Stellar Acquisitions And Defense Diversification Set To Boost Revenue, Despite Margin Pressures

Key Takeaways

• Gilat's acquisition of Stellar Blu Solutions enhances its leadership in the in-flight connectivity market, promising significant revenue growth through new markets and customers.
  
• Expansion in the defense sector and investments in the mobility sector indicate diversification of income sources and potential for substantial revenue and margin increases.
  
• Reliance on acquisitions like DataPath and Stellar Blu introduces execution and financial risks, potentially affecting profitability if integrations don't meet expectations.

Catalysts

Provides satellite-based broadband communication solutions in Israel, the United States, Peru, and internationally.

• The acquisition of Stellar Blu Solutions positions Gilat as a leader in the market for electronically steerable antennas (ESA) for in-flight connectivity (IFC), which is expected to significantly increase revenue through new strategic customers and markets, potentially impacting revenue growth positively.
  
• Stellar Blu's expected revenue addition of $120 million to $150 million in 2025, with an EBITDA margin above 10% once full manufacturing capacity is achieved, suggests a substantial boost to future earnings and net margins.
  
• Gilat's leadership in the VHTS and NGSO market segments, with orders from strategic partners like satellite operators for the SkyEdge IV platforms, indicates ongoing revenue growth from expanding network services across multiple satellite orbits, enhancing revenue from product and service offerings.
  
• Expansion in the defense sector, notably through the acquisition of DataPath and the appointment of new leadership to drive growth, suggests an increase in revenues from government and defense contracts, potentially raising both revenue and margins in this high-value sector.
  
• Investments in the mobility sector and the success with IFC products and solutions orders worth over $14 million indicate strong growth potential in commercial and business aviation connectivity solutions, likely contributing to revenue expansion and diversification of income sources.

Assumptions

• Analysts are assuming Gilat Satellite Networks's revenue will grow by 23.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.5% today to 3.5% in 3 years time.
• Analysts expect earnings to reach $20.1 million (and earnings per share of $0.35) by about November 2027, up from $16.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.1x on those 2027 earnings, up from 18.2x today. This future PE is greater than the current PE for the US Communications industry at 24.2x.
• Analysts expect the number of shares outstanding to grow by 0.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.45%, as per the Simply Wall St company report.

Risks

• The reliance on significant year-over-year growth from acquisitions such as DataPath and Stellar Blu introduces execution risk and could impact future profitability if these integrations and expansions do not proceed as planned, affecting net margins.
  
• Any delays in ramping up Stellar Blu's production line and delivering a significant number of ISA terminals as expected could lead to revenue shortfalls and impact earnings negatively.
  
• The high expectations for Stellar Blu to add between $120 million to $150 million in revenues in 2025 rely on successful market penetration and sales execution, which, if not achieved, could negatively impact projected revenue and earnings growth.
  
• The ability to cross-sell DataPath equipment internationally and Gilat's equipment to DoD may face unforeseen challenges, potentially limiting the expected revenue and profit growth from these synergies.
  
• The substantial investment in the acquisition of Stellar Blu, including an initial consideration at closing of $98 million plus additional earn-out payments, poses a financial risk if the anticipated accretive growth to Gilat’s non-GAAP results does not materialize, impacting net margins and earnings.

Valuation

• The analysts have a consensus price target of $8.1 for Gilat Satellite Networks based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $571.3 million, earnings will come to $20.1 million, and it would be trading on a PE ratio of 29.1x, assuming you use a discount rate of 7.4%.
• Given the current share price of $5.27, the analyst's price target of $8.1 is 34.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.