3 Stocks to Watch From the Satellite and Communication Industry
Companies within the Zacks Satellite and Communication industry are well-poised to benefit from a vast proliferation and cheaper access to space technology in the long run. This trend is leading to a diversification in end-market users. Artificial Intelligence, Machine Learning and Big Data have given rise to multiple use cases across industries like oil and gas, agriculture, transportation and non-governmental organizations. Geopolitical competition in space as a contested domain is boosting investments by global militaries. The Liberty SiriusXM Group LSXMA, Iridium Communications IRDM and Globalstar GSAT have significant growth potential on global security threats, surging defense budgets and demand for high-quality imagery and value-added services. However, volatile global macroeconomic conditions, inflation and supply chain dynamics could affect growth prospects of the participants in the near term
Industry Description
The Zacks Satellite and Communication industry comprises space technology companies that provide satellite imagery, intelligence services and spacecraft and robotics for space exploration, research and national security. They help customers understand and navigate the evolving planet, deliver global broadband communications and explore space. The industry players provide communication services to media businesses, fixed and wireless telecommunications operators, data networking providers and Internet service providers. They also offer commercial satellite communication services to government and military organizations. The firms offer satellite-based consulting and technical services, including the lifecycle of satellite operations and infrastructure, ranging from satellite and launch vehicle procurement to telemetry and commanding services.
What's Shaping the Industry's Future
Advancements in Technology Hold the Key: There has been a radical change in highly-specialized satellite manufacturing patterns. More emphasis is put on using common buses and computer-aided design tools to customize the communications payloads. A mass-produced system is adopted and several satellites are manufactured in an assembly line. Integration and testing have become highly automated. The extent of testing is lowered after prototyping and initial production is completed. Countries with comprehensive space programs have distinct military, economic and scientific advantages. However, complexity and barriers to entry into space have allowed only a few to develop notable capabilities. The demand for small satellites across regions is expected to increase over time. North America has the bulk of the market share, followed by the Asia Pacific, Europe and the rest of the world. North America maintains its dominance with the highest number of small satellite launches by government end users. The companies continue to align their products and services with the U.S. Department of Defense’s National Defense Strategy needs and the growing international defense and intelligence demand.
Subscriber Momentum to Drive Growth: Wide proliferation and cheaper access to space technology have diverse end-market users. The companies share a strategic relationship with various government organizations, including military and disaster response agencies and non-governmental organizations, to provide robust, tactical, real-time voice and low-latency data command and control communications. A wide product portfolio enables companies to expand their customer base and offset the losses from one product category with benefits obtained from another. High product quality increases brand loyalty and enhances performance in a competitive market. For civil customers, particularly NASA, growth is being driven by space exploration programs. For commercial customers, growth drivers include a strong demand for imagery due to new use cases, space-based remote sensing, Geosynchronous Equatorial Orbit replacement demand and Low Earth Orbit communications programs. Also, personal satellite communications are witnessing strong demand leading to subscriber growth.
Spending on Space Infrastructure Could be Affected by Macroeconomic Weakness: With more than half of the revenues coming from U.S. government customers, the industry will likely benefit from increasing defense and space infrastructure budgets. The explosion of space-based intelligence, surveillance and reconnaissance and communications is expected to boost government investments in the sector. However, weakness in global macroeconomic conditions could compel customers to lower spending, which does not bode well for industry participants. Volatile supply chain dynamics and rising inflation could lead to higher costs and increased lead time, which are major concerns. The inflow of capital investment to this particular industry is likely to be affected due to interest rate hikes and investor uncertainty amid a broader market slowdown. Many industry participants are likely to find the present investment situation highly challenging.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Satellite and Communication industry is housed within the broader Zacks Computer and Technology sector. It currently has a Zacks Industry Rank #16, which places it in the top 6% of more than 252 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries can be contributed to the positive earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are confident about this group’s earnings growth potential. Since Mar 31, 2023, the industry’s earnings estimates for the current year have increased 22.1%.
Before we present a few satellite and communication stocks that you may want to consider for your portfolio, let’s look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms Sector, S&P 500
The Zacks Satellite and Communication industry underperformed the S&P 500 composite and the broader Zacks Computer and Technology sector in the past year.
The industry has lost 5.9% over this period compared with the S&P 500’s increase of 16.2%. The broader sector gained 24.6%.
One-Year Price Performance
Industry's Current Valuation
The Enterprise Value-to-EBITDA (EV/EBITDA) ratio is commonly used for valuing satellite and communication stocks. The industry has a trailing 12-month EV/EBITDA of 9.24X compared with the S&P 500’s 13.55X. The sector’s trailing 12-month EV/EBITDA stands at 12.55X.
In the past five years, the industry has traded as high as 24.58X and as low as 7.60X, with a median of 10.13X, as the chart below shows.
Enterprise Value-to-EBITDA Ratio (Past Five Years)
3 Stocks to Watch in the Industry
The Liberty SiriusXM Group: Headquartered in Englewood, CO, Liberty SiriusXM Group provides satellite radio services consists of commercial-free music, sports, news, talk, entertainment, traffic and weather. The Liberty SiriusXM Group is a subsidiary of Liberty Media Corporation.
Liberty SiriusXM Group sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for the stock’s current-year earnings is pegged at $3.32 per share, up 13.7% in the past 60 days.
Price and Consensus: LSXMA
Globalstar: Headquartered in Covington, LA, Globalstar offers satellite voice and data services to commercial and recreational users in more than 120 countries around the world. Globalstar's products include mobile and fixed satellite telephones, simplex and duplex satellite data modems and flexible service packages. Globalstar serves various sectors like oil and gas, government, mining, forestry, commercial fishing, utilities, military, transportation, heavy construction and so on.
The company’s efforts to boost the development of its spectrum and wholesale services bode well. GSAT’s MSS business is likely to gain from momentum in Commercial IoT. The company is gearing up for the launch of its first two-way IoT product in the latter half of 2023. Earlier in the year, Globalstar also announced a strategic agreement with Qualcomm. As part of the partnership, Globalstar’s Band 53 has been rolled out across Qualcomm’s RF ecosystem and sales network, which includes the chipset and the front end.
The Zacks Consensus Estimate for this Zacks Rank #2 (Buy) stock’s current-year earnings is pegged at a loss of 1 cent compared with a loss of 14 cents reported in the previous year.
Price and Consensus: GSAT
Iridium Communications: Iridium provides mobile voice and data communication services and products to businesses, the United States and foreign governments, non-governmental organizations and consumers. The company delivers mission-critical services across various industries, allowing its business to remain resilient despite headwinds.
Iridium's performance is being driven by higher subscriber equipment and engineering and support revenues. The engineering and support service segment is gaining from increased activity across both commercial and government, including a Space Development Agency contract. The company aims to tap the consumer-oriented satellite segment by launching new satellite direct-to-device capabilities and collaborating with Qualcomm for satellite messaging and emergency services in smartphones. Iridium expects the voice and data business to gain from the increasing demand for newer services like Push-to-Talk and Iridium GO! Services.
Iridium carries a Zacks Rank #3 (Hold). The consensus estimate for its current-year earnings is pegged at 22 cents, unchanged in the past 60 days. The stock has gained 63.5% in the past year. The company delivered a trailing four-quarter earnings surprise of 250%, on average.
Price and Consensus: IRDM
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