Published: May 10, 2010
What do penguins in Antarctica and a
company in Colorado have to do with the profits you can make on
the New York Stock Exchange?
More than you might think.
Antarctica's clusters of emperor penguins are spread across the
5.4 million square miles of ice on the frozen continent, which
makes counting them a challenge. Previous attempts to enumerate
the flock have been either imprecise or cost-prohibitive. Now, a
British scientist has been poring over satellite images of the
ice to look for penguins the same way an intelligence analyst
might look for signs of Osama bin Laden in Afghanistan.
As a matter of fact, the images the scientist is using come from
the exact same place the CIA gets its pictures. While most
Americans would logically assume these images come from highly
classified military spy satellites hundreds of miles above the
earth, the fact is the satellites really aren't much of a secret
at all and are, as it turns out, owned by private contractors.
The British scientist, Philip Trathan, is using images from the
National Geospatial Intelligence Agency. The U.S. government
currently spends about $300 million a year, nearly a million
dollars a day, buying images from two companies, Digital
Globe (NYSE: DGI) and GeoEye (Nasdaq: GEOY).
These satellite images are usually used by CIA or the Department
of Defense to guide national security decisions. Typically, of
course, these agencies are scanning the world's hot spots for
hostile military or terrorist actions, not surveying the polar
ice cap for entirely peaceful but seemingly overdressed fowl.
These unclassified images, though, are invaluable to scientists,
who, until last year, had a better set of maps for Mars than for
The barriers to entry in the satellite imagery business are
high: 423 miles above the earth, to be exact. That's where the
satellites hover, and a prospective competitor would need a
stack of cash almost that high to gain a toehold in the market.
DigitalGlobe and GeoEye have already used rockets to put a flock
of satellites in space. Both companies have ground-based crews
to run the satellites and send the right images to the right
agencies and to other customers. Most important, however, these
companies have a long history with the buyer, Uncle Sam. That's
their most important asset.
Consider DigitalGlobe, a company I shared
with readers of my premium Government-Driven Investing
newsletter a year ago. This $1.3 billion company based in
Longmont, Colo., has returned +28.9% in the past 12 months and
trades at a strong 33 times earnings. That valuation is
supported by the company's strong financial results: Since 2006,
it has increased revenue +157.7% while growing its profits a
The world has not grown any safer in that time period.
Intelligence analysts still need all the data they can get to
peer into the remote corners of the globe to protect our
country. From North Korea to Darfur, from Iran to Venezuela and
a dozen other potential flash points around the world, including
the volatile Middle East, our national defense agencies have to
keep a vigilant watch. Business, alas, is booming for these
satellite image providers.
DigitalGlobe's net margin in 2009 was an enviable 16.8%, though
it can do better and has: In 2007, for example, it booked an
amazing 63.2% net
margin, earning $95.8 million on $151.7 million in revenue.
There's no reason it can't achieve that kind of earnings again.
One thing that will drive that level of profitability is its
growing base of commercial customers. The company's most recent
quarterly filing shows its government business grew +9.3%
year-over-year, to $62.6 million, while its commercial revenue
shot up +46.5%, to $14.5 million.
DigitalGlobe is a vibrant company in a growing space with a very
profitable business that is protected by a very wide moat and
serves a customer, Uncle Sam, that always pays the bills.
DigitalGlobe is a good company for long-term, growth-oriented
investors to consider adding to their portfolios.
(In case you were wondering about the penguins, the biologists
doing the census estimate the satellite-assisted total will be
in the neighborhood of 200,000 and 400,000 pairs.)
-- Andy Obermueller
Chief Investment Strategist