GeoEye Beams a 'Buy' Signal to Investors

GeoEye's newest satellite (GeoEye 1) is expected to launch in August and provide significant new revenue-enhancing opportunities to the company's existing and future customers.

However, no company or person is perfect. GeoEyes clearly must take steps to properly reward shareholders by fully realizing the inherent value of the company.

Here is a summary of the activist suggestions I raised to GeoEye's Chairman and CEO in my recent letter to them.

Raise GeoEye's P/E ratio to be in line with its peers: At the moment, GeoEye's trailing P/E is only 12.66. Yet, the company has projected to grow its earnings at 20% a year over the coming five years. Competitors sell at trailing P/Es in the mid- to high-20s. If GeoEye sold for a P/E of 20, the result would be a 58% increase in the stock's price to $45.82. If GeoEye were trading at a premium to its peers, which I believe is warranted, of 40, its stock price would appropriately be valued at $62.62.

I believe that the market has failed to see the inherent value in GeoEye because the company has not sufficiently articulated its strategy moving forward. It's not enough to simply estimate to investors when GeoEye 1 will launch or provide timelines for GeoEye 2 (its next-generation satellite that won't be launched until 2011), for that matter.

Investors want to know what the company will provide to its customers better than its competitors and in a sustained fashion. They also want to know that GeoEye is unique and better positioned to deliver to a large and fast-growing market. This hasn't happened as effectively as it could, in my opinion. I believe that, with a much more focused and vigorous explanation of GeoEye's inherent value relative to its peers, the market would properly value the company.

Rectify the earnings delay: Despite strong revenue announced during last week's quarterly call with analysts and investors, the company's stock was immediately punished, falling to $28 from $33. The reason was the management team's inability to communicate GeoEye's 2007 EPS because it couldn't account for net operating losses from the acquisition of M.J. Harden Associates from GE in early 2007.

These days, the markets abhor uncertainty. Investors shoot first and ask questions later, sometimes when it's unwarranted, as is the case here. The current stock price appears to me to be a market overreaction. However, this is partly management's fault for failing to move more swiftly in 2007 to clarify this point. They need to get this information out to the market as soon as possible.

Get a better board with more skin in the game: GeoEye has a prestigious group of directors. Its chairman, Lt. Gen. James Abrahamson, formerly headed up Ronald Reagan's "Star Wars" project. James Simon, former Assistant Director of the CIA, is also a director. However, a disproportionate share of directors on GeoEye's board have government/military backgrounds. There is also a plethora of lawyers and accountants. Such backgrounds aren't objectionable in themselves (the government, after all, accounts for over half of GeoEye's revenue). But it is a concern that there are no directors who represent the perspective of GeoEye's commercial customers.

Additionally, I'm concerned about the low stock-ownership levels of several of the outside directors. In research I collaborated while at Columbia Business School, we found that no single governance characteristic mattered more to improving a company's share performance than the percentage of outside directors on the board who held meaningful equity stakes they had purchased themselves.