The action’s been heating up at Hulu, as its list of possible suitors grows longer by the day.
According to recent speculation, DirecTV (DTV) is leading the charge, coveting Hulu’s streaming video-on-demand platform. While it’s not a done deal by any means, if it were able to complete the acquisition, that would definitely put DTV ahead of Dish Network (DISH) in the race for satellite supremacy.
On the surface, you’d think this development makes DTV the better stock. But let’s not get too hasty. The entire television industry is in a state of flux at the moment; any perceived advantage today might turn out to be a disadvantage tomorrow. Therefore, before crowning DTV the winner, let’s take a closer look at both companies and their stocks.
May the best dish win!
Anything related to Latin America gets my attention these days. If the governments there could ever figure out how to stabilize their currencies, their economy would be a global powerhouse. Even now, the region is growing by leaps and bounds. DTV’s Latin American revenue grew 16% in the first quarter and now represents 23% of its overall business. With more than 16 million total subscribers, DirecTV is the largest pay-TV provider in Latin America.
Excluding exchange rates, the company increased the average monthly revenue per subscriber by 1.5% in Q1, which led to an adjusted operating profit before depreciation and amortization of $546 million (an increase of 17%). As CEO Mike White said in its Q1 conference call: “… Our Latin American business continues to offer us terrific long-term growth opportunities.” Need I say more?
In the U.S., DTV continues to fight the good fight in an incredibly competitive marketplace. All its metrics were up in Q1, including a 5% increase in revenue, 4.4% increase in ARPU, 7.9% increase in OPBDA and 70 basis-point increase in OPBDA margin. The results suggest it can continue growing its top and bottom lines for the next several years. Adding Hulu to the mix would certainly boost its future growth in the U.S. Regardless, it seems the company will be able to hold its own against Dish Network and other multichannel video programming distributors like Time Warner Cable (TWC) and Verizon (VZ).
What’s really attractive about DTV is that it has been a disciplined allocator of capital. According to the Globe and Mail, the company has reduced its share count by 43.7% over the past five years, paying out $20.66 billion or $36.63 per share. Taking the high and low between Dec. 31, 2007, and Dec. 31, 2012, it paid exactly at the midpoint per share. That’s not a spectacular job but it’s not a poor one either.
Two things are important here.
First, the stock has achieved a 69% return on its investment over the past five years through June 19. Secondly, it has given investors a huge tax-free gift. Berkshire Hathaway (BRK.B) owns 37.3 million of its shares. If it had owned those shares at the end of 2007 through today, its economic interest would have increased by 270 basis points to 5.8%. Without adding a single share or the stock price increasing in value, Buffett would own a bigger piece of the pie. I’m generally not a fan of share repurchases, but when done on a massive scale as DTV has done, they can be very good for shareholders.
Morningstar might only give it one star, but the company’s consistent delivery of revenue and profit growth is to be commended.
When it comes to satellite, Dish can’t hold a candle to DTV. It has 6 million fewer subscribers, earns $17.50 less per subscriber per month, and has almost no business presence outside the U.S.
Its $320 million purchase of Blockbuster in 2011 has been an unmitigated disaster. It sold off the U.K. unit and continues to close stores here in the U.S. Majority owner Charles Ergen wants to somehow use the remaining 500 stores to build Dish’s wireless empire. Any way you slice it, the Blockbuster acquisition has done nothing to strengthen its existing satellite business. Shareholders must cross their fingers that it’s more successful on the wireless front.
Dish announced June 18 that it was dropping out of the competition to buy Sprint (S), opting instead to focus its attention on Clearwire (CLWR). Its $4.40 per share bid for Clearwire is clearly higher than Sprint’s offer. Unfortunately, Sprint’s lawsuit renders it a moot point. With more than 50% of Clearwire’s votes, it appears to have the legal right to squash the offer. Most of the analysis I’ve read suggests Sprint will end up increasing its bid for Clearwire despite having a leg to stand on.
It’s more likely that Dish moves on to T-Mobile (TMUS), which would be a much smaller purchase than Sprint, but still get it in the game.
Charles Ergen sees pay-TV as a losing proposition. He desperately wants out of satellite and into wireless. For this reason, a bid for T-Mobile makes sense if everything else were to fail. However, Dish’s profitability over the past five years has been very inconsistent. A deal of this magnitude would only act as gas on the fire, putting its future profitability at risk.
Meanwhile, boring old DirecTV continues to focus on providing its customers with the best digital television viewing experience anywhere. An acquisition of Hulu, while not critical to its success, would certainly keep it firmly in the pole position. Furthermore, with Dish apparently headed for greener pastures, DTV will grab a further stranglehold on the satellite business.
For my money, DirecTV is a much better investment than Dish Network because DTV appears to have a more focused plan for the future.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.