Is Iridium Communications the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Iridium Communications (Nasdaq: IRDM  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Iridium Communications.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-year annual revenue growth > 15% 13% Fail
  1-year revenue growth > 12% 126.8% Pass
Margins Gross margin > 35% 66.3% Pass
  Net margin > 15% 9% Fail
Balance sheet Debt to equity < 50% 29.6% Pass
  Current ratio > 1.3 1.72 Pass
Opportunities Return on equity > 15% 5% Fail
Valuation Normalized P/E < 20 19.17 Pass
Dividends Current yield > 2% 0% Fail
  5-year dividend growth > 10% 0% Fail
       
  Total Score   5 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

Iridium Communications dials up a midrange score of five. You may have thought the satellite communications company was long since departed, but like a phoenix, Iridium is back and better than the original.

Iridium was a pioneer before its time, launching dozens of satellites to enable global communication just about anywhere. But because the service was expensive and clunky, the company, originally backed by Motorola Solutions (NYSE: MSI  ) , collapsed into bankruptcy in 1999. At the time, some thought that its satellite network would literally crash and burn.

But at the last minute, an investor group bought the company's assets, saving the network. After emerging from bankruptcy in 2001, Iridium focused on niche areas of the data and voice transmission industry, including machine-to-machine applications, and went public in 2009. Now, the company counts a wide range of businesses among its clientele, ranging from defense companies Raytheon (NYSE: RTN  ) and ITT (NYSE: ITT  ) to oil services giant Schlumberger (NYSE: SLB  ) . Offering slimmed down products at lower expense without having to worry about cellular towers is appealing to global customers like those, and Iridium now expects to modernize its satellite network to meet the expectations of newer technology.

Iridium certainly hasn't figured out a certain path to perfection, with plenty of uncertainty left about the exact shape its future course will take. But it looks quite a bit healthier than competitor Globalstar (Nasdaq: GSAT  ) , which has been losing money and has a much bigger debt load. Iridium has come quite a way from its brush with oblivion a decade ago, and the future should be interesting for the satellite company.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Iridium Communications to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Fool owns shares of Iridium Communications, Raytheon, and Schlumberger. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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  • Report this Comment On May 13, 2011, at 5:37 PM, PCSTEL wrote:

    Perhaps it looks healthier than Globalstar and has a lower debt load than Globalstar. But, you fail to point out that in Globalstar's current debt load represents a fully paid for second generation constellation that is being launched now. Versus Iridium whose expected debt will reach 2 Billion to fund it's second generation constellation that is just now being planned, and years away from actually being launched. The other issue that should be noted that a large amount of Iridium's growth over the last 3 years is not "organic growth", but more so growth that has come at the expense of Globalstar as it's first generation satellites began to fail 4 years ago. Iridium's Voice ARPU is already in decline as Inmarsat and soon Globalstar will re-enter the competitive landscape with superior service offerings and from all indications.... Drastically lower service pricing.

    Bankruptcies in the MSS business are as common as water in rivers. These companies can "pound their chests" about margins and EBITDA. However, the reality is. Iridium is operating with a basically FREE constellation that was acquired in Bankruptcy. Hard to comprehend how they will make a go of it with 2 Billion in debt load, with competitors with new constellations and faster/lower cost servcie offerings.

    To all investors in the MSS industry... Buyer Beware!!!

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