DGI: Should Investors Take Profits From DigitalGlobe Now?

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We’ve talked before about how the fourth-quarter earnings season has been a tough one for a lot of companies, as investors punished stocks far more severely than they deserved in many cases. Of course, there were positive surprises, too, which is what happened with DigitalGlobe Inc (NYSE:DGI).

digitalglobe-dgi-stock-185DGI soared nearly 17% last Friday after reporting better-than-expected fourth-quarter earnings the night before. Revenues increased 9% to $185.7 million, besting expectations of $180.3 million, and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $92.9 million was also nicely ahead of estimates for $88.7 million.

The question now is whether the 17% pop ignites another run higher or if that’s all there is. Let’s start our answer to that question with why I liked DigitalGlobe to begin with.

DigitalGlobe provides high-resolution imaging products and services tied to satellite imaging of the Earth. DGI owns a network of half-a-dozen satellites orbiting the globe at this very moment in what is known as a constellation, helping the government and commercial customers monitor what is happening on the ground. They can look at anything from everyday street scenes to mapping new terrain to monitoring natural disasters and military movements all across the world. 

In the middle of January, DGI came under some pressure after announcing that Gary W. Ferrera would take over as executive vice president and Chief Financial Officer (CFO). As I wrote at the time, I was not concerned about the management change and thought the growth potential along with a nice share buyback program would move DGI stock higher. 

I mentioned that I viewed DGI as very attractive where it was trading at the time around $27, and now that it’s jumped 30%, what’s the next move?

Can DGI Go Higher?

DigitalGlobe’s fourth-quarter beat was strong though certainly not huge, but the conference call was extremely positive. Management discussed in detail its strategy to improve core commercial business, continue growing government business and improving on an operational basis.

After taking into consideration management’s goal to eventually achieve $1 billion in annual revenue, some further margin expansion and expected reductions in capital spending as DGI completes the building of its constellation system, I believe that DGI stock is now pretty fully valued at current prices around $35.

Digging deeper into the valuation analysis, if you discount DigitalGlobe’s  free cash flow potential of $270 million annually and discount this number back by 8.5% (derived by applying a 3% premium to the 5.5% yield on DGI bonds), a target of $35 is a full price. Plus, DGI stock is trading around 10 times projected 2015 EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation and amortization), which is another indication of full value.

In addition, DigitalGlobe has a history of inconsistent earnings and also has a tendency to selloff sharply whenever the Street becomes uneasy. 

So, when you combine all of these factors, upside from current prices looks a lot harder to come by. In my opinion, the impressive surge after earnings pushed DGI stock to its full value, and the risks now outweigh additional upside potential. Therefore, I recommended going ahead and locking in profits.

Hilary Kramer is the editor of GameChangersBreakout Stocks Under $10 and High Octane Trader.


Article printed from InvestorPlace Media, https://investorplace.com/2015/03/dgi-stock-take-profits-from-digitalglobe-now/.

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