Forget Gogo: This Cheaper Stock Offers 60% Upside

Marshall Hargrave's picture

Thursday, October 17, 2013 - 10:00am

by Marshall Hargrave

These days Wi-Fi has become a necessity, a part of our everyday lives that we just can't live without. That demand is now being seen in the friendly skies, as fliers prefer a Wi-Fi connection to amenities such as more legroom or better food. 

Carriers are taking note, and one company that stands to benefit from this trend is Global Eagle Entertainment (Nasdaq: ENT).

Global Eagle provides airline passengers with Internet access, live television, video content, shopping and travel information. Its in-flight services have been installed on more than 500 aircraft, covering both land and sea. Through its subsidiary Advanced Inflight Alliance (AIA), Global Eagle provides film and television content, games and applications to more than 130 airlines worldwide.

Big Tailwinds
One of the big tailwinds for Global Eagle is that a Federal Aviation Administration panel just endorsed Wi-Fi as safe for all portions of flights. The panel's recommendations would lift the restrictions on the use of certain handheld devices below 10,000 feet. Only ground-based cellular connections for voice and data would be prohibited. Passengers would be allowed to access their email and the Internet during all phases of a flight, but only through the carrier's Wi-Fi system.

This would be give a distinct advantage to Global Eagle over the largest Wi-Fi provider, Gogo (Nasdaq: GOGO), which provides Wi-Fi services for roughly 75% of the commercial aircraft in the U.S. but relies on cellular towers for its services below 10,000 feet. Global Eagle's services are satellite-based and do not rely on cellular towers. The new recommendations would give a huge competitive advantage to Global Eagle because the FAA currently prohibits the use of Wi-Fi services below 10,000 feet. 

Since StreetAuthority expert Andy Obermueller wrote about Gogo a couple of months ago, GOGO is up over 60%. Global Entertainment has the potential to reward shareholders just as nicely. 

The market for Global Eagle's services is expected to grow from roughly $700 million last year to an estimated $2.1 billion by 2017. Expected to drive that growth is the rise of international carriers from market leaders Boeing (NYSE: BA) and Airbus, particularly in China. Global Eagle gets 60% of its revenue internationally and only 40% from the U.S. -- but while the U.S. in-flight connectivity penetration rate is 43%, the international penetration rate is only 4%, making the international market the biggest opportunity for Global Eagle. 

As a result, analysts expect Global Eagle to post revenue of $263 million for this year and $340 million next year. Earnings are expected to rise from a loss of $1.05 a share this year to a profit of $0.66 a share next year.

Diverse Revenue Streams, Strong Management 
Global Eagle has multiple revenue sources. In the second quarter, its largest revenue source was the sale or licensing of content, video and music programming, applications and video games, good for $38 million. Next were Wi-Fi, TV, Video on Demand, shopping and travel-related applications at $12 million. Third was the sale of satellite-based connectivity equipment at $6.4 million. Finally, Global Eagle brought in $5.7 million for technical services such as encoding and editing of media content. 

Formed by former MGM CEO Harry Sloan and CBS Entertainment President Jeff Sagansky earlier this year, Global Eagle has a strong management team, which has been helpful in securing content and gaining licenses for TV and film distribution. The company is the exclusive distributor for Lionsgate/Summit Entertainment content, and it has secured Asian, Bollywood, European and Middle Eastern content for its in-flight entertainment offerings.

One of Global Eagle's most exciting initiatives is the launch of its new portal, which it's calling Portal 2.0. This new portal offers improved advertising features. The company has a captive audience with the passengers stuck in their seats, which it can leverage by hitting them with targeted advertising. There's no TiVo on board, so passengers can't skip ads -- and Global Eagle gets to collect the advertising dollars from targeted ads. 

Global Eagle's closest comparison is Gogo, which trades at a price-to-sales ratio of 5.3 and a price-to-book ratio of 4.7, compared with Global Eagle at 3.7 and 2.6, respectively. Global Eagle is expected to be profitable next year, while Gogo is not. Global Eagle has the stronger balance sheet, with only $8 million in debt, while Gogo has $245 million. Which raises the question: Why is Gogo worth three times Global Eagle in terms of market cap?

Risks to Consider: The biggest risk for Global Eagle is that satellite providers partner with the airlines and offer their own Wi-Fi and content packages. Over time, expect additional competitors to emerge, but right now Global Eagle has a very strong position in the market.

Action to Take --> Buy Global Eagle for upside to $15. The airline industry is growing rapidly, and fliers want Internet connectivity, especially on long-haul flights. Global Eagle is one of the best opportunities that combines media, entertainment and technology for airlines.

P.S. Andy Obermueller was dead-on with his Gogo call, and he's predicting great things for the company -- but it still didn't make his list of The 11 Most Shocking Investment Predictions of 2014. Andy's previous predictions have returned gains of up to 310% in a year. For more of Andy's predictions, including how Apple's next breakthrough could kill the traditional bank, click here.

Marshall Hargrave does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.