DISH Creating New Reality

2/6/2012


  Recent Price
$28
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
9
  Shares (millions)
448
  Long-Term Debts as % of Capital
99%
  52-Week Price Range
$32.56 - $20.89

For pay-TV companies, the sluggish economy has weighed on subscriber growth. DISH Network ($28; DISH) lost 188,000 net subscribers in the first nine months of 2011, giving back nearly all of the 189,000 net subscribers it gained over the same period in 2010.

DISH's struggles reflect a poor job market that has delayed the formation of new households and nudged younger consumers toward cheaper alternatives, such as online video. Against that backdrop, DISH paid roughly $3.1 billion last year for three moribund companies: Blockbuster, DBSD North America, and TerreStar Networks. The last two companies held swaths of spectrum that augmented the airwaves DISH bought for $712 million in 2008.

It's not yet clear what shape DISH will take once management stitches together all of its new parts. But the spate of deals gives DISH several options, leading us to believe that its Frankenstein approach will create profits for investors rather than an unmanageable monster. DISH is a Buy and a Long-Term Buy.

Speculating about spectrum

The central question is whether DISH will use its spectrum to construct a fourth-generation wireless network, a risky and capital-intensive move. DISH executives have said the company plans to launch its own wireless-communications business. But DISH has also repeatedly emphasized that it will consider any deal that might increase shareholder value. That leaves open the possibility of DISH selling its spectrum — or the entire company — to AT&T ($29; T), Sprint Nextel ($2; S), or another telecom hungry for airwaves. Based on two analysts' estimates, DISH's spectrum alone could be worth more than $8 billion.

With a total stock-market value of $12.50 billion, DISH is a manageable morsel for many potential telecom suitors. It also generates a lot of cash, with free cash flow doubling to $1.40 billion in the first nine months of 2011.

DISH paid a special dividend of $2 per share last December, the first such payment since 2008. The move was a curious choice for a company that claims to be preparing for a massive investment in a new network.

Conclusion

From a competitive standpoint, DISH said in November that it doubted it could raise prices in 2012. But rival DirecTV ($45; DTV) announced a 4% rate hike starting this month. Should DISH follow suit, a price hike would boost average revenue per user, but it could also trigger subscriber losses.

For the December quarter, Wall Street's consensus estimate calls for per-share earnings of $0.62, up 10% on 13% higher revenue. DISH is slated to release earnings Feb. 20. While we don't expect DISH to repeat the 22% profit growth projected for 2011, the consensus target of a 10% decline in 2012 sounds too pessimistic.

At nine times trailing earnings, shares trade 35% below their five-year average and 40% below the median for cable and satellite companies in the S&P 1500 Index. An annual report for DISH Network Corp. is available at 9601 S. Meridian Blvd., Englewood, CO 80112; (303) 723-1000; www.dishnetwork.com.

DISH NETWORK
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '11
0.71
vs.
0.55
+ 12%
32.56
-
20.89
11 - 7
Jun '11
0.78
vs.
0.57
+ 13%
30.84
-
22.71
11 - 8
Mar '11
0.75
vs.
0.52
+ 5%
24.76
-
19.38
10 - 8
Dec '10
0.89
vs.
0.40
+ 8%
21.50
-
17.95
11 - 9
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend ‡
($)
52-Week
Price Range
($)
P/E Ratio
Range
2010
12.64
2.53
0.00
24.16
-
17.32
10 - 7
2009
11.66
1.42
0.00
22.18
-
8.79
16 - 6
2008
11.62
2.01
3.77
36.11
-
8.34
18 - 4
2007
11.09
1.68
0.00
52.54
-
36.38
31 - 22
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
92
62
82
81
42
55
81

   * Earnings exclude special items.
   ‡ Special dividend in 2008. Dish pays no regular dividend.
   † Quadrix® scores are percentile ranks, with 100 the best.


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