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.
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Thursday was a great day for Intelsat (NYSE: I) shareholders, who saw their shares jump nearly 6% on no news at all. But could Friday be even better?
Maybe. This morning, analysts at investment banker Jefferies & Co. announced they are upgrading Intelsat stock to "buy." Furthermore, Jefferies is upping its price target on the stock -- doubling it from $2.50 per share to an even $5. With the stock now selling for $4 a share, that works out to a potential 25% profit for investors buying now. So, great news, right?
Again, maybe. Before getting too excited about Intelsat, here are three things you need to know.
1. The boring stuff
Let's start with the basics. Intelsat is (as its name suggests) a satellite operator, providing satellite communications services to companies and governments around the world.
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Now, this is a business that can produce either big profits (such as the nearly $1 billion Intelsat earned last year) or big losses (such as the nearly $4 billion Intelsat lost the year before last). Last quarter, we got a reminder of how things can go badly, when Intelsat reported a $0.20-per-share loss on lower-than-expected revenue for its fiscal second quarter. But despite that brief loss, Intelsat remains profitable enough that its stock costs barely half its own annual profits: $478 million market capitalization, and $800 million in trailing-12-month profit.
Result: The simple interpretation of this is that Intelsat stock sells for a price-to-earnings ratio of just 0.6.
2. Here's where things get interesting
And yet, there's very little that's simple about Intelsat. You see, Intelsat may have a small market capitalization relative to its profits, but that's only because it has a very big debt load. Basically, Intelsat is a big bag of debt, with a tiny market cap struggling to lift it -- and failing. Remember, this company's stock sells for just $4 a share.
At last report, Intelsat was carrying about $14 billion more debt on its balance sheet, than it has cash on hand. Thus, while the stock may have only a $478 million market cap, Intelsat's enterprise value is $14.5 billion.
How big of a burden is this debt on Intelsat's business? Picture this: Last year, Intelsat paid $938.5 million in interest on its debt, a figure twice as big as the company's own market capitalization. Those interest payments ate up nearly half the profits the company could have earned, if it had no debt.
3. And here's where it gets even more interesting
Which brings us to the real story behind Intelsat, and why it might be interesting to value investors.
Earlier this year, Intelsat came up with a plan to help it deal with its debt problem, save its business, and reward shareholders with a windfall profit. In a complicated scheme, Intelsat negotiated a deal to merge itself with rival small-sat operator OneWeb, attract a $1.7 billion investment from Japan's SoftBank, and renegotiate its debt obligations to creditors. If all worked out as planned, this deal would cut Intelsat's debt load by $3.6 billion and roughly quadruple the stock's market cap in the process.
Problem is, things did not work out as planned. Intelsat's creditors balked at the company's demand that they roll over old debt into new debt at just $0.46 on the dollar. And with bondholders nixing the deal, Intelsat's merger plans fell apart. By June, just months after the deal was announced, Intelsat reluctantly reported that the deal with OneWeb and SoftBank was dead.
Final thing: The deal is dead -- long live the deal (or not)?
Not long after the deal fell through, Intelsat began laying the groundwork for a new deal -- or, in the worst case, for shoring up its finances to make a go of things on its own. In late June, Intelsat announced $1.5 billion in new bond issuances, money it can use to roll over old debt.
With this money in hand, and Intelsat beginning to exceed expectations for earnings (although it lost money last quarter, Intelsat lost less than analysts had projected), Jefferies is now coming on board. As reported on TheFly.com today, the analyst's new "buy" rating is predicated on a belief that Intelsat is "on the cusp" of growing its revenues independent of OneWeb and SoftBank. If earnings continue to improve as well, Jefferies thinks Intelsat stock could be rewarded with "significant" upside to its stock price as investors focus less on the debt and more on the profits Intelsat is earning with it.
The downside to this, of course, is that a stronger Intelsat -- i.e., one at less risk of bankruptcy -- is a company creditors will be less likely to reward with steep concessions (in an effort to avoid losing their whole investment when Intelsat goes bankrupt). The upside is that a stronger Intelsat may be able to overcome its difficulties and thrive on its own, with no need for a creditor bailout. In that regard, Intelsat is continuing to pay down its debt, with debt falling from $16.1 billion in 2012 to as low as $14.3 billion in the most recent quarter.
Maybe, just maybe, if Intelsat keeps going in this way, the stock could be a "buy" after all.
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