by Jonathan Berr | November 5, 2013 2:27 pm
DirecTV (DTV) has made some of the funniest commercials in recent memory, and after the company’s most recent earnings report, it’s laughing all the way to the bank.
The largest satellite television provider reported an awesome quarter. Net income at DTV surged 24% to $699 million, or $1.28 per shares, easily beating the $1 per share consensus. Revenue spiked more than 6% to $7.88 billion, surpassing analysts’ $7.88 billion estimates.
DirecTV added 139,000 new subscribers in the quarter — the most since 2011, thanks to refugees from Time Warner Cable (TWC) and CBS (CBS) fee dispute. Time Warner, the second-largest cable company, was the clear loser in the two-week blackout. It lost 304,000 video customers in the quarter, almost double what analysts expected.
DTV has jumped almost 30% this year, on par with peers like Dish Network (DISH) and Comcast (CMCSA). One reason for DTV’s outperformance has been its strong international business and its satisfied customers. During the most recent quarter, DirecTV’s churn rate fell to 1.61% — its lowest quarterly churn in more than 6 years.
So, is now the time for investors to tune into DTV’s stock? Let’s examine the pros and cons.
Happy customers: For years, DTV and its rival DISH have scored higher than their cable rivals on customer satisfaction surveys. Happy customers tend to be loyal customers, meaning that it will take more than a promotional rate to get them to leave DTV. It also means that they may be less tempted to “cut the cord” or quit pay television entirely.
Valuation: Shares of DTV trade at forward earnings multiple of 12.9, well under Dish’s 30.4 valuation and Comcast’s 19.1 valuation. The stock trades about 6% under its average 52-week price target of $68.04, while Dish trades about 3% under its average target of $49.73. Comcast, though, still has a 25% upside for its $53.74 target. But comparing CMCSA with DTV and DISH has its limits since the Philadelphia-based cable company also owns the entertainment giant NBC Universal.
Dish Merger: Earlier this year, Billionaire John Malone, the largest shareholder of DTV, has urged his counterpart at DISH Charlie Ergen to merge the two satellite providers “for the good of the industry.” Ergen, who is no slouch in the dealmaking department either, reportedly has his eye on a deal with Time Warner Cable. The potential of a DTV-DISH alliance should give the shares a boost, at least until the next shoe drops in the constantly changing world of Pay TV.
Costs: Costs for original content seem to be soaring by the millisecond. Of particular concern to DTV shareholder is the company’s NFL Sunday Ticket program. The satellite provider’s $1 billion contract with the NFL expires in two years, and retaining that business won’t be cheap. Officials in the NFL are certainly keeping their options opened and have recently met with Google. As I argued before, NFL Sunday Ticket is such huge deal for DTV that it could force a “shotgun wedding” with DISH so it can gain the scale to counter the threat posed by the search engine giant.
Latin America: The company has been growing like gangbusters in Latin America in recent years, but it might nearing a cap. As of September 30, DTV had 11.3 million customers in the region, an increase of 260,000 from a year earlier. That number might seem like a big bump, but it’s down from 543,000 a year earlier. This may not be a temporary hiccup, either: The International Monetary Fund recently lowered its forecast for the region’s economic growth to 2.7% for 2013.
Television Watching: In 2011, many people were shocked to learn that number of TV householders — defined by Nielsen as homes having at least one television set — fell for the first time in 20 years. The number rebounded slightly this year to 115.6 million, though it still lags 2010’s 115.9 figure. What this shows is the consumers increasingly want to consume media on their terms, which is going to create huge challenges for the pay TV industry going forward.
DirecTV has many challenges ahead. Not only is growth in Latin America slowing, but content costs and carriage fees continue to skyrocket. The fights between content providers and distributors are only going to get nastier over time. And then there’s the uncertainty over DTV’s lucrative NFL programing.
So should you buy DTV? No. For now, the stock’s risks outweigh the rewards .
As of this writing, Jonathan Berr didn’t hold a position in any of the aforementioned securities.
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