Loral: the lure behind this blown-up stock

Kiplinger's Personal Finance Magazine, Nov, 1998

Tyler Smith, who runs Alliance Growth fund, focuses on large growth companies selling at reasonable prices. One beaten-up favorite, Loral Space & Communications, suffers not only from the market's tumble but from a few special concerns.

As its name suggests, Loral (LOR, NYSE, $14) is a leader in the satellite-communications industry. Renamed after selling its defense businesses to Lockheed Martin in 1996, Loral manufactures satellites and, through various subsidiaries, transmits voice, video programming and data via satellites. It also owns 42% of Globalstar Telecommunications (GSTRF, Nasdaq, $12), which is developing a wireless-communications network using a constellation of 48 satellites. Though its annual revenues exceed $1 billion, Loral is not expected to be in the black until 2001.

The stock, which had been as high as $34 this year, suffered a triple whammy. General market conditions have hurt. So has controversy surrounding allegations that Loral may have transferred sensitive satellite technology to China and gotten away with it because Loral chief executive Bernard Schwartz is a major Democratic Party contributor. The most recent misfortune occurred in early September when a Ukrainian-made rocket carrying 12 Globalstar satellites exploded upon launch in Kazakhstan, causing the stocks of both Loral and Globalstar to implode.

Not to worry, says Smith. Failed rocket launches are a normal part of the business, he says, and besides, insurance will cover most, if not all, of the loss. At worst, says Smith, who considers Loral a more conservative way of playing Globalstar, the accident merely delays deployment of the system until late 1999.

Because Loral isn't expected to become profitable for another three years, Smith says its stock will react to such factors as the success or failure of future satellite launches, the timetable for getting Globalstar's network operational and--once that happens--how many users it attracts. He doesn't consider the controversy surrounding Schwartz's political contributions and technology transfers to China to be a significant risk to Loral's stock.