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EchoStar Corporation (NASDAQ:SATS) continues to believe that HughesNet Fusion will likely bring business growth. I am optimistic about future innovations after noting the increase in R&D delivered in the most recent quarterly report. Besides, taking into account the growing demand for geostationary satellites, the future does look a bit better than what the market forecasts. Even noting several risks from the lack of certain components or inflation, I think that SATS could trade at a higher price mark.
EchoStar Corporation is a leading network technologies and services company. The company offers Internet services to consumer customers as well as satellite and multi-carry technologies to business and government customers.
EchoStar’s business model is based on two main business segments: Hughes and EchoStar Satellite Services. These segments reflect how decisions are made and resources are allocated in the company under the supervision of the CEO. In addition to its business operations, the company has corporate functions and conducts satellite development activities and other commercial projects.
As pioneers in the industry, the company is focused on meeting the growing global demand for broadband Internet access through various technologies such as geostationary satellites, LEO, and MEO networks. The following is a list of GEO satellites owned and several financial leases.
Considering the expected growth of the LEO and GEO satellite market, I believe that investors may want to have a look at the company. Under my DCF model, using net sales growth lower than 4%, which is lower than the expected market growth, EchoStar appears quite undervalued.
According to this report the LEO and GEO satellite market was valued at $11.8 billion in 2021, and is estimated to reach $43.9 billion by 2031, growing at a CAGR of 14.3% from 2022 to 2031.
Analysts seem optimistic about incoming quarters. They expect a small decline in profitability, but 2024 Q2 net income would be positive. I was a bit more conservative in my assumptions, but I believe that readers may want to have a look at the market guidance.
Many Quite Large Competitors
EchoStar operates in a highly competitive industry with numerous telecommunications service providers, which put pressure on prices and margins. To stand out in this competitive environment, they lay emphasis on the quality of their network and the ability to customize and offer network solutions as a managed service.
EchoStar’s differentiation is based on the ubiquitous availability of service, proprietary technology, and distribution channels. In enterprise markets, it competes with satellite and terrestrial network providers, emphasizing technological features, customization capabilities, and quality of customer service to differentiate itself. The company also faces competition from resellers and local companies that buy equipment and sell services to customers, including national and international telecom operators and cable companies.
In 2023, the total amount of assets decreased, mainly because of decreases in property and equipment. The company also reported less cash and cash equivalents because of the purchase of bonds and commercial paper. Taking into account the large amount of marketable investment securities reported, I believe that it is worth showing the list of available-for-sale debt securities and equity securities reported.
EchoStar also noted cash and cash equivalents close to $702 million, marketable investment securities worth $1.211 billion, and total current assets worth $2.3 billion. The total amount of current assets is significantly larger than the total amount of current liabilities. Hence, I don’t expect any liquidity issues in the coming quarters.
Property and equipment stood at $2.1 billion, with operating lease right-of-use assets close to $144 million, goodwill worth $533 million, total non-current assets worth $3.8 billion, and total assets of about $6.2 billion.
The asset/liability ratio stands at more than two. However, investors might want to have a look at the total amount of long-term debt, which is not small. With that, if we include market investment securities, the net debt appears negative. Long-term debt stands at $1.4 billion, with deferred tax liabilities close to $432 million, operating lease liabilities worth $128 million, and total liabilities of about $2.56 billion.
Cash Flow, And The Recent Merger Agreement
I believe that further optimization of operations and products, prioritizing capacity performance, and seeking profitability in scalable regions will most likely lead to FCF growth. Besides, the introduction of HughesNet Fusion, a low-latency satellite Internet offering that connects mobile and fixed technologies with satellites, will most likely offer opportunities for growth and service expansion.
Besides, it is also worth noting that following the launch of the EchoStar XXIV satellite, the company plans to monetize it by offering new higher-speed plans, which may also enhance future net sales growth and net income growth.
Additionally, I think that leveraging commercial connectivity, hybrid solutions, managed services, and further development of S-band spectrum and other hybrid resources could bring further growth opportunities. In my view, the focus on new developments of advanced technologies will most likely allow EchoStar to maintain its leading position in the industries in which it operates.
For the future income statement, I expect that EchoStar Corporation would report 2034 services and other revenue close to $1.144 billion with equipment revenue of about $1.426 billion. 2034 total revenue would stand at close to $2.570 billion with 2034 net income of $202 million, resulting in a net income/sales ratio close to 7%. Notice that I expected revenue growth, but I remained quite conservative. Under my estimates, from 2023 to 2034, sales growth would not go beyond 4%.
I also included depreciation and amortization worth $53 million, 2034 losses on investments close to -$390 million, stock-based compensation worth $16 million, amortization of debt issuance costs of about -$21 million, and trade accounts receivable and contract assets worth $501 million. Also, with trade accounts payable of about $164 million, contract liabilities of $127 million, and changes in accrued expenses and other current liabilities of -$66 million, net cash provided by operating activities would be $427 million. Finally, if we assume expenditures for property and equipment of -$306 million, 2034 FCF would be $122 million.
In the past, EchoStar traded at about 21x-11x FCF, so I believe that a terminal EV/FCF close to 12.055x appears quite conservative. With this figure and a WACC of 6.055%, the NPV of future FCF would be close to $1.9325 billion. Taking into account the Senior Secured Notes due 2026, bearing 5 1/4% annual interest, I believe that assuming a cost of capital close to 6.055% is reasonable.
On July 27, 2016, EchoStar Corporation’s subsidiary, Hughes Satellite Systems Corporation, issued a total of $750.0 million in Senior Secured Notes due 2026, bearing 5 1/4% annual interest, and $750.0 million in Senior Unsecured Bonds due 2026, with an annual interest rate of 6 5/8%. Source: 10-K
Adding cash and cash equivalents worth $702 million and marketable investment securities close to $1.2 billion, and subtracting long-term debt of $1.497 billion, the implied equity valuation would be $2.3 billion. Thus, we would be talking about a fair price of about $28 and an internal rate of return of 6.3%.
With these figures in mind, I believe that the merger agreement signed with DISH Network Corporation (DISH) does not look that fair. Each EchoStar share would be converted into the right to receive 2.85 shares of DISH Network Corporation. It means that the offer is close to the current stock price.
On August 8, 2023, the Company entered into an Agreement and Plan of Merger with DISH Network Corporation (DISH), a Nevada corporation, and Eagle Sub Corp, a Nevada corporation and a wholly owned subsidiary of DISH. Source: 10-Q
On the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of EchoStar Class A Common Stock, par value $0.001 per share (“EchoStar Class A Common Stock”), EchoStar Class C Common Stock, par value $0.001 per share (“EchoStar Class C Common Stock”) and EchoStar Class D Common Stock, par value $0.001 per share (“EchoStar Class D Common Stock”), outstanding immediately prior to the Effective Time, will be converted into the right to receive a number of validly issued, fully paid and non-assessable shares of DISH Class A Common Stock, par value $0.01 per share (“DISH Class A Common Stock”), equal to 2.85 (the “Exchange Ratio”). Source: 10-Q
The closing is expected to occur in Q4 2023. In my view, certain market participants may expect another bid from other players, which may explain why the stock price is that close to the offer of DISH.
The closing of the Merger is expected to occur in the fourth calendar quarter of 2023, subject to the satisfaction of certain regulatory approvals and other customary closing conditions. Source: 10-Q
The company faces significant risks related to its contractual commitments for satellite capacity. If existing customer contracts are terminated prior to expiration, the company may not generate enough revenue to cover satellite capacity costs. In addition, available satellite capacity may be insufficient to meet increases in demand, and rapidly adjusting capacity to changes in demand may be difficult. Limited additional capacity in North America and certain areas of Latin America and pending the launch and operation of additional satellites could adversely affect the ability to provide services and business growth in addition to generating the revenue. These factors present material risks to the company and were mentioned in the most recent quarterly report.
Our ability to gain new customers and retain existing customers in the U.S. is being impacted by our capacity limitations, competitive pressure from satellite-based competitors and other technologies, and increased bandwidth usage on average by our existing customers. For the three months ended March 31, 2023, these factors resulted in lower total subscribers as compared to the three months ended December 31, 2022. Source: 10-Q
With the previous risks, I would also include the lack of components, mainly because there are very few suppliers for certain items needed. Negotiation with suppliers may lead to lower FCF margins and lower stock valuation.
A limited number of suppliers manufacture, and in some cases a single supplier manufactures, some of the key components required to build our products. We do not generally maintain long-term agreements with our suppliers or subcontractors for our products. Source: 10-K
Besides, I believe that changes in the price of certain raw materials may also affect the FCF margins. We cannot be sure whether the company will be able to increase the price of its services to deal with the impact of inflation. In this regard, management made several comments.
Fluctuations in pricing of raw materials can affect our product costs and we may not be able to pass on the increased costs to our customers. Additionally, we are seeing increasing inflationary price pressure and where we have fixed-price customer contracts, we may have to absorb the increased costs. Source: 10-K
EchoStar’s Hughes expects further business growth thanks to HughesNet Fusion. I think that further improvement in R&D expenses as seen in the most recent quarter, operating improvements, and further increases in the demand for geostationary satellites will most likely bring FCF generation. Even if 2023 does not show an increase in subscribers, like other analysts, I am optimistic about the future because the market is growing. Even considering risks from lack of components, competition, or lack of demand, I think that EchoStar is undervalued.