Newsflash: GeoEye Is Not DigitalGlobe

Once upon a time, a certain well-known credit card company went public -- and its stock went through the roof. A couple years later, its archrival filed for an IPO and followed a similar path.

The success of the twin IPOs for MasterCard (NYSE: MA  ) and Visa (NYSE: V  ) has a lot of investors looking for a replay in tomorrow's expected initial public offering of satellite photoshop DigitalGlobe (which will soon bear the moniker "NYSE: DGI"). But if you keep your ear to the ground on what investors are saying, a lot of people seem to think that the best news about tomorrow's IPO is what it could do for the stock price of DGI-doppelganger (and Motley Fool Rule Breakers recommendation) GeoEye (Nasdaq: GEOY  ) .

I'm not one of those people.

Spinners aren't winners
Oh, I have no doubt the IPO will be successful to some extent, and for some players. The bankers running it, for example -- JPMorgan Chase (NYSE: JPM  ) , Morgan Stanley (NYSE: MS  ) , et al. -- will no doubt make out like bandits. In Morgan Stanley's case, they'll also make for the exits; Morgan Stanley owns a 32% stake in the company, and will be cashing in a bucketful of shares in the IPO.

And of course, in a market mostly devoid of successful IPOs, I rather expect we'll see good things happen to whomever is so fortunate as to get a piece of DGI at the IPO price.

But that's not what Tom and Harriet Investor are talking about. They're all about what DGI's supposed IPO valuation tells us about GeoEye. Specifically, they're all about the likelihood that once people get a look at how much DigitalGlobe is "worth," they'll revise their thinking about GeoEye's valuation in a hurry.

Problem is, they won't -- or at least they shouldn't.

I mean, sure, the companies have their similarities. They're archrivals and duopolists in the satellite imagery space, for one. Each has (or will soon have) three satellites orbiting the globe, asking it to say "cheese," and snapping Polaroids for everyone from Google (Nasdaq: GOOG  ) to Yahoo! (Nasdaq: YHOO  ) to the National Geospatial Intelligence Agency. And if you believe the analysts, their revenues should quickly become as similar as their satellite counts. But aside from the obvious parallels, how do the companies really stack up against each other?

The question got to bugging me after I got a peek at GeoEye's first-quarter earnings report Tuesday, and so I did a little digging into the SEC files. Here's what I came up with:

Fiscal Year 2008

GeoEye

DigitalGlobe

Fiscal 2008 revenue

$146.7 million

$275.2 million

Fiscal 2008 operating profit

$22.8 million

$94.9 million

Fiscal 2008 operating profit margin

15.5%

34.5%

Fiscal 2008 free cash flow

($129.8 million)

$12.6 million*

*Free cash flow calculation based on $131.8 million in "cash paid for satellite and related ground related facilities construction" figure in company prospectus.

So that's how the companies stacked up yesteryear, with DigitalGlobe casting shadow over the firm that preceded it into the public markets. But what about this year? Is GeoEye closing the gap any?

Fiscal Q1 2009

GeoEye

DigitalGlobe

Q1 2009 revenues

$45.2 million

$67.2 million

Q1 2009 operating profit

$1.7 million

$19.5 million

Q1 operating profit margin

3.8%

29%

Q1 operating profit growth (YOY)

(70%)

(22%)

Q1 2009 free cash flow

($16.6 million)

$10.5 million

Net debt

$152.0 million

$208.6 million (Non Pro Forma)

Apparently not.

The racehorse and the donkey: an investing fable
So you see, GeoEye really isn't DigitalGlobe, and vice versa. Despite the similarities (sizeable debt loads, providing the same kinds of services to the same kinds of clients), when it comes to evaluating their potential as investments, these two firms are entirely different beasts. How do they differ?

  • Size: DigitalGlobe is nearly twice as big as GeoEye by annual sales -- though that gap may be narrow with GeoEye's increased revenue from the launch of GeoEye-1.
  • Profitability: DigitalGlobe is more than twice as profitable (per revenue dollar) as GeoEye ... and that gap is expanding.
  • Profits that count: Finally, when it comes to the best kind of profit -- the cash-money kind that rustles in the wind, that you can count, the kind your landlord requires for your rent payment -- DigitalGlobe outclasses GeoEye by a mile. DigitalGlobe made money last year, and is starting off this year making even more. Both companies have been burning cash trying to get their new state-of-the-art satellites in the sky, but it looks like DigitalGlobe has been the more efficiently run operation. GeoEye? About the best we can say for it is that so far this year, GeoEye's not burning cash with quite as much abandon as it exhibited last year. Hooray? Once again, a lot of hope rests on GeoEye's new satellite GeoEye-1, but DigitalGlobe has already launched one successful next-generation satellite, and should beat GeoEye to getting two new birds in the sky when it launches Worldview-2 in December.

Foolish takeaway
I hate to say it, Fools, but I've got a sneaking suspicion that the folks at Motley Fool Rule Breakers are backing the wrong horse in this race. Whereas DigitalGlobe is shaping up to be a real racehorse, I'm starting to worry that GeoEye may be just a donkey in drag.

Fools of a feather don't often flock together, and it's entirely possible -- in fact, it's downright likely -- that the gang over at Motley Fool Rule Breakers disagrees with Rich about all this. Find out their latest thinking on GeoEye, DigitalGlobe, and a whole host of other cosmically cool companies when you try the service out for free for 30 days.

Fool contributor Rich Smith does not own shares of any company named above, but as already mentioned, Motley Fool Rule Breakers has recommended GeoEye -- and Google, too!

The Motley Fool's disclosure policy is outta this world.


Read/Post Comments (6) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 13, 2009, at 7:45 PM, PeakStocks wrote:

    Hey Rich,

    I appreciate your analysis, it was thorough to a point.

    You forgot to really look deeper into the capital expenditures that are going to happen this year, as well as the ramp up from GeoEye-1.

    When you include that ramp up, GeoEye and DigitalGlobe will have about equal revenues this year, with the gap in profits and margins shrinking to almost imperceptible levels.

    As forward looking investors, that's what we need to focus on.

    In addition, you fail to comment on GeoEye's production and services division which is hiring 120 additional staffers this year, and is able to manipulate and fine tune imagery from ANY source, not just their satellites, for all types of customers.

    This is something that DGI doesn't do.

    Also, you forgot GeoEye's MJ Harden division that uses local aircraft and cameras to do corridor mapping closer to the ground. That division just purchased another airplane and camera because demand was exceeding supply.

    Again, for revenue diversification and product offerings, GeoEye is head and shoulders above DGI.

    With the ramp up in revenues from GeoEye-1 (which only in April started delivering a full slate of imagery), the revenue gap will close, and we'll see things much closer to par for both companies, with the edge going to GeoEye because of the aforementioned product and diversification offerings.

    Thanks for the report.

    Chris Fernandez

    http://www.PeakStocks.com

  • Report this Comment On May 13, 2009, at 10:19 PM, TMFBreakerTAllan wrote:

    Let's see. Mastercard and Visa both were successful on the IPOs. But does that matter now? The first to IPO, MA at $45.53 is now at $170.76. The second to IPO, V at $56.50 is now at $64.47. So, there is really little stock to put into the IPO success. And with a bit more history, the tale of the credit card companies has become clearer. So, a prediction of a successful IPO for DigitalGlobe means what? You're right - bankers make money.

    As for the track analogy you make, I don't think we are comparing horses that are racing on the same track. In addition to Chris' comments above, I think one of the things missing in your comparison is the look at only the most recent history of Geoeye and DigitalGlobe. A bit of revenue comparison that is like comparing apples to oranges. You neglect to note that prior to DigitalGlobe's launch of its latest satellite, it garnered only 1/2 the revenue GeoEye realized. More interesting is that you present the latest quarter's numbers without noting that GeoEye had only one month of the quarter with revenue coming from it's latest satellite. Not to say that you may be right that DigitalGlobe will be the investment winner, but the snapshot comparison...and conclusion that GeoEye will not earn investors as much as DigitalGlobe investors, is not so, well, stellar.

    You may very well be right that DigitalGlobe will maintain revenues higher than GeoEye and you may be right that that they can do so with the imminent launch of a new satellite that offers no better resolution than GeoEye's latest. And you may be right that the RB team selected the company that will finish the investing race second. But how can RuleBreakers be "backing the wrong horse" when for the past few years, there has been only one horse to pick?

    Bold prediction Mr. Smith. I hope that you are wrong in that both companies are able to make money for their investors. I for one am long GEOY. I am also taking a wait and see attitude on DigitalGlobe. The imagery industry that these companies make-up is growing, and will likely continue to grow. There is a steep barrier to entry - both in time and cost - and that means that both companies are likely to grow in tandem, or likely leapfrog each other with the next launch and improvement in imagery.

    An investment in both would make more sense than attempting to handicap this particular space race, even before we see how GeoEye does without the blinders it had on in '08 and two of the three months of the Q1 '09. But that investment should certainly be made only after DigitalGlobe has been a bit more carefully vetted as a public company. And only after more resolution is realized in the revenue picture when GeoEye has the current advantage in the sky.

    T. Allan

  • Report this Comment On May 14, 2009, at 11:48 AM, TMFDitty wrote:

    To Chris and Allan, great comments both.

    And to anyone else who's reading these comments and wondering to whom you should listen... let me point out that both Chris and Allan rank in the top 10% of investors tracked on Motley Fool CAPS (http://caps.fool.com).

    Listen to 'em both. Their records demonstrate that both these Fools are right more often than wrong... just not today ;-)

  • Report this Comment On May 14, 2009, at 1:25 PM, TMFBreakerTAllan wrote:

    Rich

    It appears so far that DGI has had a successful launch. And GEOY has been grounded on the pad. It appears you are right... for now. We will just have to wait and see how the companies perform in the long run.

    T. Allan

  • Report this Comment On May 14, 2009, at 1:36 PM, ArchieBelaney wrote:

    Both companies sell imagery, and we see the results on Google...which is 'kewl' for most folks.

    But both companies make their real money on professional-grade products sold to the Dept. of Defense.

    Since GeoEye launched their next generation satellite, there has been some nervous muttering that the 'professional-grade' capabilities are limited or compromised.

    Does anyone know the answer to this? Despite all the hype around service diversification, this is fundamentally material to their viability. If the answer is GeoEye-1 takes happy-snaps but the military uses are limited, then we really don't have a two-horse race after all.

  • Report this Comment On May 14, 2009, at 7:56 PM, TMFBreakerThiel wrote:

    Rich

    I love it when you give me a hard time! GeoEye is worrying me plenty these days (arrgh! Camera problems!), but not because I think it's going to perpetually run operating margins that are an eighth of those at Digital Globe.

    As noted in an earlier post, comparing 2008 figures for these companies is pretty much a non-starter, and even the first quarter only reflects partial operation of GeoEye-1, while WorldView-1 has been in place since October 2007.

    In fact, comparing 2007 is maybe a little more instructive--GeoEye didn't have GeoEye-1 and DG (mostly) didn't have WorldView-1.

    2007 Rev: $183M (GEOY), $152M (DG)

    2007 EBITDA margin: 54.4% (GEOY), 49.5% (DG)

    2007 operating cash flow margin: 39% (GEOY), 53% (DG)

    Of course, this isn't perfect either, since it compares two largely irrelevant satellites, but I think it gives a somewhat clearer idea of how the companies will compare when fully ramped up. These are different companies indeed, and DG has had consistently better gross margins, which will likely continue to trickle through to the bottom line somewhat. But the kind of discrepancies you're observing won't persist, I don't think.

    Here's from a recent RB post a few days ago about past and future revenues:

    2006 rev:

    GeoEye: $151.2M (no GeoeEye-1)

    DG: $106.8M (no WorldView-1)

    Total: $258.0M

    2007 rev:

    GeoEye: $183.0M (no GeoEye-1)

    DG: $151.7M (no WorldView-1, pretty much)

    Total: $334.7M

    Growth from prior year: 29.7%

    2008 rev:

    GeoEye: $146.7M (no GeoEye-1)

    DG: $275.2M (WorldView-1 online!)

    Total: $421.9M

    Growth from prior year: 26.1%

    2009 rev (est):

    GeoEye: $267.0M (GeoEye-01 working!! But not for the full year!)

    DG: $260.4M to $268.8M**

    Total: ~$528M

    Growth from prior year: ~25%

    **I don't see any analyst estimates, so I did an estimate two ways. One, I just took first quarter revenue of $67.2M and used it as a run rate (=$268.8M). Second, I assumed the overall market would grow by about 25%, which represents a continuation of the current trend--ie, the slope of growth slowly flattening.) Subtract GeoEye's estimated $267 and that leaves $260.4. These numbers are remarkably close, and I think there's probably at least some ballpark accuracy here.

    Note that it means GeoEye and DG will be roughly on par this year in terms of revenue, but DG will theoretically start off with a ~50% greater valuation (and that's assuming no bump from the IPO price).

    Also note that it means zero growth (slight contraction) for DG revenues in 2008. Not surprising--GeoeEye-1 wasn't available in 2008, so DG took all the growth and put up some pretty spectacular numbers. This year, GeoEye will take all the growth. So will DG take all the growth in 2010 assuming the WorldView-2 launch is successful and on schedule (the latter, history would indicate, a pretty big assumption)? Not necessarily. WorldView-1 offered an order of magnitude improvement over Ikonos. GeoEye-1 offers substantial improvement over WorldView-1 (although not really quite as dramatic a step). WorldView-2, however, doesn't really offer any improvement over GeoEye-1. It is the multispectral counterpart to WorldView-1's panchromatic imagery, still with slightly lower rez than GeoEye-1 although slightly better volume capture/revisit rate. (Caveat: I'm sure as heck not a rocket scientist; if someone thinks I'm misreading the specs, please tell me!) It mostly just offers more capacity. So I would expect GeoEye-1 to continue to grow to full capacity and WorldView-2 to take additional capacity. GeoEye will probably use this year to make a firm decision about GeoEye-2.

    One more recent caveat: GeoEye's camera problems could change this calculus. Right now it's not clear how revenue will be affected, if at all. It could become a substantial problem, or it could be resolved. I wish we knew!

    Karl

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