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GeoEye, A Speculative Idea

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The company's success truly depends on the successful launch of GeoEye-1, its newest imaging satellite...

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The risks of globalization have never been more clear than they were over the past week, as a crew of foreign-born terrorists allegedly planned a new series of car-bomb attacks on the United Kingdom. It's terribly ironic that as our planet gets smaller, through the benefits of faster air travel and easier global cash transactions, the dangers have grown larger.

Another contributor to a sense that the planet is shrinking is the growing sophistication of satellite imagery that's available to the public. Maps and photos that were once a closely-guarded government secret are now widely available at the click of a mouse button on Yahoo! (YHOO).

Over the past couple of weeks, I've been asking people to consider taking positions in a young public company in this space called GeoEye Corp. (GEOY). It's a risky bet, as you'll see in a moment, but perhaps one worth taking with funds you've designated for speculations.

GeoEye is the world's largest commercial provider of satellite imagery. Its constellation of assets consists of two imaging satellites dubbed IKONOS and OrbView-2, names that seem to be straight out of Star Trek. In fact, if you want to be "beamed up" free of charge, just gaze skyward and smile at 10:30 AM PT each day. That's when IKONOS will be over our section of the planet, snapping your grin from its polar orbit, some 423 miles high.

GeoEye gathers and processes imagery in support of companies and governmental organizations dealing with global warming, commercial fishing, naval operation and national defense. The industry is small but it is growing rapidly. GeoEye is the only publicly-traded play in a field dominated by national governments. Last year half of GeoEye's $160 mln revenue came from Uncle Sam.

The business developed after the U.S. government decided, back in 1994, that it would be a good idea to support the development of privately-owned imaging satellites to complement its own assets. These efforts are run by the U.S. National Geospatial-Intelligence Agency, which recently awarded GeoEye a large portion of its $1 bln NextView contract, to supply imagery in support of military and surveillance operations.

Of this, roughly $240 mln will go towards the $502 mln cost of constructing and launching GeoEye-1, the company's newest imaging satellite. Furthermore, the government has already committed to purchasing some $200 mln worth of imagery from GeoEye-1 once it is launched later this year. Not a shabby deal, considering GeoEye can sell the rest of the capacity commercially.

And this, my friends, brings us to the crux of the story: the reason you should consider this, a very speculative idea. You see, the company's success truly depends on the successful launch of GeoEye-1. Both IKONOS and OrbView-2, although still performing well, have lived past their operating life expectancies. A third satellite, OrbView-3, was expected to operate well into 2008, until it fatally malfunctioned in March. Instead of taking color images, OrbView-3 now shoots all-white blanks.

Without GeoEye-1, the company will likely lose its orbital imaging capacity sometime next year as its two existing satellites expire. The market believes there is a 50% chance that the launch of GeoEye-1 will go off without a hitch. I believe its chances are closer to 90%, given the recent trends in launch and deployment success rates.

GeoEye-1 has been built by General Dynamics (GD) at a plant in Arizona. When the satellite is ready for launch, either in October or December, GeoEye-1 will be hoisted onboard a Boeing (BA) Delta II rocket and launched from Vandenberg Air Force Base in California. Considering that you're strapping a metal pod onto a 120-foot-tall rocket filled to the brim with jet fuel and liquid oxygen, and then lighting the fuse, the contraption is remarkably reliable. The Delta II platform carries a 98.5% success rate, with 70 consecutive successful launches.

Assuming GeoEye-1 reaches space, it will then need to successfully deploy itself and achieve a sustainable orbit, or risk falling back into the Earth's atmosphere to be incinerated. Over the past 12 years, GeoEye and its predecessors have deployed four satellites in six attempts. DigitalGlobe, the company's main competitor, has had a few expensive boo-boos as well. However, since 2001, there has been a 92% success rate on all deployments of imagery satellites.





If all goes well, GeoEye will soon be the operator of the world's highest-resolution imaging satellite, with color detail down to 41 centimeters. This should pique the interest of commercial users and current clients, such as Yahoo! Maps and Microsoft (MSFT) Virtual Earth, as well as forestry, agriculture and energy companies. There is also a push underway by makers of portable GPS devices to overlay satellite imagery on the company's mapping programs.

GeoEye is expanding and diversifying its offerings with the recent acquisition of a plane-based aerial imaging company, as well as a large investment in a geo-analytics company. The latter specializes in software and services that can turn aerial and satellite imagery into actionable business info. For instance, by monitoring certain areas from the sky, an analyst can predict retail sales patterns or real estate trends. Analysts can also identify potential terrorist or military treats.

GeoEye fits neatly into my big-picture theme of global growth and satisfies my preference for industry consolidators. I'll have more later on the Buzz. In the meantime, keep in mind that this is a very binary idea. With a successful launch, the stock goes up a lot. If not, it's toast.

In the event the satellite is commissioned without a hitch, I am looking for earnings per share growth north of 25% over the next two years. At present, shares are trading at only 11X my 2008 EPS estimate of $2. So if you apply a more reasonable 20X multiple on number, you will see that shares could double over the next year. I'm looking at GEOY as a speculative play with no more than 1.5% of one's investable funds, with a stop at $18. My 12-month target is $40.

No positions in stocks mentioned.

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