Foolish Forecast: All Eyes on GeoEye

Look! Up in the sky! Is it a bird? A plane? A satellite?

Well, yes, it is a satellite, and Motley Fool Rule Breakers recommendation GeoEye (Nasdaq: GEOY) owns it. But if I might draw your eyes back down to earth for a moment, GeoEye is getting ready to report its year-end financials on Thursday. Let's get its bearings.

What analysts say:

• Buy, sell, or waffle? Exactly one analyst keeps eyes on GeoEye, rating it a buy.
• Revenue. Said analyst predicts that quarterly revenue will drop 6.5% $39.5 million...
• Earnings. ...while profits more than double to $0.63 per share.

What management says:
GeoEye has two operable eyes in the sky right now -- the high-resolution Ikonos and the lower-res OrbView-2 satellites. Problem is, Ikonos only has a few years of life left in it, and OrbView-2 is entering obsolescence. Hopes are high that a new satellite, GeoEye-1, will put GeoEye back in the game, but on Jan. 12, launch partner United Launch Alliance (a joint venture between Boeing (NYSE: BA) and Lockheed Martin (NYSE: LMT)) warned that it may bump GeoEye-1 from its anticipated April 16 launch date -- all the way back to Aug. 22 or later, in fact.

Bad news for existing shareholders -- the day GeoEye filed notice of this risk with the SEC, the stock sank 10% -- but good news for Rule Breakers investors. The fortuitous timing of the announcement created an attractive entry price when we recommended the stock two days later.

What management does:
GeoEye's margin trends are equally attractive. When a business depends on two working satellites, and one not-yet-working unit, for its revenue, you'd expect a bit of lumpiness in the margins. Strangely, GeoEye has managed to grow both its gross and operating margins steadily over the last 18 months, though the net is still lumpy.

Margins	6/06	9/06	12/06	3/07	6/07	9/07
Gross	58%	60.5%	63.9%	66.3%	71.8%	73.1%
Operating	11.5%	23.6%	28.6%	32.1%	39.1%	40.9%
Net	(5.8%)	10%	15.5%	(4.7%)	5.7%	32.1%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Summing up his investment thesis on the company in the February issue of Rule Breakers, fellow Fool Karl Thiel put it to us like this:

GeoEye faces a critical event with the launch of its newest satellite, but I believe there's an excellent chance of success. Best-in-the-world capability, government contracts, and commercial demand will unlock great growth for a little-known company that's undervalued even on the basis of its existing revenue and cash flow. It may make sense to withhold part of your investment until GeoEye-1 is safely in space, but you should definitely consider launching your journey with the only pure-play company in remote sensing.

I agree. Selling for just 12 times trailing earnings, but expected (albeit by just a single analyst) to grow those earnings at 20% per year over the next five years, GeoEye sure looks cheap to me. Then again, that valuation could change in a hurry if one or the other of GeoEye's still-working birds drops dead, or if anything goes wrong with the third satellite. This one's a gamble, folks, no doubt. But it might be worth a flyer.

On the other hand, if you like your risks less concentrated, consider investing in one of the several high-tech firms that sell to, and will benefit from, GeoEye's success -- while not necessarily depending on it. General Dynamics, Orbital Sciences (NYSE: ORB), Northrop Grumman, and ITT all count GeoEye as a customer.