DirecTV Dishes Up Subscriber Growth

5/18/2009


  Recent Price
$24
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
19
  Shares (millions)
1,021
  Long-Term Debt as % of Capital
56%
  52-Week Price Range
$29.10 - $11.25

In the nearly 15 years since DirecTV ($24; DTV) sold its first satellite-television system, the company has grown to serve more than 18 million U.S. subscribers, or 16% of the country’s households. DirecTV also operates in Latin America, where it generates 12% of revenue.

DirecTV’s broad range of product offerings contributes to a brighter growth picture than that of most cable- and satellite-television providers. Consensus estimates project DirecTV’s per-share profits will rise 10% this year and 40% in 2010. No other major competitor is expected to approach such growth. DirecTV is a Focus List Buy and a Long-Term Buy.

Channeling growth
In recent months, DirecTV has shown that pay television is recession-resistant. In the March quarter, sales rose 7% and the company added more than 460,000 U.S. subscribers, up 67% from net additions in the year-earlier period and the biggest quarterly increase in four years. In comparison, net subscriber additions fell 38% at Time Warner Cable ($32; TWC) and 43% at Comcast ($15; CMCSA) during the same period. Rival satellite provider Dish Network ($17; DISH) lost subscribers, most likely to DirecTV.

Fueling DirecTV’s growth were aggressive promotional offers and a marketing partnership with AT&T ($26; T) that began Feb. 1. Hefty subscriber-acquisition costs weighed on per-share earnings, down 38% to $0.20, short of the consensus by $0.12.

While gaining new subscribers is expensive, profit margins fatten when they renew. The company’s rate of U.S. defections, or churn, reached a ten-year low of 1.33% in the quarter. That low churn partly reflects DirecTV’s policy of reviewing the credit history of perspective customers — and it should boost results in coming quarters.

DirecTV owes some of its success to differentiating its product from rivals. The company offers 130 national high-definition TV channels and such advanced services as digital video recording and video on demand.

Finding Liberty
In May, DirecTV agreed to merge with Liberty Entertainment Group ($25; LMDIA), a unit being spun off from Liberty Media Interactive ($6; LINTA). The resulting company gains control of Liberty Media’s 54% stake in DirecTV but also inherits net debt of roughly $2 billion.

The deal simplifies DirecTV’s ownership structure and could possibly pave the way for future deals. Liberty Media CEO Greg Maffei said a potential sale of DirecTV would be easier now, though the company can succeed on its own. Mergers between telephone and satellite companies could make sense, allowing them to better compete against the “triple play” bundles of phone, Internet, and television service offered by cable providers.

Conclusion
Management now expects to add more than 1 million net U.S. subscribers this year, boosting the base by at least 5%. For the rest of 2009, DirecTV plans to place less emphasis on promotions, projecting 2% to 3% growth in average revenue per user after less than 1% growth in the March quarter. An annual report for The DirecTV Group Inc. is available from 200 N. Sepulveda, El Segundo, CA 90245; (310) 964-5000, www.directv.com.

DIRECTV
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Mar '09 $0.20 vs. $0.32 + 7% $24.28 -

$18.81

18 - 14
Dec '08 0.31 vs. 0.30 + 9% 26.52 - 17.70 20 - 13
Sep '08 0.33 vs. 0.27 + 15% 28.83 - 11.25 22 - 9
Jun '08 0.40 vs.

0.36

+ 16% 29.10 - 24.26 23 - 18
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

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
2006 $14.76 $1.13 $0.00 25.57
-
13.28 23 - 12
2005 $13.16 $0.24 $0.00 17.01
-
13.17 71 - 55
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
92 74 62 97 80 69 65

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


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