Globalstar: Asset Tracking Industry Could Push Stock Price Up (NYSE:GSAT)

PeopleImages/iStock via Getty Images

With Globalstar (NYSE:GSAT) identifying many opportunities in the growing asset tracking industry, I believe that the stock may gain some traction soon. Keep in mind that the asset tracking industry is growing at more than 33% CAGR. GSAT already has more than $660 million in property and equipment ready to offer services to industries interested in commercial internet of things services. If management is not successful in offering services to other industries, or their satellites fail, I believe that the stock price could decline to close to $0.15 per share. However, I believe that an increase in the stock price is likely.

Globalstar

Globalstar offers mobile satellite services over a proprietary network of in-orbit satellites and active ground stations. In my view, the most interesting services of Globalstar are the commercial Internet of Things data transmissions and the company’s asset tracking capabilities.

In the last quarterly report, Globalstar’s commercial IoT reported an impressive increase in the number of subscribers. I believe that the upward trend will most likely continue in the future.

Globalstar Announces First Quarter 2022 Results - Globalstar, Inc.

Globalstar Announces First Quarter 2022 Results – Globalstar, Inc.

In my view, if management continues to find opportunities, and signs agreement with partners in the terrestrial spectrum, net sales will trend north. In the last report, in this regard, management was quite optimistic:

Terrestrial spectrum opportunities continue to mature. We have signed a term sheet with a large, global customer to begin deploying Band 53 in the US and beyond. This is a significant opportunity that will take time but signs point towards success; we will share more information when we are allowed. We are also active in several international opportunities in the mining, transportation and logistics sectors, any of which would be meaningful if concluded. Source: Globalstar Announces First Quarter 2022 Results – Globalstar, Inc.

Balance Sheet

The most valuable of the company’s balance sheet is the property and equipment, which is worth $680 million. With an asset/liability ratio around 2x, in my view, the company’s financial situation appears quite healthy. I believe that bankers will offer financing if the company decides to invest more intensively in growing market segments like the internet of things.

Globalstar Announces First Quarter 2022 Results - Globalstar, Inc.

Globalstar Announces First Quarter 2022 Results – Globalstar, Inc.

Notice also that Globalstar reports $115 million in deferred revenue, which means that the company receives money in advance from customers. In sum, clients are paying the company in advance, so debt financing may not be that necessary.

Globalstar Announces First Quarter 2022 Results - Globalstar, Inc.

Globalstar Announces First Quarter 2022 Results – Globalstar, Inc.

Extremely Conservative Valuation With Some Satellite Failures And Risks Implies A Fair Price Of $0.1-$0.2

Under my most conservative scenario, I assumed that Globalstar will not invest significantly in any of its growing business segments. As a result, net revenue will likely grow close to mobile satellite services market growth. I also expect that Globalstar’s satellites may have issues like component failure, solar array failures, or loss of power or fuel. If this is the case, management will not be able to repair satellites in space. As a result, I believe that accountants may have to reduce the company’s properties, which may lead to less free cash flow expectations:

There are some remote tools we use to remedy certain types of problems affecting the performance of our satellites, but the physical repair of satellites in space is not feasible. We do not insure our satellites against in-orbit failures after an initial period of six months, whether the failures are caused by internal or external factors. In-orbit failure may result from various causes, including component failure, solar array failures, telemetry transmitter failures, loss of power or fuel, inability to control positioning of the satellite, solar or other astronomical events, including solar radiation and flares, and collision with space debris or other satellites. Source: 10-k

Besides, I believe that Globalstar may not be able to use its second-generation satellites for the expected 15 years. Hence, the sum of future expected cash flows would be lower than forecasted, and the valuation of the company will likely decline:

Although we designed our second-generation satellites to provide commercial service over a 15-year life, we can provide no assurance as to whether any or all of them will continue in operation for their full 15-year design life. Source: 10-k

Under this DCF model, I used sales growth close to 7.52% y/y from 2025 to 2030, which is close to the estimated market growth of the mobile satellite services market:

Mobile Satellite Services Market is estimated to maximum a healthy market growth at a healthy 7.52% CAGR during the review period of 2022 to 2028. Source: Mobile Satellite Services Market Size 2022 with 7.52% CAGR

I also assumed a long-term EBITDA margin close to 33%, which is among the figures reported by other competitors. Also, with CFO/Sales around 27%-49%, I believe that I am quite conservative with my assumptions.

Ycharts

Ycharts

If we assume that Globalstar, Inc. continues to invest around 33% to 21% of its net sales in capital expenditures, the free cash flow could reach $51 million in 2030. Finally, with competitors trading at around 6x to 8x forward EBITDA, I believe that we could use an exit multiple of 7x.

Ycharts

Ycharts

With the previous assumptions and a weighted average cost of capital of 6.8%, the discount of future free cash flow from 2022 to 2030 would equal $239 million. The terminal value discounted at 6.8% should stay close to $270 million, and the implied fair price wouldn’t be larger than $0.1-$0.2.

Author's DCF Model

Author’s DCF Model

Finally, let’s note that I don’t believe that my numbers are far from the reality shown by other competitors. Most peers report a FCF/Sales ratio of 8%-42%. My model includes a ratio of around 22%.

Author's DCF Model

Author’s DCF Model

Ycharts

Ycharts

Assuming Investments In Globalstar’s Fleet Vehicle Tracking Devices, The Company Could Reach A Fair Price Of $2.5

In my view, if Globalstar continues to sign agreements with new partners, not only in the communications industry but also elsewhere, revenue will grow. In this regard, I celebrated quite a bit the satellite procurement agreements reported in the last quarterly report:

The first few months of 2022 have been very active. As previously announced, we entered into a satellite procurement agreement with Macdonald, Dettwiler and Associates Corporation in February. Source: Globalstar Announces First Quarter 2022 Results – Globalstar, Inc.

In the previous case scenario, I didn’t take into account SmartOne Solar, the solar-powered asset tracker designed by Globalstar. In my view, if Globalstar, Inc. continues to invest massively in the growing asset tracking industry, future sales growth will likely be higher than that in the previous case scenario.

One of the most feature-rich satellite devices for tracking fleet assets, this small, easy-to-mount and configurable device is powered by sunlight and delivers years of use with little or no maintenance. Built-in sensors automatically detect when it is attached, report if it falls free from the vehicle, and monitor the battery level. It functions as a standalone asset tracker and can also relay data from other devices via satellite to Globalstar. Source: Globalstar US

According to a recent report, Globalstar’s asset tracking devices could enjoy a target market that grows at a CAGR of 20%. I included this impressive sales growth in my new discounted cash flow model.

Asset Tracking Industry Outlook Report, 2020-2025 – Real-Time Location Systems (RTLS) Will Experience Growth of Approx 20% CAGR Through 2025. Source: ResearchAndMarkets.com

I also took into account that new innovations are pushing Globalstar’s cash flow from operations from around $10 million to more than $134 million. Under this case, I assumed that both the CFO/Sales ratio and the EBITDA margin will likely increase.

Ycharts

Ycharts

In this case, with 20% sales growth until 2030, I believe that Globalstar could reach almost $650 million in 2030. Also, with an EBITDA margin around 45%, CFO/Sales of 55%, and more capex than in previous case scenarios, 2030 FCF could stay at around $305 million. Finally, with a discount at 5.5%, the sum of future free cash flows would be $950 million.

Author's DCF Model

Author’s DCF Model

With sales growth close to 20% and an EBITDA margin around 45%, in my view, we could use an exit multiple close to 20x. In this case, the results turn out to be almost $4.5 billion in equity and an equity per share of $2.5.

Author's DCF Model

Author’s DCF Model

Takeaway

In my opinion, Globalstar is right now close to an inflection point. If management successfully positions itself in the assets tracking industry, revenue growth will likely be substantial in the next decade. In my view, Globalstar is well positioned with satellites and know-how to successfully target opportunities in the assets tracking industry. If Globalstar fails to invest in growing sectors, some of its satellites suffer damages, or they don’t last as expected, I believe that the stock price could decline. With that, considering the recent optimistic commentaries noted in the last quarterly report, I remain optimistic about the stock. Yes, I believe that it is not for everybody, but the likelihood of seeing higher price marks appears high.

Source link