One more time: CS on Maint. Capex (IRDM)



A reader kindly shared:


Also, to see cash flow analysis of different industries to START your analysis go to:

Now on to Iridium (IRDM)

You just got hired as a junior analyst for a hedge fund. Your boss calls you in and asks for your opinion on whether he should buy IRDM.  He heard about it from a hedgie friend in New York who heard about it from another hedgie friend in New York  who heard about it from…….you get the picture–a daisy chain of independent-thinkers.

Your boss slaps this on your desk:


IRDM_VL Dec 2014   Check this first.



You remember something about Buffett saying that the tooth fairy doesn’t pay for capex?  What will you tell your boss this afternoon?

If you want more clues (after trying hard) go to the search box on this blog and type in IRDM–follow the links.

Good luck!

PS: I will resend the book folder to new students and I will send value vault folders to the folks who have been asking for the past three weeks. I try only to check email once a day and I group the various email requests over time.

I will be next focusing on ROIC for Chapter Four in Deep Value because we already covered EBITDA and its use and ABUSE.  And EV/EBITDA multiples. Remember that multiples are simply a short-hand for cost of capital.  I remember when Blockbuster (US Video Chain) looked cheap in an EV/EBITDA analysis (from a broker report) but Blockbuster was being dis-intermediated by Netflix and planned to reinvest in its stores to sell popcorn and toys along with DVDs. How do you think that turned out?   Rear-view looking at past multiples may mean being entombed in a value trap.  When I heard of Blockbuster’s plan, I thought of entering a mule in a horse race–what are my chances?

A Blockbuster Video store - File / Photo: Justin Sullivan/Getty Images








Have faith but don’t be overconfident! Have a great weekend from sub-zero New England.

9 responses to “One more time: CS on Maint. Capex (IRDM)

  1. Hi John,

    Quick question about the use of EV multiples. i was wondering why we mostly use EV/EBIT or EBITDA and not net income. There are some companies with very high interest payments. Sometimes much higher than operating profits so wouldn’t using EBIT be saying like interest doesn’t matter? Is the reason why we don’t include it is because EV already includes debt?

    • Danb: Did you read Ch. 4 of Deep Value, specifically pages 55 and 56? The answer is there. Post the answer so you learn it.

      If you don’t have the book, let me know. Use EBITDA – MCX instead of EBIT–to be safe.

  2. It looks like a rubbish business. The tear sheet shows that both its return on capital and returns on equity have been very poor, with debt ramping up. Depreciation charges are higher than its net profits. Clearly, this is a very capital-intensive business; not surprising for a satellite company. I could imagine that this is the sort of company that would happily grow its way to bankruptcy. The company certainly seems excited by its “growth opportunities”, but judging by the poor returns on capital so far, such growth will do more harm than good. “Our path to value creation is rooted in teh transformational change to our cash flow that is projected to occur in a few years”. There’s always a hook, isn’t there? It remains to be seen whether these projections will bear fruit. Personally, I’m sceptical.

    I guess the question is: so what’s it worth? I certainly wouldn’t want to pay above book. At $9.58 the market cap is £898m, Equity at 31 Dec 2013 was $939m. However, long term debt is £1039m, which should be taken as a warning sign. Even paying a PE of 13.7 seems too generous.

    The company also seems to be capitalising interest, and capitalising amortisation of deferred financing costs. I doubt that that will end well.

    Verdict: can’t see any point in buying

    • Based on what the business does–what is the key to understanding the future investment risk? If you study the history of this industry, it would surprise you. No satellite company has ever been sustainable profitable–most are all own by governments.

  3. Hi john, so I read the pages you told me and found out that the ev/ebit ratio is better than p/e because it takes capital structure into account while ebit allows you to compare apples to apples because it focuses on a company’s core operating earnings.
    Ok so for Iridium, it is true that cap ex is just extremely high but that’s not completely bad. The real question is what returns Iridium expects from the launch of the new satellites. This is the most important question in determining the intrinsic value. This is impossible to answer from reading the 10k alone and I might have to look at conference calls, but even so I think management is over optimistic and will exaggerate the expected returns.

  4. By the way John, what source is it that tells you no satellite company has ever been able to sustain profitability. I went to the trade association site and couldn’t find much about this, but it does provide some useful information on the current overcapacity problems in Africa. I also took a look at some industry overview reports but that was more like marketing and PR.

  5. I read about that stat. back three years ago in an analyst report.
    If you go to, register and then search for IRDM, you will find it there. But regardless, I don’t know now how many Sat companies are state-subsidized, but this does not look like a good business. To know if it is cheap you have to figure out true maintenance capex.

    The main point is that you have to know the useful life of these SATs and their replacement cycle. Also when will another technology wipeout the use of these sats. It is pretty tough to normalize earnings.

  6. Based on the Annual Report, I find there are two key risks an investment in this company would be subject to, apart from the poor ROE (which is low and falling):

    1) a huge cash outflow will take place (at least $3bn estimated through 2017) to produce and launch the new satellites, while funding is not secured (only $760m is available in the current credit facility and less than $200m in cash). The company already appears over-leveraged as its operating income is 1/10 of the debt outstanding in the current facility, even though the principal is due after the launch of new satellites. Hence, even if enough funding is provided, a slight underperformance might put the company into bankruptcy due to very high leverage. Launching new satellites is a very risky bet (even if it can be implemented financially), while current satellites can be ordered to be de-orbited at any time by regulators.

    3) even though the technical operating model might provide certain advantages (possibility for customers to use services regionally and not necessarily on a global scale and minimisation of the needed on-ground infrastructure), the business model appears very fragile. If Motorola’s or Boeing’s incentives change, they can destroy the company that relies on their services. Moreover, IRDM “rely on third-party distributors to market and sell our products and services to end users and to determine the prices end users pay”, while these distributors are being acquired by other big industry players and do not bring as much sales as they used to. Thus, using WEB’s wording, this business hardly has any “moat”. Only its relationship with DoD (19% of revenues) seems to differentiate the company, but even if DoD stays a loyal customer, the other 81% or business are under threat.

  7. Hi John,

    Quick questions on the Financial Analysis Lab. Can you share a bit more on how this website helps our cash flow analysis?

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