GeoEye: Falling Star?

From at least one perspective, it's been a miserable three months for investors in Motley Fool Rule Breakers pick GeoEye (Nasdaq: GEOY).

Down about 40% from its highs at the beginning of April, the satellite imaging company's stock has declined steadily for the past five days, with the fall accelerating as June transitioned into July. We already know why the major declines came -- GeoEye's earnings report in May was a real downer. But what's with last week's 7% slide? That's what we'll look at today.

Good news
The news seemed promising at first. The Associated Press reported last Tuesday that in an effort to fill a gap in military satellite coverage, the Pentagon will:

• Spend $1 billion buying satellite imagery from its two main commercial providers, GeoEye and archrival DigitalGlobe (DG). The two companies' plans to put an additional total of four birds in the sky between now and 2013 should tide the military over until ...
• ... 2014, when the U.S. National Reconnaissance Office (NRO) aims to buy and put one or two satellites of its own in orbit, and finally ...
• ... 2018, when the NRO puts another advance bird up there.

Good news?
Now, GeoEye only booked $181 million in revenue last year. So, at first glance, its possible share of $1 billion in revenue sounds entirely welcome. Why did last week's announcement spook investors, then? I'm guessing they're looking down the road to 2013, suspicious that the feds might bring satellite imaging in-house, which could push commercial satellite operators down a gravity well.

Good news!
If that's the concern, though, I think it's overblown. The U.S. government has a policy of buying commercial imagery whenever possible to help support the industry. This suggests that even if the NRO gets its new satellites, it will continue buying at least some commercial imaging.

Consider also that against the NRO's two or three new satellites planned to go up over the next 10 years, DG already has two satellites up and a third ready to rise later this year. Likewise, GeoEye has two birds in the sky and one on the ground. With General Dynamics' (NYSE: GD) testing of "GeoEye-1" complete, GeoEye expects the Boeing (NYSE: BA) / Lockheed Martin (NYSE: LMT) "United Launch Alliance" to get its third bird up next month.

Simply put, there's a lot more commercial capacity up there already than NRO aims to add. And I view its announcement more as a cry for more capacity -- capacity that GeoEye and DG can profit from striving to fill -- than as a threat to their business going forward.