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...
Intelsat (NYSE:I) shareholders have had a rough time of things these past five months -- heck, they've had a rough time of things these past five days!
Since hitting a high north of $37 in October, Intelsat shares have shed more than half their value, falling to a recent patriotic (but disappointing) price of just $17.76. The stock's especially suffered this week, losing 24% between close of trading Friday and close of trading Tuesday, hurt by worries about congressional interference in its plans to sell spectrum to telecommunications companies.
But then this morning, a miracle happened: Intelsat got upgraded.
Before we get to the upgrade, it's worth spending a few moments considering what laid Intelsat low in the first place.
Intelsat is a strange sort of a business: a satellite communications company with an enterprise value consisting mostly of debt owed to creditors. Although its market capitalization of $2.5 billion is not inconsiderable, Intelsat's debt load is much, much bigger -- $14.3 billion, offset by less than $500 million in cash. As such, much of Intelsat's market value is tied to investors' belief that the company will be able to find a way to pay off its debt.
How Intelstat could pay off a big chunk of debt
Investors have been hoping that wireless telecommunications companies' need for spectrum to provide 5G wireless services will provide at least a partial solution to Intelsat's debt problems. As the satellite specialist explained the situation in a post-earnings conference call last month, the plan is for Intelsat and its fellow members of the "C-band Alliance" to "clear" a portion of the C-band spectrum for use by 5G providers (Verizon, AT&T, T-Mobile, and the like), preventing "massive interference between 5G and satellite." While Intelsat doesn't plan to "transfer" any of its licenses to this spectrum, it would "allow wireless to use this 200 MHz of spectrum" for a fee.
A very large fee. According to Bloomberg, selling access to C-band spectrum in the 200 megahertz range -- currently licensed to satellite companies Intelsat, SES, Eutelsat, and Telesat -- could generate proceeds of as much as $40 billion.
Now, it's not clear that this number is 100% reliable -- or how much of the $40 billion might go to Intelsat even if it is reliable. Still, if we take a rough estimate of one-quarter of the proceeds, or $10 billion, going to Intelsat, then that windfall could go a long way toward paying off the satellite communications specialist's debt -- and turning Intelsat into something more resembling a "normal" company, carrying a debt load more in proportion to its market cap.
What's ailing Intelsat
But here's the problem: $40 billion is a lot of loot, and with so much money up for grabs, folks are coming out of the woodwork looking to claim a piece of the action -- specifically, folks within the U.S. government. Over the past few days, multiple reports have surfaced of Washington bureaucrats angling to (a) claim a portion of the proceeds of any sale of 200 MHz access rights for use in extending broadband service to rural locales in the U.S., (b) forbid the FCC to authorize sale of access to this spectrum, or even (c) nationalize the spectrum and use it to create a government-run 5G wireless network in the U.S.
Such rumors have apparently spooked Intelsat investors, and sparked the 24% sell-off we've seen so far this week.
The good news, though, is that after this massive sell-off, Wall Street sees an opportunity for new investors to buy Intelsat. Yesterday, TheFly.com quoted RBC Capital analysts calling Intelsat's new share price "a great buying opportunity" and dismissing concerns of a potential federal takeover of the spectrum as mere "noise."
Then this morning, investment banker Raymond James went a step further, and upgraded Intelsat shares from underperform to market perform, arguing that the company probably will be able to sell access to its spectrum as planned, and that the stock's new-and-improved price now more accurately reflects how much it should be worth after collecting the cash.
What it means to investors
Now, it's important to note: While RBC thinks Intelsat is a great buy and rates the stock outperform, Raymond James' upgrade is effectively only a hold rating -- and of the two analysts, I lean more toward RJ's way of thinking.
I have two reasons why. First, profits: Intelsat doesn't have any. In fact, the company hasn't earned a full-year profit since 2016, and most analysts who follow it don't expect it to earn any profits before 2024 at the earliest, according to data from S&P Global Market Intelligence. Intelsat itself, by the way, forecast declining revenue and EBITDA in 2019 -- not exactly a recipe for stock outperformance.
And second, debt: As mentioned above, Intelsat's $16.2 billion enterprise value is 85% debt and only about 15% equity. While a big windfall of spectrum cash might change that math, until we know precisely how much Intelsat stands to make off of its effort to "clear" the way for 5G, it's impossible to say if this will make a big enough dent in the debt load to transform Intelsat into a company worthy of investing in.
At present, "hold" is about the kindest thing I can say about this stock.