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Satellite business comes back to earth

The investment world is moving towards growth. Reliable income streams and steady earnings profiles will always have appeal, and a place in many portfolios. However the global pressure on bonds and support for industrial commodities speaks to a longer term trend. The challenge for many investors is that this trend is now well established, and shares that offer higher growth rates are trading at higher valuations.

How can investors buy into growth exposures at a reasonable price? One way is to look for good long term prospects suffering temporary setbacks. The current company reporting season has produced a number of disappointments. Investors who detect better long term prospects could view the resulting share price carnage as an opportunity.

Speedcast International (SDA) potentially fits this profile. The company occupies a specialised niche of the telecommunications industry, providing satellite based communication networks and services. Its customers include mining operations, terrestrial telcos that need to reach remote customers, schools, universities and businesses. After its first half earnings report this week the share price plunged more than 40%.

The tumble came despite the fact revenue grew by 24% and earnings by 14%. The issue is that earnings expectations were significantly higher, and management’s outlook statements can be viewed as cautious. The sellers also appear to place little value on the company’s simultaneous announcement of the acquisition of Globecomm Systems.

In my view this puts SDA firmly on the radar. While this week’s news creates uncertainty about the future, there is still potential for annual revenue growth over the next three years in the 20% to 30% range. Calculating a Price to Earnings ratio is also somewhat problematic, but I place it somewhere between 10 and 15 times.

The key question for investors is whether or not the disappointment in earnings is temporary or permanent. If the earnings improve from current levels its likely there will be a significant lift in the share price. Buying “fallen angels” is one way investors can add growth exposure to their portfolio without paying an eye-wateringly high price.

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