What happened
Shares of satellite communications operator Iridium Communications (IRDM +1.49%) fell an unlucky 13% through 12:05 p.m. ET after the company reported an apparently big earnings miss Tuesday morning.
Analysts had forecast Iridium would earn $0.04 per share (pro forma) on sales of $198.4 million for the quarter. Iridium's actual Q2 results, however, show a loss of $0.24 per share under generally accepted accounting principles (GAAP), and sales of only $193.1 million.
NASDAQ: IRDM
Key Data Points
So what
That sounds pretty bad. Iridium, however, highlighted the fact that its sales -- while perhaps missing analyst expectations -- still grew more than 10% year over year. Commercial service revenue rose 11.5% and engineering and service revenue was up more than 148%. Meanwhile, the company grew its customer base almost 14% to 2.05 million billable subscribers.
As for why Iridium reported a loss where Wall Street was hoping for a profit, management explained that it wrote off the value of one "ground spare satellite" after launching five such spares successfully, and that charge to earnings pushed the company into an accounting loss. The company apparently thinks that five is enough spare satellites in orbit for now, and decided to save the cost of launching the sixth -- but Iridium presumably still has it in storage should it be needed in the future.
Which sounds like just good plain business sense to me.
Now what
But if Iridium's "loss" for the quarter isn't as serious as it sounds, then how should investors evaluate this stock? I'd suggest evaluating Iridium not on its GAAP losses, but rather on its free-cash-flow profits.
As it turns out, these look pretty good (albeit perhaps not good enough to make the stock an obvious buy). Over the past 12 months, Iridium generated positive free cash flow of $350 million. When applied to the company's $6.6 billion market capitalization and adjusted for its $1.4 billion in net debt, that works out to an enterprise value-to-free cash flow ratio of about 22.8 on the stock.
That still seems pricey to me for a company growing revenue in the very low teens, however. On balance, I'd say investors are probably right to be selling the shares today -- not because the company reported a loss today, however. Rather, because Iridium stock was too richly priced even before it reported earnings.
Iridium stock shouldn't have cost this much to begin with.
