Looking for some "real" help to price equity

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J.Galt

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All,

I'm trying to determine the cost of equity for GeoEye (GEOY). I have calced the beta from the monthly S&P returns v. geoy (Jan 2004-July 2007) and derived the same 0.69 number that many of the quote pages show. However, I ran a regression analysis and this is what I got:

Regression Statistics
Multiple R 0.091166935
R Square 0.00831141
Adjusted R Square -0.016480805
Standard Error 0.159134931
Observations 42
P-value
Intercept 0.934519427
X Variable 1 0.565834655

OK, so the values show there is no significant correlation between the two. In fact, it's useless. If I use a CAPM approach, assuming a risk free rate of 4.74% and a market risk premium of 4.8% (anybody have better rates?), I would end up with a cost of equity of 8%. This is obviously silly, given the nature of GeoEye's business (satellite imagery). Plus, the current coupon of their $250mm debt is about 14.88%. (6 mo LIBOR + 950bp)

Could anyone in the equity research profession tell me how the "pros" handle this descrepancy between calced numbers and reality? Should I use the cost of debt + equity risk premium (gets me to around 19-20%, which seems more reasonable.

Thanks

PS everyone could use a little diversion from the test-results!
 
The easy answer is to buy the beta from Alacra and wash your hands of the whole exercise.

You could screw around with the variables as well, such as maybe a composite of satellite imagery comps instead of the S&P 500, using 5 years instead of three, quarterly betas instead of monthly, etc...

The cost of equity is also subject to other premia such as small-stock, financial illiquidity and so on that you can justify in many ways. Screw around with it until you come up with 12% and call it a day. Any methodology can simultaneously be defended and derided ad naseum.
 
Kind of what I expected. I ran the beta calc on daily and weekly and came up with significantly different numbers.

thanks.

Would still like to hear other perspectives.
 
For the risky stuff look at what kind of returns venture capital funds have to deliver in order to raise capital instead of S&P returns. That would be your base for cost of capital.
 
Wow

what fun. The one analyst covering this company says they'll earn $1.65 next year? the estimate for this quarter was 25cents and they came in at $1?

The satellite company recorded gains on derivatives? Great.

What's the deal with this company?

Satellites, derivatives, volatile earnings, sounds juicy...
 
Cramer had a piece about this company:

Channel:
CNBC

Date:
7/13/2007

Time:
23 :43 :30

Keyword:
N/A


Text
tonight please. You need a stock called goi. -- Deoy. That's my pick for speculation friday, geoy the largest satellite imagery company they gather and process aaron miles images which they sell to governments and companies. It's the last season of 24 which is on the bad guys network hadn't been such a continuous disappointment i'd say it's a jack baher stock. G goi big order if you do a market odor trade off hours you won't like the out could. Before i make the pitch for geoy you need to promise me that you'll be careful if you choose to buy the stock. Ball in small increments. Use limit orders. You will for once listen to cramer because i'm trying to protect you. This is why i only recommend specs on friday because over enthusiastic investors would jump on this and hurt themselves serves. This is not like recommending conoco. Now that we have that out of the way here's the pitch basically the demand for satellite and aerial imagery is growing as more governments use it to deal with terrorism and environmental issues. Increasingly gary knotts are outsourcing the work instead of launching their own civil rights. Plus the commercial use of satellite imagery is on the upswing look at google earth. Microsoft virtual earth. The demand for this stuff from insurance companies while all this is happening geoy is part of a virtual duopoly in satellite imagery. The other one digital globe isn't public. This is the only publicly traded pure play on satellite imagery. How about i throw in the catalyst? If everything goes according to plan i think this $22 stock could double. Geoy was supposed to launch a new satellite this year but the launch has been pushed back to the second half t. Satellite doesn't go up you'll get hammered here. If it's commissioned successfully, then you get the double. You get a $40 stock. That satellite goes up this is a $40 stock masquerading as a $22 stock. Geoy is not for your ira. It's the can definition of a great spec stock and that's what we do on friday. Stick with cramer to try to make more money.
 
Hmmmm... so it's a lottery ticket that Cramer is touting on his tv show. Maybe Vonage will buy them after they digest google.
 
Cramer......but I am up 120% on CROX! Thanks, Jim (plus, CROX is a local company for me!)

Anyway, I thought I would test out my knowledge gained from the CFA Program (come on LIII results!). I didn't believe a company with this type of risk profile could have such a low beta. So, I tested my quant skills, verified the beta number, determined it was statistically useless, then figured, hey, the AF is loaded with smart people, maybe they can tell me what I'm doing wrong.

Fun little exercise to distract me from the Results posts. Doesn't give me a lot of confidence in certain metrics, though.
 
This company should definitely have a low beta. Don't worry about exercising your Level III math abilities though because the answer is quite intuitive.

Remember that beta is not a measure of total risk. It only meaures systematic (or market or non-diversifiable) risk. The return on this stock will not be about the market, it will be about unique aspects of the company.

Try thinking of it this way. If the market were to increase by 25% in the next year but these guys don't launch a satellite, their price will probably still decrease. However, if the market were to decrease by 25% in the next year and these guys end up launching two satellites (more than expected), their price will probably still increase signficantly.

I hope that helps.
 
Well put regarding the systematic risk comment. Theoretically, should it even be quoted when there is no statistical validation for the measurement? Maybe that is why Yahoo! shows a "0". There should be a disclaimer on beta measurements quoted by the stock pages that say "statistically, this measurement for this stock could be useless, so don't look at it! Use your brain instead".

So, that takes me back to my original question, where would "expert analysts" go to price this wquity appropriately and what method would they use? Risk premium build-up, yes?
 
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