Taipan Microcaps October 1998
Orbital Sciences dips to absurd valuations
Now is the time to pick up shares for US$18... and sell them above US$50
by the year 2000
by Brian Hicks
Every now and then, the market gives you a second chance at redemption.
It was a year ago that Taipan recommended Orbital Sciences (ORB NYSE) under US$24. If you got in at those levels, then you know Orbital was one of the best small cap plays of the year - going from US$22 a share in September '97 to a high of US$50 in April.
But the bloodbath in the small-cap market has been unmerciful - especially to small-cap growth stocks.
Stocks with high earnings growth rates typically trade at high p/e multiples. Trading near a trailing p/e multiple of 70 in April, Orbital Sciences was one of the first to get hit during the small-cap top 5 months ago. The sell-off was severe.
Orbital is now trading at levels around US$18.
If you observed a 20% trailing stop-loss (and I know many of you did), then you sold at around US$40 a share for a 82% profit in less than a year.
But Orbital is now trading at a market cap lower than it was during the original recommendation in October 1997.
I think it's time to reevaluate Orbital's fundamentals, because not only are they extremely attractive, they're better than they were a year ago.
And once the small-cap sector turns out of its bear market, Orbital will be one of the many to skyrocket back to new highs.
Satellites are still in
Orbital Sciences was a pure satellite play for Taipan - and it still is.
I won't rehash Orbital's story again - and why satellites will be the prominent
technology going into the next millennium. (You can read the October '97
recommendation for a thorough analysis.)
But don't worry, the company is still the leading manufacturer of small and medium size satellites - especially for the LEOs (low earth orbiting) industry.
But I do want to tell you about its ORBCOMM system
By 3Q98, ORBCOMM - a joint venture between Orbital Sciences and Teleglobe
- plans to complete a network constellation of 28 satellites, to provide
near real-time transmission of data and messages from anywhere on Earth...
to anywhere on Earth.
ORBCOMM provides two-way monitoring, tracking and messaging services through the world's first LEO satellite-based data communications system.
ORBCOMM applications include monitoring of fixed assets such as electric utility meters, oil and gas storage tanks, wells and pipelines and environmental projects, tracking of mobile assets such as commercial vehicles, trailers, rail cars, heavy equipment, fishing vessels, barges, and messaging services for consumers and commercial and government agencies.
You're a rocket man
And, yes, Orbital is still the leading provider of booster rockets for the
delivery of satellites into orbit.
If you have a chance, take a look at the International Space Industry Report - a biweekly magazine on the space and communications market. Their constantly updated satellite log gives a comprehensive schedule of satellites set for launch through 2011.
We're talking a few hundred launches just in the next 5 years. Given that Orbital's rockets are used as the primary launch vehicles, ORB is going to be very busy. No wonder the company's backlog has swelled to over US$3.6 billion.
A market cap of just US$660 million... on a backlog
of US$3.6 billion!
Taipan has stayed strong on Orbital - mainly because its rock-solid fundamentals
keep getting better.
Do the math on this ratio. Orbital trades just 18% of backlog. This is absurdly undervalued. I usually consider any growing small cap stock trading below 50% of backlog to be attractive. But less than 20 percent?
Even after a full year, Orbital is still deeply undervalued
compared to its peers
Stocks in the satellite industry have been crushed in the past 5 months.
Iridium has lost 52% of its valuation in 4 months. Loral has gone from US$34
a share to US$12. ViaSat lost 50% of its share price. And poor GlobalStar
went from US$35 a share to its recent low of US$10 - a drop of roughly 72%.
One of the reasons for the recent bloodbath in satellite stocks is the continued speculation of revenue shortfall from a possible economic slowing.
But Orbital is different. Unlike Iridium and GlobalStar, Orbital is well diversified - and generates substantial revenue from other markets.
Orbital is still one of the leading manufacturers of booster rockets that deliver satellites into orbit.
The Pegasus and Taurus rockets are 2 of the most affordable and reliable delivery systems in the industry. The Pegasus has performed over 20 times since 1990... and the ground-launched Taurus has performed over 30 times in the past three years without any flaws.
But no matter how you cut it, Orbital still looks more attractive than the rest - from a fundamental perspective.
Here's why
Iridium has a market cap of US$400 million on US$0 revenues. That's right.
No revenues... yet the stock trades at 60% of Orbital's valuation... even
though Orbital has trailing revenues of US$712 million.
Loral Space trades at a rich valuation of US$3.9 billion... on US$1.2 billion in trailing revenues. That's over 3.6x revenue - while Orbital trades at 1x revenue.
And here's one I really can't understand: GlobalStar trades at a market cap of US$1.3 billion on US$0 in revenues. They just lost 12 satellites when one rocket went down, and they still trade at a higher valuation 2 times that of Orbital.
Second chance at triple-digit profits
Call it an inefficient market - or severe profit-taking, but you're getting
a chance to buy Orbital at distressed valuations. Just look at the comparison
chart ratios:
Growth rates ORB Industry S&P 500 Sales (MRQ) vs Qtr. 1 Yr Ago 29.7 8.5 10 Sales (TTM) vs. TTM 1 Yr Ago 41 14 11.5 Sales - 5 Yr. Growth Rate 24.3 5.3 14 EPS (MRQ) vs. Qtr 1 Yr Ago 20.5 -14.5 11.3 EPS (TTM) vs. TTM 1 Yr Ago 25 34 8 EPS - 5 Yr Growth Rate 21 23 17
Look at the sales growth. Orbital blows away the broader market. Yet in terms of valuation, Orbital is trading at a huge discount to both its industry and the broader market.
Valuation Ratios ORB Industry S&P 500 Price to Sales (TTM) 1.0 0.79 3.65 Price to Book (MRQ) 1.5 3.40 7.01 Price to Cash Flow 7.6 33.9 21.1
Regardless, I consider Orbital to be undervalued by at least 50%... today. Currently, Orbital trades at a p/e multiple of 30. Earnings are estimated to grow 65% between FY98 and FY99. At an estimated eps of US$1.40 in 1999, ORB trades at a forward p/e multiple of 13. Assuming ORB can maintain earnings growth and a p/e multiple around levels 30 (1/2 its estimated eps growth), that would put the stock at US$42 next year.
In our original recommendation, Taipan set a 1-year target of US$40 and a two-year price target of US$56. Orbital exceeded our 1-year target in February '97 - just 5 months after the October recommendation.
Considering this is one full year after our recommendation, I maintain a price target of US$40 on Orbital. Buy Orbital Sciences (ORB NYSE) at current levels. For more information, contact Orbital Sciences at 21700 Atlantic Blvd., Dulles, VA 20166, USA; tel. (703)406-5000 fax (703)631-3610.