In terms of specific path forward, we expect that Hughes will grow its revenue ~MSD% in 2020, before launching Jupiter 3 in 2021, after which we expect a meaningful acceleration.

·         Hughes is capacity-constrained in North America, so we expect L-MSD% North America growth and high growth in Latin America to continue to drive the overall number higher.

·         After Jupiter 3 is launched in 2021, we expect another strong step-up in revenue/EBITDA (~30-35% over 2-3 years or so).

 Valuation Framework

 Given the business layout above, the key question is the valuation of the Hughes business + the valuation of the non-Hughes SATS assets + the modest net cash generated. We assume 

·         No explicit EBITDA from Jupiter 3 in our 2021 EBITDA estimates, but instead $330M of value for the new satellite (60% of the construction value)

·         ~$250M in value for the 49% stake in Dish Mexico, a ~50% valuation discount to the rumored valuation of DirecTV Mexico

·         $50M of S Band spectrum value (the price paid for it; some experts believe this could be worth much, much more)

·         $60M of value for the EMEA JV

·         Little net cash generated through the end of 2020

 With those pieces out of the way, the key variable is the valuation methodology for Hughes.

We believe that the broader market will use TEV/EBITDA as a shortcut, because it tends to use that methodology for satellite companies that are constantly spending large amounts of growth capex. But we sense-check that methodology vs. other methods discussed below). Hughes’s 3 real satellite peers are Eutelsat, Inmarsat, and Viasat. Eutelsat and Inmarsat have historically traded at 7-8x TEV/EBITDA, and have generally been expected to generate flattish to slowly growing EBITDA. Viasat, growing EBITDA very very quickly, trades at 12-13x TEV/EBITDA. Meanwhile, the SATS stub trades at 6x TEV/EBITDA on a headline basis and 5.3x if you back out the value of the non-Hughes assets described above. We think a re-rating to 7-7.5x over the next 18 months seems reasonable.

Given the capital intensiveness of residential broadband (due to consumer equipment), we sense-check the TEV/EBITDA methodology above by looking at TEV/(EBITDA – maintenance capex), where maintenance capex is defined as the capex needed to keep the customer base flat (customer equipment capex to replace churn + an allocation for a replacement satellite). On that basis, Hughes trades at 10.8x TEV/(EBITDA – maintenance capex) on a headline basis and 9.3x if you back out the value of the non-Hughes assets described above. Hughes’s slow/no-growth peers Eutelsat and Inmarsat have historically traded (10-15x) on this basis. Our 7x TEV/EBITDA referenced above implies 12x TEV/(EBITDA – Maintenance Capex) on 2021 #s .

 Potentially Bullish Trading by Charlie Ergen

 Charlie Ergen doesn’t engage in open-market buying of SATS stock, but he does occasionally exercise non-expiring options as a way to increasing his holdings, and he did so on May 21, after the deal was announced. Ergen has a good track record in these exercises:

·         After the 2012 exercise, SATS went on to generate 30 points of alpha in the following 12 months and 45 points of alpha over 18 months.

·         After the 2015 exercise, SATS went on to generate 25 points of alpha in the following 12 months and 35 points of alpha over 18 months.

 RISKS

·         Government-subsidized rural DSL: Congress could allocate funds to subsidize buildout of DSL in Hughes customer areas where it is non-economic for the DSL providers to build, threatening Hughes’s competitive position.

o    Our view: (a) This is a constant dynamic of the Hughes business in the last decade, and Hughes has thrived despite it (b) when Jupiter 3 launches, Hughes speeds will be so much faster that it will be hard for subsidized DSL to compete. While some have noted that the population of homes with <10mbps internet has been shrinking, the continued launch of Hughes satellites is raising the bar for what counts as the under-served TAM…in a few years when Jupiter 3 has made 50mbps the standard, the “under-served” TAM may be households with internet <30mbps, a much larger group, keeping the Hughes TAM fairly constant.

 ·         5G buildout: It’s possible the buildout of 5G by AT&T/Verizon/T-Mobile/Dish could introduce 5G as a competing technology to satellite broadband.

o    Our view: 5G rollout is largely concentrated in cities where Hughes has does not have subscribers. 5G buildout is designed to help the need for data capacity in population-dense areas, whereas satellite broadband serves areas with low population density that makes cable/fiber/5G buildout non-economic.

 ·         LEO (low-earth-orbit) satellites: other satellite companies such as OneWeb and SpaceX plan on launching a large quantity of small, low-orbiting satellites to provide connectivity to areas around the globe, and some fear the LEO satellites could threaten Hughes in residential broadband

o    Our view #1: Because LEO satellites are not stationary, they require rotating antennae that track the satellites as they orbit Earth, and those antennae will not be economic for consumer applications for 5-20 years. This is why those satellites are focusing first on B2B/government applications, particularly those in emerging markets. To the extent they are targeting consumers, those consumers are high-use gamers that prefer the low latency of the LEO satellites, but those users don’t use Hughes now because of the Hughes latency and data caps.

o    Our view #2: The LEO satellite companies would have to establish a customer service & distribution network that is expensive and time-consuming to replicate…OneWeb has partnered with Hughes for ground equipment and market access, and the two companies view each other as partners addressing different end-markets rather than competitors.

 ·         Jupiter 3 launch errors: It’s always possible that there could be an issue launching the Jupiter 3 satellite.

o    Our view: There was an issue with the Viasat 2 launch that caused Viasat to lose 20% of its capacity, but Hughes has never made this sort of error, which speaks to their technical expertise vis-à-vis Viasat.