their own communications networks (like polar regions).

The Bottom Line
Iridium's a tough stock to assess right now, though the company's balance sheet is clean and it looks like funding for the NEXT project is workable. Obscure ideas like this can be interesting plays, but perhaps not at a double-digit EV/EBITDA valuation. Orbital Sciences might be the more interesting off-planet idea today, but Iridium is a name to watch for the future.

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