There's a word you hear all the time when people talk about their favorite stocks.
Maybe you've used it. I know I have. It's the ideal visual, a perfect metaphor.
But on Thursday, May 14 -- just a few short days from now -- that word is going to take on special significance. It's going to be literally true for one company.
Let me explain.
For the past six months or so, the market for new stock offerings -- known on the Street as "IPOs" -- has been all but nonexistent. In the first quarter 2008, there were 12. This year there were only two.
That makes some sense, of course. The whole purpose of going public is to raise money -- as much as possible -- and no company wants to give its equity away in a lousy market. It's better to wait until conditions are a little more favorable.
Now, there are some signs that's happening. The economy could well be in the nascent stages of a recovery. The market has staged an impressive rally since early March, rising +35% off its lows. But neither of those two factors had anything to do with why one company decided late last month that it was time to pull the trigger on an IPO and go public.
It's not because the IPO market is great. It's not. In fact, the conditions for an initial public offering are somewhere between "daunting" and "less-than-ideal." But this company is basically being forced to sell its shares.
How can a company be forced into selling its shares? There's really only one way: A strong government action.
In early April, the U.S. intelligence director decided to increase the number of satellite images the government buys. You'd think this was all handled by the military, but in fact there are two private vendors that operate what amount to private spy satellites.
These two companies, which are critical to national security, are already stretched thin. There's already more business than they can accommodate. So when these companies learned that the feds needed even more images, one of the companies decided its only option, even despite market conditions, was to go public. It will use the proceeds from the IPO to build its capacity and fill Uncle Sam's orders. The deadline for launch, so to speak, is Thursday, May 14.
Oh, I nearly forgot: The other company? It's already publicly traded: GeoEye (Nasdaq: GEOY). Its shares are up more than +42% this year. That bodes pretty well for the company that's getting ready to launch its shares. Remember, these are the only two companies the government uses to provide these crucial images.
The company about to go public had revenues of $275 million last year -- which was an +81% increase from the year before. With the government looking to increase the amount of images it buys and the company able to deploy IPO proceeds to get more satellites into orbit, shares of the company are going to -- I'll say it -- take off.
This company is going to skyrocket, in every sense of the word. All courtesy of its No. 1 customer, the U.S. government.
Let's look at the business model: The barrier to entry is extremely high. It costs hundreds of millions of dollars to design, build and launch satellites. Very few companies have the financial or technical capability to pull it off. And even if they did, who are they going to sell images to? The government already has its suppliers. That is what Warren Buffett refers to as a "sustainable competitive advantage." It's a pretty wide moat!
And those two suppliers, incidentally, do extremely well. The profit margins are quite juicy: This company posted $92 million in operating earnings on $275 million in '08 revenue. That puts this company in the top 1.5% of all publicly traded U.S. companies.
On Thursday, this company will sell nearly 15 million shares at between $16 and $18, about a $250 million deal. Investors who know the power of government action can't afford to sit on the sidelines. Now, it would be foolish to predict what's going to happen on the first day. I don't know. But over time these shares are going to far outpace the overall market.
Here's my prediction: This company's $250 million worth of stock will be worth $1 billion in less than two years -- it will double and then double again. I think these shares will easily reach $50 -- possibly within weeks -- but wild horses couldn't get me to sell mine for that. These shares will be a beautiful long-term play.
Why? Because our government is going to continue to put pressure on Afghanistan, and there's no way to win the war there without the best intelligence. That means constantly updated imagery, which, in turn, means more sales for the government's two satellite image providers. And there are certainly other areas that our intelligence leaders need to keep up with, too: Certainly hot spots like Iran and North Korea, but also other areas like Israel, Chechnya and Venezuela, just to name three. In fact, there's really no place on earth the United States doesn't have an interest. No one wants to be surprised. I for one am glad that the U.S. is keeping its eyes open.
To that end, intelligence officials have already decided to procure additional imaging. The company about to sell shares is obviously moving to position itself to take full advantage of the huge government-driven opportunity. The potential obviously outweighs the risk of selling shares into a less-than-ideal market.
Let me be clear: The federal machine is the most powerful financial force on the planet. Since the bailout began, Uncle Sam has spent, lent or committed $13 trillion to get the economy back on track. Every time one of those public dollars is spent, a private profit is realized. In this case, a government order is forcing a company to go public. The least you can do is volunteer to be one of the investors who reaps a windfall from it.
The name of this company is DigitalGlobe. It will trade under the ticker DGI.