Viasat: This Leading Satellite Company Appears Undervalued

The company's recent merger announcement created an overblown negative reaction to the stock

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Tom Kerr
Mar 07, 2022
Summary
  • Viasat owns and operates geostationary satellites that offer broadband connectivity
  • The company is in investment mode as it builds out future satellite launches
  • Viasat to merge with privately held Inmarsat and create an industry leader
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Viasat (

VSAT, Financial) is satellite technology company that primarily provides bandwidth and internet services. These high-speed broadband services are targeted towards consumers, corporations and airlines. The company also provides connectivity systems to commercial networks and governments, including providing secure government communication systems.

Viasat satellites are defined as geostationary, meaning they orbit at approximately 22,000 miles above the earth. This provides a very expansive coverage area as compared to low earth orbit satellites, which operate only 300 to 600 miles above earth. The trade-off is greater latency, meaning the distance a satellite beams it signal may affect realized broadband speeds to the end-user on earth.

The company was founded in 1986 and went public in 1986. Viasat currently has a market cap of approximately $3.4 billion.

In-flight connectivity is a growth area

In-flight connectivity is an important and fast growing revenue stream for Viasat. At the end of 2020, the company counted 1,500 commercial airplanes as customers for their onboard internet service for passengers. Market share is believed to be around 30%. In the past 24 months, Viasat has signed deals with Delta (

DAL, Financial), KLM Royal Dutch (KLMR, Financial) and TMC Private Jets. There are approximately 26,000 commercial aircraft in the world today, and that number is expected to grow to 35,000 over the next 10 years.

Recent merger announcement

As Viasat stock was climbing to all-time highs in October 2021 with positive outlooks across the board, the company made a surprise announcement on Nov. 8, 2021. They announced that they were planning on acquiring Inmarsat, a leading provider of global mobile satellite communications services. The transaction was valued at $7.3 billion and comprised of $850.0 million in cash and approximately 46.4 million shares of Viasat common stock valued at $3.1 billion based on the closing price on Nov. 5, 2021, as well as the assumption of $3.4 billion of net debt.

The newly-formed company intends to integrate the spectrum, satellite and terrestrial assets of both companies into a global high-capacity hybrid space and terrestrial network, capable of delivering better services in the fast-growing commercial and government sectors.

This advanced architecture from the combined companies will theoretically create a system that incorporates the most favorable characteristics of multi-band, multi-orbit satellites and terrestrial air-to-ground systems that can deliver higher speeds, more bandwidth, greater density of bandwidth at high demand locations. For example, at places like airports and shipping hubs, they can offer lower latency at lower cost than either company could provide alone.

The deal was immediately met with skepticism by the financial markets as Viasat stock declined from a 52-week high of over $68 three days before the announcement to $42 about 30 days later.

Balance sheet

The latest balance sheet figures were provided by the company was for its fiscal third quarter of 2022, which ended on Dec. 31, 2021. Cash and equivalents stood at $166 million and total debt was $1.7 billion.

However, assuming that the Inmarsat merger closing occurs during the second half of calendar year 2022, Viasat's pro forma net leverage at the end of 2022 is projected to be approximately 5 times trailing 12-month Ebitda. The leverage ratio is expected to decline to less than 4 within 24 months following the closing.

Growth prospects

Viasat is investing heavily in its satellite buildout and other infrastructure needs, so the company currently does not generate strong earnings that are reflective of its future potential, in my view. However, the company could possibly earn $1.5 billion in adjusted EBITDA by 2024 according to Wall Street. With a current market cap of only $3.4 billion, that scenario could create long-term upside potential.

Guru holdings

Gurus that have added to their Viasat positions recently include

Michael Price (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Seth Klarman (Trades, Portfolio). One notable investor that has sold out of his Viasat position is Mason Hawkins (Trades, Portfolio).

Conclusion

I believe there was an overreaction to the recent merger announcement at the end of last year. Although Viasat's debt leverage profile will increase following the transaction, the long-term value of the combined entity is likely to increase. The newly-formed company could become an industry leader with the potential to generate above-average shareholder returns over time. Therefore, I believe the stock is currently undervalued.

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Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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