DirecTV's Growth Cuts Through Static

12/12/2011


  Recent Price
$47
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
15
  Shares (millions)
737
  Long-Term Debts as % of Capital
122%
  52-Week Price Range
$53.40 - $39.12

DirecTV ($47; DTV) has added more than a half-million video subscribers this year, while other cable or satellite-TV providers have seen their subscriber bases erode. DirecTV, the largest U.S. satellite-TV company, converted those subscriber gains into 13% higher sales and a 41% surge in earnings per share in the nine months ended September.

Americans remain tethered to television, watching an average of five hours of TV a day. Yet pay-TV providers will probably see U.S. subscriber counts rise less than 1% this year. Headwinds such as the weak housing market, anemic job growth, and high programming costs are squeezing this mature industry. And it's unclear whether the Internet will ultimately reshape the way Americans value video content as it did with music.

To cope with the industry's decelerating growth and attract some of the households getting priced out of the pay-TV market, DirecTV is considering smaller channel bundles without the expensive sports networks. Moreover, the company's presence in Latin America should pick up some of the slack if the U.S. business stalls. With double-digit sales growth in eight straight quarters, DirecTV is a Focus List Buy and a Long-Term Buy.

Business breakdown

In the September quarter, DirecTV started offering a free year of the NFL Sunday Ticket to new subscribers. Management has spread out the higher costs of its football programming by increasing its subscriber base. DirecTV added 327,000 net U.S. subscribers, up 88% from the year-ago quarter, while increasing average monthly revenue per user 4% to $92.

We won't know the lasting effects of the promotion until those subscriptions come up for renewal. But DirecTV stressed the quality of its new subscribers, with strong credit scores and relatively high incomes. More than 80% also purchased pricey advanced services, historically an indicator of high average revenue per user and lower churn over the long haul.

As successful as the NFL promotion has been, Latin America (19% of revenue in the nine months ended September) remains the primary driver of DirecTV's growth. Sales jumped 45% in the nine-month period, when DirecTV added 1.47 million subscribers, hiked average monthly revenue per subscriber 12% to $64, and reduced churn.

Conclusion

DirecTV funnels much of its excess cash towards stock buybacks, which have reduced the share count by 25% in the past two years. Management plans to keep repurchasing shares at a rate of about $100 million a week throughout the December quarter.

Rising analyst estimates now target 2012 earnings per share of $4.40, implying 31% growth. Yet the shares trade at less than 11 times the 2012 estimate, a 13% discount to the median broadcasting or cable stock in the S&P 1500 Index. At 15 times trailing earnings, the stock trades at a discount of 22% to its three-year average P/E ratio. An annual report for The DirecTV Group Inc. is available at 2230 E. Imperial Highway, El Segundo, CA 90245; (310) 964-5000, www.directv.com.

DIRECTV
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '11
0.70
vs.
0.55
+ 14%
53.40
-
40.22
18 - 13
Jun '11
0.91
vs.
0.60
+ 13%
51.23
-
45.52
19 - 17
Mar '11
0.85
vs.
0.59
+ 13%
47.40
-
40.20
19 - 16
Dec '10
0.74
vs.
0.48
+ 11%
44.61
-
39.12
20 - 18
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2010
24.10
2.48
0.00
44.61
-
29.83
18 - 12
2009
21.57
1.46
0.00
34.25
-
18.81
23 - 13
2008
19.69
1.36
0.00
29.10
-
11.25
21 - 8
2007
17.25
1.20
0.00
27.73
-
20.73
23 - 17
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
98
88
74
98
59
93
67

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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