Monday, May 11, 2009
(Cont'd from above)...

Jim (cont'd):   

That is why I think that you should try to get into the next big IPO… and it is called...

Digital Globe (DGI)...  (New IPO - not yet traded...)

It is a satellite imagery company that will trade under the symbol DGI…. when it comes public later this week, could come public maybe Wednesday night… the lead underwriter is Morgan Stanley, so if I were in your shoes, I would send some commissions their way to try to get in on this IPO action… not that I am implying in any way that it works that way, because we all know Wall Street is as squeaky clean as it gets.

Where do we like Digital Globe, what price… the offering is 14.7 million shares priced between $16 and $18, and at that range frankly I think the stock is a steal… even with all of these other equity deals coming, although I actually doubt that it will come between $16 and $18... the offering is for about a third of the companies shares, but only 1.4 million new shares are being offered… with the rest being sold by a number of different investors in the company who are looking to cash out… now, candidly, I usually like to see shares sold only by the company on an IPO, but I do not believe that Morgan Stanley, which owns a ton of this company and is offering shares, wants to hurt anybody on this deal… because it will want to sell some later, not doubt… and if you poison the well now on an IPO, you may not get investors to come back for seconds… they are very careful about this.

Digital Globe is essentially is in a happy duopoly with GeoEye, that is another satellite company that we have liked on this show, that does a lot of business with the US government, therefore they pay…and that one is just two weeks off of its 52 week high, so we have got a strong cohert… the satellite biz which has steady customers like the Feds, the oil companies, Google and Garmen… it is a business with very high barriers to entry… it costs a fortune to launch a satellite up into the air… and there is no guarantee that the launch will even be successful, that means that there is very little competition… something you know that we cannot stand on this program… as competition is athema to our friend joyous profits… it made us, at least we used to make a lot of profits with the previous government, because that was still of, by and for the corporations, instead of the people like this new guy...

Alright, right now Digital Globe has two satellites into space… it plans to launch a third by the end of the year, which should double the companies capacity for imagery collection… it is basically where GeoEye was a couple of years ago… Digital Globe was able to take advantage in the delays in the launch of GeoEyes new satellite to grab more market share, something that could flow back to GeoEye now that its satellite is up… one of the main reasons that I think that it makes so much sense to put in a bid for Digital Globe on this IPO, is that the recent IPO’s have all been major successes… they all fall into the category of under priced stocks that the brokers try to use to get you back in after there has been just a substantial decline… take a look at the last four big IPO’s… Rosetta Stone, Bridgepoint Education, Changyou.com, Mead Johnson Nutritional Company… these four stocks were up an average of 20% the day after the IPO… and now they are up an average of 43% year to date… that has been the pattern so far this year, and I think that we will see something similar from Digital Globe.

Now, there was an article this morning, and this is very typical of what I try to offer vs. the paper, the papers are good… this is “Satellite Firm Will Launch Offering”, and that is good, what we like to do is try to figure out what price it should be… because while this article might call your attention to it, you could actually fail if you pay too much, and succeed if you pay too little… so lets talk about what you should be willing to pay… what do I think it is worth… we are lucky here because there is an obvious compare to GeoEye, that trades at 18.2 times 2010 earnings, next years earnings… here is what professional money managers do… we compare, we look at GeoEye vs. Digital to come up with an apples to apples bet on a company, and not overpay… I could just tell you what the numbers are, but let me be your coach or something so you can do this yourself… I would much rather walk you thru the whole process, so you can evaluate a fresh faced IPO the same way the pros do… instead of just here is the price.

Now, I like to be conservative in my assumptions, because it never pays to be optimistic.. so what are we doing, we are trying to figure out what a newly public company like Digital Globe will be able to earn, what is its earnings per share going to be… in our calculations, we have to make assumptions… Digital Globes new satellite, lets say that it will not be launched as expected… that would make it roughly comparable to GeoEye, if that satellite goes up on schedule… how about this, Digital Globe is the better company with superior assets, not to mention superior attitude, and a superior state of mind.

Now, Digital Globes revenues have been growing at about 60% a year, but because we want to be very conservative lets presume some dire stuff… we have got to do that… so we will presume a delay in the launch of the new satellite, we will presume a slowing in revenue just 15% a year, we are going to presume a cut in gross margins from 90% to 80%… while we are being negative, lets also bet on a slight increase in sales, general, and administrative expenses… because of the cost of being a publicly traded company… hey, lets presume a $500m increase in depreciation and amortization, a $400m increase in interest expense, and a 30% tax rate… in other words, I am presuming a lot of things could go wrong… with all of that conservative, if not completely dire assumptions, I come up with $1.16 for 2009, and $1.49 in earnings in 2010... given the IPO range of $16 to $18, Digital Globe will be trading at 12 times 2010 earnings… 50% discount to GeoEye… and that is assuming that Digital Globe’s execution is sub par to say the least.

If it trades at 18 times earning, GeoEye’s valuation… okay, here it is… this is the moment of truth… I think that it goes to 27, so assuming that the stock is heading for 27, how much should you be willing to pay… no more than $20 to $22, yeah no more than that… see I start to feel uncomfortable, I want you to take a pass on more than that… nobody ever lost money taking a pass… even though Digital Globe is poised to double its image collecting capacity with its new satellite… there is always a risk, the risk that one of the two satellites that it currently has could come crashing down… which would be devastating to earnings, so we do not want to pay up… this is a risky industry… we just want in for a short term gain… although telling you that to your broker is a real non-starter, they do not want any flippers in any of their deals… you have got to place your order by tomorrow.

Here is the bottom line on what I think you should do…

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