On 3/16 (Monday), I rebuilt a small position in GEOY at $18, in accordance with my previous estimate of GEOY’s intrinsic value at $18-$30. I sold the entire position the very next day at $19, thinking that manipulation by options traders will sink the stock price as we approached options expiration Friday. The very next day, management revealed that the delay in filing its 10k is due to immaterial accounting errors. Apparently, the market was worried that the delay was because something had gone wrong with the GeoEye-1 satellite, and relieved investors quickly pushed the stock price up to $21. I finally ate humble pie and rebuilt a position at a higher price of $20 on ops ex Friday (yesterday).
Looking forward, the company should file its 2008 10k very soon. By itself, that is a non-event, since the 2008 results are universally expected to be bad, what with the delays in the launch of GeoEye-1 last year and the accompanying loss of revenue. However, there is a chance that management will finally provide some guidance on future earnings, or perhaps even reveal additional contracts that have materialized now that GeoyEye-1 is certified and fully operational. While management had a long-standing policy of not giving guidance, there is a chance that this may change as the CEO has spent $100k of his own money on GEOY shares last December. Still, I wouldn’t bet the farm on it. Management usually has little incentive to pump up the share price unless it wants to raise cash in the equity market. Management which expects to stay on for the long-term (i.e. the kind of management you want) tend to want a low stock price so that they can issue themselves cheap options at the current low market price, and to provide a low bar for future improvements.
There is also some speculation that an acquisition of GEOY is forthcoming given its low valuation. I view that as improbable. Google, which purchases imagery from GEOY for its Google Earth product, is an unlikely acquisition partner since GEOY handles classified work for the government, and Google is likely to face an extreme amount of red tape and security checks if they were to control such a company. The other class of potential acquirers, namely the defense contractors which routinely handle classified work and already have security clearances, unfortunately have major problems of their own. The Obama presidency is likely to cut defense expenditures in order to boost domestic spending, and the share prices of said defense contractors have been dropping like a rock in recent days.
In summary, I think the GEOY is likely to trade in the range of $18-30, and a $20 entry price with a 10% downside and 50% upside presents a good risk-reward trade-off. Of course, one should always be aware of the extremely low probability of catastrophic loss of the satellite, and limit one’s investment accordingly. In the near future, I might even try selling covered calls on GEOY if the option premium is rich enough. Since I have previously advised against buying said calls, this falls squarely in the “if you can’t beat them, join them” category of behavior.
For my other posts of GEOY, please see GEOY : Liquidation and update, GEOY : Manipulation by options traders, and GEOY : Living off the government.
