Unlock: DigitalGlobe (DGI) Monster Winner for Clients
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Sector: Aerospace and Defense
Current Price: $21.78
Stop Loss: $19.50
Time Duration: 71 days
Trade Idea – Buy to open DGI September 22.5 calls for $1.45 or less (the bid/ask currently is 1.25 x 1.40 and volume is 247)
Following bullish risk reversal went off earlier:
– 1,000 August 20 puts sold to open for $0.70 credit
– 1,500 August 25 calls bought to open for $0.45 debit
Low probability trade but have to take into account earnings as potential major catalyst during the first week of August (date not confirmed). Last time stock ripped higher by +21% in late April. Highlights from that quarter:
– Q1 EPS $0.11 vs. ($0.03) estimate, huge beat
– Q1 Revenues $175.4M vs. $166.5M estimate, big beat
DigitalGlobe is a provider of high-resolution Earth-imagery products and services. The Company’s imagery solutions support a range of users in defense and intelligence, civil agencies, mapping and analysis, environmental monitoring, oil and gas exploration, infrastructure management, Internet portals and navigation technologies.
The company is becoming leading provider of real time imagery services with increasing needs around border controls (US/Mexico border) as well as Europe with immigration and refugee crisis. Every metric accelerated in growth rate last quarter (revenues, number of customers, EBITDA, Cash Flows). But the most important line that stood out was EBITDA margin improvement sharply to 54.4% vs. 43.2% a year ago. Q1 performance highlighted a concerted effort to control costs while expanding revenue base. This was evident with a $600MM cost target to replace WV1 and 2 capacity. Management spent a lot of time discussing how to leverage existing customers partnerships.
Catalyst – While consensus estimates have slightly moved higher since that quarter, but this note from Jefferies on April 28 is hinting that street estimates are still behind the curve, a long term view but speaks for strength:
“DGI continues to progress with expanding its offering and customer base. The company recently signed its 11th DAP customer, which will receive capacity from WV-4. Since Q3 2015, DGI has captured $355MM of commitments for WV-3 and WV-4, which is about a $43MM annual run rate. The revenues should start in Q2 of 2017, with H2 at close to the run-rate. We believe there continues to be additional opportunity as the company matures its big data offering and signs task orders with new customers.”
Stock trades at 1.75x sales (cheap relative to small cap software multiples) that are expected to grow by +5.7% YoY, re-accelerating from flat YoY growth last year. The story is changing for the better. The only risk to trade is government spending cuts on border traffic controls, which I don’t see happening in this election year. Quite the contrary, I expect more spending specially if Trump becomes the President.