What goes up must come down -- even when your business centers around orbiting satellites. That's the lesson Intelsat (NYSE:I) investors are learning this morning, as a downgrade from investment banker UBS takes a big chunk out of Intelsat's stock price. Down as much is 14.5% in early morning trading, Intelsat shares are still off by 7.4% as of 11:30 a.m. EDT.
What did UBS say to have such an outsize effect on Intelsat stock? Basically, the analyst's downgrade (to "sell") boils down to an observation that Intelsat stock, which is up 57% over the last 12 months, is now really expensive.
Now, that may come as a bit of a surprise for investors who see Intelsat stock valued at 0.8 times trailing earnings. But here's the thing: While it is true that at $480 million in market cap and with $574 million in trailing net income, Intelsat stock currently costs less than the money it's earned over the past year, "stock" is only one part of the "enterprise" that is Intelsat -- and not even the biggest part.
With nearly $14.5 billion in debt, and barely $500 million in cash, net debt comprises roughly 96% of Intelsat's total enterprise value. With debt included in Intelsat's valuation, it's more accurate to say that the stock costs not "0.8 times" market cap but more than 25 times its market cap plus net debt -- a much less attractive valuation than first meets the eye.
UBS argues that this valuation is about to get a whole lot worse. According to the analyst, a combination of pricing pressure and the reversal of "one-time cost benefits" will cause Intelsat shares to underperform over the next 12 months. In fact, if UBS is to be believed, Intelsat shares that currently cost more than $4 could easily fall as low as $3 within a year -- a 33% share price decline.
With that prospect ahead of them, it's no wonder investors are selling today.