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Know Your IPO

Whenever investors have lost boatloads of money in the market, the brokerage houses love to bring people back into the game with an under-priced IPO, says Cramer. Although, we’re still down from the market’s peak, and the street is still anxious to draw more people back into the game. Cramer has picked out the next big IPO, which he thinks it would be valuable to get your hands on: DigitalGlobe.

A satellite imagery company that will trade under the symbol DGI when it comes public this week, Cramer thinks shares of the company are a buy fresh off the IPO. The offering, 14.7 million shares priced between $16 and $18, and is a steal according to Cramer, although he doubts it’ll fall in that range.

DigitalGlobe is essentially in a duopoly with GeoEye, another satellite imagery company that does a lot of business with the U.S. government and is just off its 52-week high. This is a business with very high barriers to entry – the cost to launch a satellite being astronomical - and there’s no guarantee that the launch will even be successful. What does this translate to? Very little competition, something that Cramer says flies directly in the face of big profits. Just watch out for any anti-trust buzz, if this lack of competition begins to warrant it.

With two satellites currently in space, DigitalGlobe plans to a launch a third by the end of the year, which Cramer estimates will double the company’s capacity for imagery collection.

One of the main reasons Cramer has for recommending putting in a bid for DigitalGlobe is that recent IPOs have all been major successes—they have all been under-priced stocks that the brokers try to use to get you back into the market. The last four big IPOs: Rosetta Stone , Bridgepoint Education , Changyou.com, and Mead Johnson were up an average of 20% the day after the IPO, and they’re up an average of 43% year to date. That’s been the pattern so far this year, and Cramer expects something similar from DGI.

So how much should you be willing to pay for this stock? What’s it worth? Cramer thinks we’re in luck because there’s an obvious compare in GeoEye, which trades at 18.2 times 2010 earnings. Making some very conservative assumptions about DigitalGlobe’s earnings power in 2010, we can figure out what its stock should be worth and what you should be willing to pay for it.

Because it never pays to be too optimistic, Cramer says you want to make some conservative assumptions as you try to figure out what a newly-public company like DigitalGlobe will be able to earn. DigitalGlobe’s revenues have been growing at about 60% a year, but because you want to be very conservative, presume a less-than-optimal post-IPO situation: delay in the launch of the new satellite, a slowing of revenue growth to just 15% a year, and a cut in gross margins from 90% in 2008 to 80% in 2009. In Cramer’s conservative estimate he also looks at a slight increase in sales, about $5 million annual increase in depreciation and amortization, a $4 million annual increase in interest expense, and a 30% tax rate. Even with these conservative and dire assumptions, DGI can expect an EPS around $1.16 in 2009 and $1.49 in 2010, according to Cramer.

Given the IPO price range of $16 to $18, DigitalGlobe would be trading at 12 times 2010 earnings, a 50% discount to GeoEye, and that’s with very conservative assumptions. If DigitalGlobe traded up to 18 times earnings, which is GeoEye’s valuation, it would be a $27 stock.

So assuming this stock is headed for $27, how much should you be willing to pay? No more than $20 to $22, says Cramer. What’s the bottom line? You have to place your order by tomorrow and Cramer thinks the move is to get as many shares of DigitalGlobe as you can between $16 and $18, but be prepared to pay as much as $22 a share because there is still plenty of upside. Anything more than $22 you should pass, because above that level is the land of too much risk, with not enough reward.


Call Cramer: 1-800-743-CBNC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the Mad Money website? madcap@cnbc.com

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