Description

Rare low-float, high short interest, growing and profitable company trading at a remarkably cheap valuation.  Massive stealth buyback in process and large open-market insider purchase may telegraph a sea change in SATS investment dynamics, but market participants seem entirely unaware.  Potential for a spectrum spin-off reminiscent of IDT’s legendary Straight Path bonanza, creating a situation that could become very exciting to retail and institutional investors alike.

Based in Englewood, Colorado, EchoStar Corporation (“EchoStar” or “SATS”) is a leading global provider of broadband satellite technologies, broadband internet services for consumer customers, which include home and small to medium-sized businesses, and satellite services.  EchoStar also delivers network technologies, managed services and communications solutions for enterprise customers, which include aeronautical and government enterprises.  Separately, the company is exploring the development and deployment of S-band spectrum technologies that it expects will reduce the cost of satellite communications for internet of things, machine-to-machine communications, public protection, disaster relief and other end-to-end services worldwide, and the integration of its products and services into new global 5G networks.  EchoStar has an equity and enterprise value of approximately $2.4 billion, as the company’s cash and equivalents roughly equal its borrowings.  Run-rate EBITDA exceeds $700 million, resulting in an implied EV/EBITDA valuation multiple of only about 3.5x. 

The company is currently capacity constrained, curbing subscriber growth, however growth in average revenue per user (“ARPU”) growth drove modest revenue growth (+4% y/y) and strong EBITDA growth (+25% y/y) in the first quarter of 2021.  Management expects subscriber growth to resume following the late 2022 launch of its new Jupiter 3 satellite, which should be capable of 100 Mbps speeds.  Capital expenditures relating to new satellite construction result in modestly positive free cash flow on a reported basis.  Founder Charlie Ergen holds 92% voting control through his various ownership interests of Class A and Class B super-voting shares.  The company published an overview of its business as of May 2021, available here, which I recommend reading in conjunction with the company’s filings.

My investment thesis regarding SATS is both fundamental and technical, as I believe the stock represents terrific value relative to its assets and cash flows, but also has unusual potential for sharp appreciation due to certain technical conditions that are presently unappreciated by the public markets.  These idiosyncratic conditions include the following:

- Stealth, substantial Class A share repurchase was implemented into year-end 2020 and has continued through this writing.  As of September 30, 2020, SATS had 50.5 million publicly-traded Class A shares and 47.7 million Class B Ergen-controlled shares.  Of the Class A shares, the Ergen family owns 2.2 million, while ETF custodians Vanguard, Blackrock and State Street own 7.5 million, reducing the freely-tradeable float by 9.7 million shares.  Since the fourth quarter, EchoStar has repurchased 7.9 million Class A shares in the open market, resulting in a 16% reduction in that publicly-traded share class, and a 20% reduction in the estimated free float.

I estimate that over $300 million of share repurchases remain under the $500 million authorization put in place on October 29, 2020 (nearly 50% of the total Class A market value at the time).  As the current Class A float has an estimated public market value of only $890 million, the board’s remaining repurchase authorization amounts to over one-third of the entire remaining float.

Excerpt from 10-K filed February 22, 2021

Excerpt from 10-Q filed May 5, 2021

Historical Class A Sharecount and Float Estimates (Sources: 10-K, 10-Q and 13-D filings)

- At present, there are approximately 6.1 million SATS shares sold short (up from 5.4 million at last report), representing about 19% of the estimated Class A float.  A typical day’s trading volume is only about 600,000 shares, and some days can run 300,000 or fewer.  Assuming a theoretical 15-20% of this daily trading in a short-covering scenario, it could take over 50 trading days for short sellers to cover their short positions in SATS.

- In a transaction that I believe is without precedent at EchoStar, Chief Strategy Officer and President-ESS Anders Johnson purchased 20,000 shares in the open market at a price of $23.45 on February 25, 2021.  This share purchase amounted to a remarkable 10x his prior direct share holding [previously 2,000 shares direct plus 1,064 owned by his 401(k)].  Further, going back to 2012, all of Johnson’s reported transactions involved the sale of EchoStar stock.  “Why now?” seems to be a good question.   I suspect the answer rests in his view of the company’s near-term and long-term S-band spectrum plans, which he discusses in this June 7th SpaceNews interview.

- It is conceivable that EchoStar could choose to separate its S-band spectrum assets via a tax-free spin-off into a new publicly-traded company.  Such a move would be reminiscent of Howard Jonas’ 2013 decision to separate and spin-off IDT Corporation’s spectrum assets into newly-formed Straight Path Communications.  At the time, these 38 and 28 GHz fixed wireless spectrum licenses were considered nearly worthless for 5G networks, and post-spin the newco initially traded below $5 per share, before its sale in 2017 to Verizon for $3.1 billion ($184 per share) following a bid war with AT&T.  Ergen and EchoStar have a history with spin-off transactions, as in September 2019 they completed the spin-off of EchoStar’s BSS business in exchange for DISH shares.

- In October 2020, Charlie Ergen completed a $750 million equity offering for newly-organized blank check company CONX Corp.  CONX is led by CEO Jason Kiser, who is described as having “supported Mr. Ergen in virtually all significant transactions and strategic opportunities at DISH and EchoStar, including leading EchoStar’s $1.9 billion acquisition of broadband satellite services provider Hughes Communications Inc. in 2011.”  Explicitly in the offering prospectus, the company is permitted to pursue an initial business combination opportunity jointly with EchoStar.

- I hesitate to mention it, but in the current market environment I would be remiss if I did not note that the situational dynamics here seem as if they are very well suited to both the institutional and retail investment communities (space, satellites, 5G spectrum, low market capitalization, low float/high short interest, legendary founder and controlling shareholder).  At present, Cathie Wood’s ARK Space Exploration & Innovation ETF (ARKX) does not own any shares of SATS, however these reports are closely monitored and any purchases here would likely attract attention. 

- The current share price is depressed due to intense institutional tax loss selling that took place into the end of 2020, as several long-time, large shareholders exited completely or significantly reduced their positions.  Interestingly, David Einhorn’s Greenlight Capital exited a tiny position in 3q20, then in 4q20 and 1q21 has repurchased a much larger position, appearing to make SATS its 14th largest disclosed long holding.  

- For those concerned about Starlink, I would recommend reading this article: “Elon Musk Makes It Clear Starlink Won’t Have The Capacity To Disrupt U.S. Broadband.”  Hughes CEO Pradman Kaul also addressed this topic directly on the 3q20 conference call, explaining “economically, we are at a significant advantage over Starlink.”

Primary Risks:

• Controlled company

• Satellite anomalies

• Competition

Disclaimer:  The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice.  The data contained herein are prepared by the author from publicly available sources and the author's research, opinions and estimates.  No representation or warranty is made as to the accuracy of the data, thoughts and/or opinions contained herein.  Please do your own research.

Catalyst

• Buyback / float shrink

• Awareness

• S-band progress / clarity