Hughes Communications Inc.HUGH

Morningstar Rating

Stock Research and Analysis

by Michael Hodel, CFA

Hughes Communications' profitability should improve substantially, with cash flow growing nicely, over the next couple years as it deploys new services using a satellite it launched in late 2007. We don't believe, however, that the firm operates with significant long-term competitive advantages as it goes up against rival technologies and other satellite providers. Read more

Bulls Say

Hughes is a pioneer in the VSAT market and holds hundreds of patents related to satellite communications. The firm claims roughly half the global market.

Demand for high-speed Internet access has clearly been pent up in rural America. The average Hughes customer pays about $65 per month, nearly 50% more than the typical cable modem subscriber who receives far superior service, and is surprisingly loyal.

The Spaceway 3 satellite has more capacity available than all of the transponders Hughes currently leases, and it boasts capabilities never before seen, such as on-board routing. Filling up this bird should provide significant high-margin revenue growth.

Hughes has been developing its ability to provide managed services to businesses, adding other communications technologies to its satellite offering where appropriate. The firm has also partnered with telecom giants like AT&T T and British Telecom BT to enhance its capabilities.

Hughes has used its technology to create mobile solutions, such as sending operating data from an automobile back to a service center. Sales of this equipment and related engineering solutions are growing rapidly. Read more

Bears Say

The consumer business provides more than a third of Hughes' revenue. Terrestrial alternatives, including the phone network and, increasingly, wireless services, are superior to satellite in most areas.

Hughes Network Systems' former parent, DirecTV, is a giant in the satellite television business and will likely need to offer Internet access services to compete with cable over the long run. The fact that DirecTV sold Hughes rather than use its technology is odd.

A significant portion of revenue growth recently has come from business with Hughes Telematics, a business owned by Hughes' largest shareholder.

If Spaceway 3 fails or is otherwise impaired--a risk that is beyond Hughes' control--the value of the firm will fall precipitously. Read more

Strategy

Developing topnotch yet low-cost satellite communications technology is Hughes' primary effort. Rather than sell equipment to customers, the firm increasingly aims to use its technology to provide services under long-term contracts. Read more

Management

Private equity firm Apollo Advisors holds about 57% of Hughes' shares and effectively controls the company. Of the seven members on Hughes' board, three are current or former Apollo employees. While we don't begrudge Apollo the right to control given its ownership stake, its relationship with Hughes is our biggest concern with respect to stewardship. Read more

Profile

Virtually all of Hughes Communications' assets reside in Hughes Network Systems, which DirecTV decided to sell in 2004. Hughes designs Very Small Aperture Terminal (VSAT) equipment used to connect remote locations via satellite to a core communications network. Read more

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