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Published in Company Comment on 31 August 2010
During an economic downturn most companies' profits will take a beating whilst their managers have to batten down the metaphorical hatches to pull through what is a period of great uncertainty.
The few businesses which prosper during a recession are those whose characteristics are particularly well suited to hard times such as debt collectors, insolvency practitioners and discount retailers like Poundland.
So it is a bit of a surprise to find a high-technology business which has positively thrived during the recent global recession. In the last two years Inmarsat (LSE: ISAT), the provider of satellite telecommunications services, has managed to increase its turnover by 80% whilst its earnings per share have risen by two-thirds.
Recession. What recession?
Inmarsat's performance is no fluke; the company is still growing strongly as its results for the first half of 2010 showed, with earnings per share increasing by over 40% compared to the same period in 2009.
If Inmarsat can produce this sort of performance during a recession, a big question is much better might the company's performance be when the world economy starts to power ahead?
Naturally this means that Inmarsat's shares aren't cheap and this is reflected in a PE ratio of 31. But since Inmarsat's sales, profits and dividend have doubled since it floated on the stockmarket in 2005, realistically you its shares wouldn't be sitting in the bargain bin!
The business
Inmarsat owns and operates a network of eleven geostationary satellites through which its customers make satellite telephones calls and access the internet from almost anywhere on the surface of the Earth. Consequently its main customers are organisations which operate in what the company describes as "the remote environment market" such as the military, mining and oil companies, aid agencies and shipping (both commercial and recreational).
You can find more background information on Inmarsat in my article from last December.
In June Inmarsat started selling its first global handheld satellite telephone, the IsatPhone Pro, to good reviews. Intriguingly commentators on sailing websites have remarked that the IsatPhone Pro's calling costs can sometimes be cheaper than those of some conventional mobile phone networks.
While the current range of satellite phones won't replace most people's mobile phones, if only because they won't fit into your jeans or shirt pocket, it's quite possible that they may directly compete with mobile phones one day.
Inmarsat's satellite network represents a considerable barrier to entry for potential competitors as they would need to establish a similar network, or lease space on other satellites, which would take a lot of time to establish (and cost a lot). Consequently Inmarsat and its major competitors, Globalstar, Iridium and Thurya, have a big foothold in the market which makes it difficult for newcomers to dislodge them.
A great set of numbers
I've summarised Inmarsat's financial performance for the last five years in the table below. Note that like many multinational companies, Inmarsat presents its accounts in US dollars.
When comparing 2009 with 2008 you should bear in mind that Inmarsat's 2008 after-tax earnings received a massive boost thanks to a deferred tax rebate which meant that the company ended up with a net tax receipt of $161.6 million. To get a clearer picture of the underlying business for 2009, it's better to look at the adjusted diluted eps which increased from 39c from 32c
Inmarsat's results for the first half of 2010 were released on 6 August and these were excellent, with sales up by 12% whilst diluted earnings per share rose by 41% and the interim dividend was increased by 10% to 14c.
Inmarsat's shares performed well in the first half of 2010, rising from 700p in January to over 820p in July but they have fallen back with the rest of the market to the current price of about 670p, which is roughly where they stood last December.
The prospects
To keep its network up-to-date Inmarsat has to regularly launch new satellites to replace its older models. Its three earliest satellites, the Inmarsat-2 series, are expected to cease operating within the next two years, but Inmarsat is planning three more launches to complement its most recent satellite, Inmarsat-4 F3, which came into service in 2009.
A dilemma for investors is that Inmarsat's shares have never been cheap. The historic P/E ratio (diluted eps) of 31 tells us that the stock market expects to see a substantial improvement in profits over the next few years (merely adequate results will not be enough for the market).
However the demand for satellite telecommunications should continue increase as the world becomes ever more interconnected, which means that Inmarsat's profits are likely to grow substantially in the next few years. Consequently some investors are perfectly happy to pay up for what looks to be a very full share price and no doubt deters many others.
