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Why Intelsat Stock Shot Into Orbit Today

By Rich Smith - Feb 27, 2018 at 5:21PM

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Investors react to yesterday's overreaction.

What happened

Down more than 10% in Monday trading, Intelsat (INTE.Q) stock trampolined right back up on Tuesday, closing the day 28.2% higher -- on no new news at all.

Nothing. Nada. No one upgraded the stock, so far as I can tell. No one so much as tweaked a price target. Regardless, Intel sat today costs 14% more than it did before earnings -- and before the post-earnings sell-off.

Rocket launching through air

Now this is what a rocket stock is supposed to look like. Image source: Getty Images.

So what

Does that make any sense? After all, Intelsat's earnings yesterday were pretty bad. The company lost $0.75 per share in its fiscal fourth quarter, and $1.50 per share for the full year. That explains yesterday's sell-off, but not today's rebound.

So what does? If you ask me, the answer lies in some of the final few lines of Intelsat's earnings report yesterday -- the part where Intelsat management revealed that it plans to spend:

  • $375 million to $425 million on capital investment in 2018.
  • $425 million to $500 million in 2019.
  • $375 million to $475 million in 2020.

These spending levels all fall far below the $462 million Intelsat spent on capital investment in 2017, and even farther below the $684 million investment laid out in 2016. Assuming Intelsat generates positive operating cash flow on par with those years -- $464 million generated in 2017, and $684 million generated in 2016 -- this means there's a very good chance that Intelsat will generate positive free cash flow over the next few years as well.

Now what

If it does, Intelsat will be able to use that free cash flow to begin chipping away at its mammoth $14.5 billion debt load, reducing its interest costs -- and growing earnings even faster. The effect could snowball, and the investors who piled back into Intelsat stock today will count themselves the richer for it.

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