Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
You kind of have to feel sorry for Morgan Stanley.
This investment megabanker first downgraded shares of satellite communications specialist Intelsat (INTE.Q) three and a half years ago (according to StreetInsider.com), giving Intelsat a rating of underweight, which basically means sell. And Morgan Stanley was right -- within less than a year, Intelsat stock had lost 85% of its value, and was selling for less than $2 a share.
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"I was right once, so..."
Problem is, such a quick victory can make an investor overconfident. "I was right once, so I must really know this stock. I'm going to stick to my guns on this one forever after now."
Thus, when Intelsat's stock started to creep back, and ultimately doubled in price to the mid-$3 range by early this year, it probably made sense to Morgan Stanley to stick with its sell rating, and continue to pan Intelsat. Instead of signifying that the company was improving, the analyst probably saw Intelsat's rising stock price as proof that Intelsat was just getting more and more overvalued.
And why wouldn't Morgan Stanley think that?
After all, when Intelsat reported 2017 earnings early this year, the numbers were truly awful. Intelsat lost $1.50 per share last year -- $0.75 in the last quarter of the year alone. The company was deep in debt -- $14.5 billion worth -- and spending nearly another half-billion dollars annually on capital investment, so digging itself in deeper.
Little wonder that as Intelsat's stock price mysteriously began rising, Morgan Stanley's only response was to gradually raise its price target to $6 a share (in June) and then to $8 (in September) -- but to keep its rating at underweight regardless. Eventually, one way or another, this stock had to come back down to earth.
Intelsat comes back down
And well, it did -- partially. After cresting near $38 a share in October, Intelsat fell thanks to the tech crash that claimed so many victims last month. The stock returned to a more palatable valuation of $25 a share, and today Morgan Stanley seized the opportunity to reverse course and upgrade the stock to equal weight with a $28 price target.
Morgan Stanley says it changed its rating because Intelsat is moving "remarkably quickly" to win regulatory approval to begin C-band transmission from its satellites. As the analyst explains in a note covered by TheFly.com this morning, Morgan Stanley believes Intelsat could monetize this spectrum and eventually earn "gross proceeds" of as much as $20 billion from the business.
Still, I suspect the real reason Morgan Stanley is changing its tune is because Intelsat today looks a whole lot different from the Intelsat of a year ago.
Valuing Intelsat
Consider: In November 2017, Intelsat had less than $500 million in market capitalization, but $14 billion in net debt. Intelsat had been profitable as recently as 2016, but was on course to end 2017 with total net losses of $178.7 million (according to S&P Global Market Intelligence), and free cash flow of only $2.6 million.
Most folks on Wall Street were predicting Intelsat would lose money for the year. (They still are predicting that, in fact.) And that Intelsat would lose money again in 2019 and 2020 as well. But here's the thing:
Although Intelsat has to continue reporting net losses under GAAP accounting standards, the company is cutting capital spending to resume generating cash. Most analysts expect the company to be strongly free cash flow positive this year ($291 million in FCF is the average estimate), and to continue generating uninterrupted free cash flow for the next five years. Cash levels are rising ($660 million-plus at last report), and long-term debt is either holding steady or even falling a bit -- the result of which is declining levels of net debt.
What's more, as the balance sheet improves, investors are ascribing more and more value to Intelsat, which is now worth $3.5 billion -- a market cap seven times what it was worth one year ago.
The upshot for investors -- and for Morgan Stanley
Does all of this make Intelsat a buy? Morgan Stanley doesn't think so -- remember that it only upgraded the stock to equal weight, which means the analyst is only really neutral on the stock. But Intelsat's vastly greater market cap creates the potential for the company to, for example, issue a boatload of new stock to raise cash and pay down debt in one fell swoop. Or Intelsat could just keep what it's already doing, and gradually use improved free cash flow to whittle away at its debt load.
Either way, Intelsat looks a whole lot healthier than it did a year ago. The company's not entirely out of the woods -- not by a long shot. But neither is Intelsat the irredeemable basket case that it was back when Morgan Stanley downgraded it more than three years ago.
That fact alone, it seems to me, is deserving of an upgrade.
