# Review of MCX and Past Case Study (IRDM); Arguing Clinic

Does the tooth fairy pay for capex–Warren Buffett

IRDM Maintenance Capital Expenditures Case Study

Time to check in on IRDM. Last post:http://wp.me/p2OaYY-zt

A hedge fund made a case for investing in IRDM’s growth, but we made the case that true capital expenditures were not being accounted for and thus true owner earnings were being overstated.  I repeat this case since the concept of true MCX is so important.  Look at the lost opportunity cost for this hedge fund.

A Thorough Discussion of MCX_Case Study and Capital Theory

Time to attend an argument Clinic

### 6 responses to “Review of MCX and Past Case Study (IRDM); Arguing Clinic”

1. John, I couldn’t access the docs in your previous post, so I did a couple back-of-the-envelope calculations myself.

I calculated MCX 3 ways:

1. Eye-balling Tilson’s graph for cap ex requirements on page 14 – it looks like about \$350m

2. I used his figures on p 13 : cost of \$2.7b. apparently satellites have a lifespan of about 10 years, so capex is about \$270m on this basis

3. I used Greeenwald’s method, and looked at the latest finances on Google. For 2011, IRDM had sales of 384m, and PPE of 1020. It increased its sales from 348m over the previous year, and had capex of 350m. This means MCX = 350 – (384-348)*1020/384 = 250m

So, somewhere between 250m and 350m. Let’s use the median figure of 270m. Do these figures look fair to you?

I see that on p 16 of his report, Tilson estimates “O”EBITDA of 185m. So it looks like the satellite business might not be generating any free cashflow at all. Have I got that right?

There’s a couple of other worrying things about Tilson’s analysis. First, he uses “O”EBITDA. I don’t know what that is – but it sounds a bit kooky. Secondly – given the particularly capital-intensive nature of the business, I would have thought that EV/EBITDA figures are highly misleading.

Am I reasonably close on this one?

2. Just reading though Whopper Investments:
http://www.whopperinvestments.com/powerball-ideas-irdm-irdmz-warrants
it seems that the conversion of warrants to shares seems a major part of IRDM’s financing strategy. IRDM need \$2.7b in cash over 4 years, but only generates 175m in EBITDA. Oh dear.

I don’t get around much, but I have NEVER heard of expected warrant conversion as being a strategic source of capital. The idea sound bonkers. Who cooks these ideas up?

• John Chew

Dear Mcturra_2000

Good thinking. Yes, no free cash flow. There is a reason that not ONE sat. company has been profitable–ony government subsidized.

The key to figuring out MCX is knowing the business and industry. These satellites are not buildings they wear out, get hit by debris and have to be replaced. What is the useful life of these sats.? I read somewhere from three years ago about 15 to 20 years. Well, then all of them will be replaced ir not then you have to discount 15 to 20 years of cash flow with a terminal value of \$0.

I beleive this is a value/death trap. I remain short.

3. Although Jim Cramer never came out and said said IRDM was an outright “buy”, he did say on 18-Feb-2011 that it was cheaper relative to ISAT; so, if he was still in his hedge fund instead of screaming on the TV like a maniac, he would go long IRDM and short ISAT: http://is.gd/lxOzHz

Just how well would you have done? Well, IRDM has gone from \$8.31 to \$6.03 from his broadcast to date, whilst ISAT has gone from 692p to 600p. So IRDM is down about 27%, whilst ISAT is down 14%.

Clearly, neither of them were buys. It’s a good job Cramer isn’t still in his hedge fund, because he called the hedge wrong.

4. Drats, I’ll learn to stop talking one day. But whilst we’re talking about hedges … hedges only work if you’re buying and selling with the same risk profile. ISAT was bigger, with better funding, so IRDM was inherently riskier. So Cramer wasn’t comparing apples to apples, despite the companies being in the same sector.

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