DirecTV: As The Satellite Turns

11/12/2012


  Recent Price
$51
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
12
  Shares (millions)
629
  Long-Term Debt as % of Capital
134%
  52-Week Price Range
$55.17 - $41.45

As if DirecTV's ($51; DTV) September-quarter profit report wasn't big enough news, investors also absorbed worries about the company's long-term health, chatter about a new Latin courtship, and rumors spread by its closest rival in the hours following the announcement.

The daytime drama that unfolded Nov. 6 befitted a soap opera beamed from the company's satellites. And in a surprising plot twist, the shares plunged more than 4% before reversing course to end the day virtually flat.

DirecTV offers superior growth potential at an attractive valuation. The consensus projects per-share-profit growth of 11% in the December quarter and 23% next year. And at 13 times trailing earnings, the stock lingers near its lowest valuation in more than six years, trading 29% below its five-year average and 32% below the industry median. DirecTV is a Focus List Buy and a Long-Term Buy.

Anatomy of the quarter

At first glance, the quarter looked unspectacular. Per share profits rose 29% to $0.90 per share — $0.03 short of the consensus estimate. Revenue grew 8%, but cash provided by operations slipped 8%. DirecTV continued to tune its business toward the high end of the mature U.S. pay-TV industry while grabbing share in Latin America.

U.S. sales advanced 6% to $5.77 billion. Net subscriber additions fell to 67,000 from 327,000 gained in the same quarter last year. That decline reflects DirecTV's continued focus on high-quality subscribers capable of absorbing rate hikes and more likely to upgrade to pricier packages. As a result, average revenue per user increased 5% to $96. Revenue in Latin America jumped 16% to $1.58 billion. Boosted by strong demand in Argentina, Columbia, and Brazil, DirecTV added 543,000 net subscribers in the quarter.

A peek ahead

Pay-TV companies must deal with a lack of subscriber growth in the U.S., as well as content fees that keep marching higher. For its part, DirecTV took a hard stance against Viacom's ($51; VIAb) demands for higher fees, causing U.S. subscriber defections, or churn, to rise in the September quarter. Some rivals have addressed these challenges by offering internet service; DirecTV has done this in Brazil, where it seeks regulatory approval on spectrum covering 16 million households. DirecTV is also considering the purchase of Vivendi's Brazilian telecom business.

Charlie Ergen, CEO of rival DISH Network ($36; DISH), urged DirecTV to consider a merger to help ease the burden of higher programming costs. Regulators blocked such a deal in 2002, but DirecTV CEO Mike White has said new competition stoked by telephone providers in recent years has made the environment more receptive to a big deal. DISH controls airwaves that could support a wireless network.

While DirecTV may deploy some of its robust cash flow for a merger, the company does not expect to initiate a dividend, preferring to continue a stock-buyback program that has lowered the share count 15% over the last year and 47% over the last five. An annual report for DirecTV 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 '12
0.90
vs.
0.70
+ 8%
55.17
-
46.59
14 - 12
Jun '12
1.09
vs.
0.91
+ 9%
50.35
-
42.87
14 - 12
Mar '12
1.07
vs.
0.85
+ 12%
49.99
-
41.92
14 - 12
Dec '11
1.02
vs.
0.74
+ 13%
48.60
-
39.82
15 - 12
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
27.23
3.47
0.00
53.40
-
39.82
15 - 11
2010
24.10
2.48
0.00
44.61
-
29.83
18 - 12
2009
21.57
1.44
0.00
34.25
-
18.81
24 - 13
2008
19.69
1.37
0.00
29.10
-
11.25
21 - 8
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
96
85
86
97
60
32
43

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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