Thursday, March 20, 2008 GeoEye Beams a 'Buy' Signal to Investors

The following is a cross-post from, which appeared today.

Editor's Note: With this column, is pleased to debut Eric Jackson. Our newest contributor has led online activist campaigns in the past, and will share his latest investment ideas with our audience. As always, let us know what you think.

I built a position in satellite company GeoEye(GEOY - Cramer's Take - Stockpickr) over the last couple of months.

Initially, I wasn't anticipating launching an activist campaign aimed at the company, which provides space-based imagery to government and commercial customers. The stock has gone up 62% in the past year, and GeoEye seemed well positioned to announce a very positive quarter and year-end results, which it did last week.

I was attracted by the stock's incredibly low valuation relative to projected earnings and peer comparisons. Trailing P/E sits at a paltry 12.66, whereas larger competitors Orbital Sciences(ORB - Cramer's Take - Stockpickr) and Trimble Navigation(TRMB - Cramer's Take - Stockpickr) have trailing P/Es of 25 and 29, respectively. What's more, GeoEye is expecting to increase earnings by 20% per year for the next five years.

However, the market was cool to last week's results even though fourth-quarter EBITDA doubled to $15.9 million from $7 million in the previous year and revenue rose to $45 million from $42.2 million a year earlier. Why?

GeoEye has not released full EPS numbers, as it is waiting for the IRS to rule on how to account for an acquisition it made in 2007. The company promised to release complete numbers before filing its 10-K, which is due at the end of March. The delay is not entirely management's fault, as it is waiting on the IRS. However, the company could have anticipated the snag and should have clarified sooner.

Activism is not just for broken companies. It can be equally important for solid but undervalued or overlooked companies. GeoEye is a perfect candidate because it's been overlooked.

Therefore, I recently launched an activist campaign aimed at raising the value of GeoEye, using the tools of the Web. As I emailed a letter to GeoEye's Chairman, Lieutenant General James Abrahamson, and its CEO, Matthew O'Connell, I posted it to my blog, inviting comments and suggestions from other shareholders.

Reaching out to shareholders of Yahoo!(YHOO - Cramer's Take - Stockpickr) and Motorola(MOT - Cramer's Take - Stockpickr) in two campaigns I ran over the past 15 months, using blogs, YouTube videos, wikis, polls and Facebook groups, was particularly helpful in disseminating my message and soliciting suggestions from an army of similarly frustrated shareholders. I hope the same will happen with GeoEye and in future Web-based activist campaigns.

GeoEye is much smaller (with a $500 million market capitalization) and less well-known than Yahoo! or Motorola. Furthermore, I don't believe it requires a major reshuffling of the board or management. This is a solid company.

The stock's price has appreciated 62% over the last year, as the company has delivered operationally for investors and started to be more widely followed by a larger institutional base.
The board and management team have also shown that they can plan ahead and do the right thing for shareholders. Earlier this year, one of GeoEye's two satellites in orbit (the OrbView-3) failed. For most small companies with poor planning, this would have been disastrous. However, GeoEye had appropriate insurance in place. That settlement ($20 million) on the aging satellite ended up being more positive for shareholders than if the failure hadn't happened.

GeoEye's newest satellite (GeoEye 1) is expected to launch in August and provide significant new revenue-enhancing opportunities to the company's existing and future customers.

However, no company or person is perfect. GeoEyes clearly must take steps to properly reward shareholders by fully realizing the inherent value of the company.

Here is a summary of the activist suggestions I raised to GeoEye's Chairman and CEO in my recent letter to them.

Raise GeoEye's P/E ratio to be in line with its peers: At the moment, GeoEye's trailing P/E is only 12.66. Yet, the company has projected to grow its earnings at 20% a year over the coming five years. Competitors sell at trailing P/Es in the mid- to high-20s. If GeoEye sold for a P/E of 20, the result would be a 58% increase in the stock's price to $45.82. If GeoEye were trading at a premium to its peers, which I believe is warranted, of 40, its stock price would appropriately be valued at $62.62.

I believe that the market has failed to see the inherent value in GeoEye because the company has not sufficiently articulated its strategy moving forward. It's not enough to simply estimate to investors when GeoEye 1 will launch or provide timelines for GeoEye 2 (its next-generation satellite that won't be launched until 2011), for that matter.

Investors want to know what the company will provide to its customers better than its competitors and in a sustained fashion. They also want to know that GeoEye is unique and better positioned to deliver to a large and fast-growing market. This hasn't happened as effectively as it could, in my opinion. I believe that, with a much more focused and vigorous explanation of GeoEye's inherent value relative to its peers, the market would properly value the company.

Rectify the earnings delay: Despite strong revenue announced during last week's quarterly call with analysts and investors, the company's stock was immediately punished, falling to $28 from $33. The reason was the management team's inability to communicate GeoEye's 2007 EPS because it couldn't account for net operating losses from the acquisition of M.J. Harden Associates from GE in early 2007.

These days, the markets abhor uncertainty. Investors shoot first and ask questions later, sometimes when it's unwarranted, as is the case here. The current stock price appears to me to be a market overreaction. However, this is partly management's fault for failing to move more swiftly in 2007 to clarify this point. They need to get this information out to the market as soon as possible.

Get a better board with more skin in the game: GeoEye has a prestigious group of directors. Its chairman, Lt. Gen. James Abrahamson, formerly headed up Ronald Reagan's "Star Wars" project. James Simon, former Assistant Director of the CIA, is also a director. However, a disproportionate share of directors on GeoEye's board have government/military backgrounds. There is also a plethora of lawyers and accountants. Such backgrounds aren't objectionable in themselves (the government, after all, accounts for over half of GeoEye's revenue). But it is a concern that there are no directors who represent the perspective of GeoEye's commercial customers.

Additionally, I'm concerned about the low stock-ownership levels of several of the outside directors. In research I collaborated while at Columbia Business School, we found that no single governance characteristic mattered more to improving a company's share performance than the percentage of outside directors on the board who held meaningful equity stakes they had purchased themselves.

The solution to improving the board comes in two forms. First, the board needs to look for possible directors with a commercial background and seek to bring them in as quickly as possible. The Chairman and CEO need to do a full review of GeoEye's current outside directors and their stock ownership.

I do not believe stock holdings are the same as the stock that someone has dug into his or her own pockets and purchased. The two are different as motivators and as predictors of future stock appreciation. There are several GeoEye outside directors whose stock holdings likely have only come through grants and options paid to them for their service -- the equivalent of found money. That's not enough "skin in the game," in my view. I would like to see each of GeoEye's outside directors purchase at least $500,000 in stock within the next six months.

I would not be a shareholder in this company if we didn't believe GeoEye had a bright future. I expect the clarification of GeoEye's earnings before the end of the month will be a major catalyst for the stock. It should be appropriately valued at $45 today. It will be worth much more upon successful launch of GeoEye 1 later in August.

If it takes some activism to help unlock some of this unrealized value, I am happy to oblige.

At the time of publication, Jackson was long GEOY, YHOO and MOT.

Eric Jackson is founder and president of Ironfire Capital, LLC, and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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