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DIRECTV Earnings Growth Isn’t What it Seems – DTV

Slower growth in a vital market spells caution


Welcome to the Stock of the Day!

DirecTVShares of DIRECTV (DTV) are falling this morning after the satellite T.V. company reported 24% bottom-line growth quarter and a double-digit earnings surprise. Wait, what? Clearly there’s more to this earnings report than meets the eye, so today let’s dig into what’s going on with the Dish.

Company Profile

DIRECTV Holdings LLC is the largest direct-broadcast satellite service in the United States, ahead of No. 2 DISH Network (DISH). DIRECTV continues to upgrade its services and add new customers even as its rivals in the cable TV business lose subscribers. With 27,200 employees, the company currently serves more than 37 million customers across the U.S. and Latin America.

Earnings Rundown

In the third quarter, DIRECTV announced that net profit grew 24% year-over-year to $699 million, or $1.28 per share. Analysts had forecast earnings of $1.02 per share so DIRECTV posted a 25% earnings surprise. The double-digit earnings growth was partially thanks to lower interest expense and the company’s ongoing stock buyback program.

Over the same period, revenues climbed 6% to $7.88 billion; this also topped the $7.85 billion consensus sales estimate. DIRECTV announced that it brought in more average revenue per use (ARPU) and that it added 139,000 subscribers in the U.S.

Why The Stock Fell

One of the biggest game changers for this company is its presence in Latin America, which for some time has been one of the fastest-growing areas of the world. South American countries have grown at an astounding rate compared with the rest of the globe and this is helping transform once poor workers into modern, middle-class consumers (with modern, middle-class appetites for TV service).

However, last quarter, the company reported sharply lower net subscriber additions compared with Q3 2012—260,000, down from 543,000. Meanwhile, ARPU fell 11.7% due to foreign currency effects.

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. DTV spent the first half of 2013 flip-flopping between a C-rated hold and a B-rated buy as buying pressure has fluctuated. Then over the summer the stock fell into sell territory after the company reported second-quarter earnings. Buying pressure has since improved so the stock currently receives a C for its Quantitative Grade.

However, there is still room for improvement in terms of the company’s financial health: DTV receives a C-rating for its Fundamental Grade. Of the eight fundamental metrics I graded this stock on, it failed in terms of earnings momentum, earnings surprises and analyst earnings revisions. It received Cs on sales growth, operating margin growth, earnings growth and return on equity. And it received an A for just cash flow.

Bottom Line

As of this posting I consider DTV a C-rated Hold.

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