Near a 52-Week Low and Buying Back Shares, Is Iridium Stock a Buy?

Iridium Communications (NASDAQ: IRDM) stock is in the dumps. Down 37% in 52 weeks, the satellite communications stock enjoyed a modest revival in July after beating on second-quarter earnings, and promising to maintain -- or even slightly accelerate -- its Q2 rate of 4% sales growth through the end of this year.

At the time, I suggested that Iridium stock looked inexpensive at a price-to-free cash flow (FCF) ratio of 12.

The stock has gotten a bit more expensive since. Regardless, Iridium itself now agrees that its stock is a "buy."

Iridium's big stock buyback

Last week, Iridium announced that its board of directors has approved a plan to buy back as much as $500 million worth of its own shares -- the company's fourth such buyback announcement in four years, and an announcement that could bring total buybacks to $1.5 billion in value.

For this stock, the entire market capitalization of which amounts to only $3.5 billion, that's kind of a big deal.

Iridium explained that since it has completed deployment of the 66 operational satellites (plus nine spares in orbit and six more on the ground) of its Iridium NEXT satellite constellation, it's now in a position to reap the benefits of its fleet upgrade. The company expects to generate "meaningful" free cash flow from the investment going forward -- and a lot of that cash is going into buybacks.

But is this the right decision?

Iridium by the numbers

Let's look at the numbers.

Iridium sports a $3.5 billion market cap, but that's only the start of the story. Putting NEXT into operation cost the company approximately $3 billion in investment, and Iridium borrowed much of that money. With only $63 million in cash, it now carries a debt load of nearly $1.7 billion, such that net debt is $1.6 billion.

Added to the market cap, this gives Iridium stock an enterprise value of $5.1 billion.

Iridium generated $256 million in free cash flow over the last 12 months, a number that analysts polled by S&P Global Market Intelligence think will grow only slowly -- to about $264 million through the end of 2024, and $285 million in 2025. This means that with Iridium, we're looking at a stock with an enterprise value of about 20 times trailing free cash flow, 19 times current-year FCF, and roughly 18 times next year's cash profit.

What this means for investors

Is that a good valuation at which to be buying back stock? Iridium seems to think so.

But if sales are only growing at 4% or so a year, and free cash flow at about 8%, I'd personally prefer to see the valuation come down quite a bit more -- like, by half -- before I'd be comfortable calling the stock "cheap." As long as growth rates remain in the single digits, Iridium might be better served by using its excess cash flows to pay down debt, which is currently a $100 million-a-year drag on company profits.

On the other hand, though -- and speaking of profits -- Iridium did earn $0.70 per share over the last 12 months. $500 million in stock buybacks would reduce the company's share count by about 14%, and add about $0.11 to Iridium's per-share profit annually, goosing the company's apparent earnings growth rate well into the double digits. That kind of growth could attract a lot of buyers to the stock.

Ultimately, whether Iridium stock is worth buying -- either for new investors, or for the company itself through its stock buyback program -- depends on whether Iridium can maintain a double-digit growth rate over the long term. If the free cash keeps flowing at the levels management is promising, though, and Iridium can buy back shares without putting itself too deeply in debt, this stock actually might be a winner.

Should you invest $1,000 in Iridium Communications right now?

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.