Up 400% So Far in 2018, Is Intelsat for Real?

Shares of satellite communications company Intelsat (NYSE:I) are up over 400% so far in 2018. Positive press and speculation have fueled the dramatic increase, and at least one analyst is calling for even more upside. However, investors hoping for more return should be aware of the big risk they are taking in owning this company.

What happened?

The hubbub got started early this year when the Luxembourg-based communications outfit reported its full-year 2017 results. Along with those results, the company said it won a contract to expand 4G LTE mobile services in rural America and that a proposal was made to the Federal Communications Commission to use Intelsat’s satellites to speed up the deployment of the fast-approaching 5G wireless network.

When you add in an upgrade from RBC Capital Markets, as well as a sensational call from small analyst Kerrisdale Capital for the sub-$20 stock to jump to $150, traders had all the ingredients they needed to land a jackpot. By the way, under all of that news is the fact that Intelsat is running at a steep loss and sales growth has been weak at best. Revenue fell 1.8% in 2017 and 3.7% in the first quarter of 2018 when excluding a $25 million benefit from new revenue recognition standards. Losses per share were $1.50 and $0.56 in 2017 and first-quarter 2018, respectively.

I Normalized Diluted EPS (TTM) Chart

Data by YCharts.

The $14 billion elephant in the room

The upshot here for investors is that Intelsat may have a few irons in the fire to get revenue and cash flow back into growth mode. The company’s biggest customers are communications networks, media companies, and government services, all of which have new needs that Intelsat’s satellites help meet. However, the big concern is on the balance sheet. Intelsat is bogged down with long-term debt, to the tune of $14.1 billion as of the end of the first quarter. To put that in perspective, Intelsat’s current market cap is only $2.4 billion and cash and equivalents on hand are only $492 million.

Juggling that debt by refinancing when it comes due has been the name of the game, but servicing it is becoming more costly. Interest expense in the last reported period was $282 million compared with $246 million a year ago. Both figures gobbled up more than profits from operations. For full-year 2017, interest expense was $1.02 billion and was the biggest reason the company posted a red bottom line.

The European continent viewed from space.

Image source: Getty Images.

In fact, it was for this reason that Intelsat shares traded for a mere $2 and change before exploding higher earlier this year. Granted, the company has plenty of assets it could monetize to wean itself off lenders, and with the prospect of new wireless networks providing a spark to generate growth, Intelsat’s heavy burden could get a little lighter soon.

For investors attracted to the triple-digit marquee return this year, though, it could be as good as it gets for the stock. Unchecked borrowing is still easily outstripping operating margins, and without confirmation that new revenue sources are for certain, losses likely aren’t going to swing to profits anytime soon.

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