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...
On Oct. 9, 2018, shares of mobile and internet satellite communications provider Iridium Communications (IRDM 2.11%) closed their trading day at $20.46. One year later, the final trade of Iridium stock placed yesterday evening closed at...$20.46.
One entire year. Zero growth.
But that is all changing today, and Iridium stock is on a tear at last, up more than 8% in early trading Wednesday thanks to a bullish note from equity research firm Sidoti & Co.
Here's what you need to know.
Get ready for the Iridium report
Iridium set a date for its Q3 2019 earnings report yesterday: Tuesday, Oct. 29, before trading opens.
Analysts in general aren't particularly optimistic about the report, with the consensus on Wall Street being that Iridium will lose money -- $0.13 per share, or exactly as much money as it lost a year ago, despite an expected 4% uptick in sales. And yet, one analyst is breaking from the herd, with Sidoti & Co. upgrading Iridium from neutral to buy ahead of earnings.
Iridium stock may be precisely prone over the past 52 weeks, but it's been a bumpy ride getting back to zero. Indeed, at one point in April, shares had gained an astounding 37% from its year-ago price, before worries about the arrival of competing sat-com services from SpaceX, Amazon.com, and OneWeb began eating away at the stock's gains.
As the months rolled on, Iridium saw all its gains whittled away, and ultimately, the stock ended up back where it began -- and 27% below its peak.
Sidoti, however, believes that Iridium deserved to be bid up in the first place, and that its subsequent sell-off was a mistake. True, Iridium's Q2 report wasn't much to write home about: sales up only 6% year over year, GAAP losses growing (past $18 million), and free cash flow still deeply negative.
But as the analyst explains in a note covered on TheFly.com, Iridium's new Certus Broadband and Narrowband services have the potential to get revenue growing strongly once more, while the company's space-based air traffic monitoring service, Aireon, is "underappreciated" by investors. And on the cash front, Sidoti emphasizes not the fact that free cash flow was negative in Q2 2019, but that it was less negative than in Q2 2018 (negative $42 million in Q2 2019 versus negative $50 million in Q2 2018, according to S&P Global Market Intelligence data).
Is merely better good enough?
Is that good enough to justify rating Iridium stock a buy, however?
I'm not so sure it is. Consider: Negative free cash flow in a single quarter shouldn't necessarily be considered a black mark against a growth stock, but in Iridium's case, free cash flow has been running negative for nine straight years -- and going on a 10th. Granted, the $82 million in cash burned over the last 12 months is less than the $140 million burned in 2017 or the $127 million burned in 2018.
But still -- this is a lot of cash going up in flames.
And while I agree with Sidoti that the trend is positive, I'm not convinced that Iridium is reducing its cash burn at a fast enough pace to get the company to cash breakeven, or to enable it to get its $1.7 billion debt load under control in time to effectively compete with all the new entrants rushing into the satellite communications market right now.
Granted, Iridium's NEXT constellation of 75 satellites in orbit is impressive, but can it compete with the likes of Amazon's Project Kuiper (3,000-plus satellites envisioned), SpaceX's Starlink (12,000 satellites), or even just OneWeb's planned 900 sats? Can the company effectively take on all these rivals simultaneously, at the same time as it's both losing money and servicing a big debt load?
Suffice it to say I have my doubts...both about Iridium's viability, and about Sidoti's decision to upgrade the stock.