DirecTV: The Picture Of Growth Potential

7/5/2010


  Recent Price
$34
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
19
  Shares (millions)
938
  Long-Term Debt as % of Capital
72%
  52-Week Price Range
$39.87 - $22.81

DirecTV’s ($34; DTV) satellite armada transmits signals to 18.7 million pay-T.V. subscribers in the U.S. and another 7 million in Latin America. The stock’s Quadrix® Overall score has jumped to 91 from 73 at the end of March, lifted by improved operating momentum, rising earnings estimates, and favorable share-price action. DirecTV generated free cash flow of $2.93 billion in the past four quarters, up 84%, while revenue climbed 11%.

DirecTV’s growth outlook appears bright. Consensus estimates project per-share profits will rise 64% this year and at least 20% annually over the next five years. The consensus forecasts sales growth of 9% in 2010 and 7% in 2011.

Over the last 14 months, DirecTV has taken steps to simplify its ownership structure and reduce the control of large shareholders. The company’s strong track record and market presence could attract the interest of a telecom company with television ambitions. While takeover potential offers an appealing kicker, we believe the stock is worth owning on its own merits. DirecTV is a Focus List Buy and a Long-Term Buy.

Business breakdown

DirecTV is managing the fastest growth of any major U.S. pay-TV provider, partly because of its specialized content. A frontrunner in the move to 3-D television, DirecTV offers the NFL Sunday Ticket and airs Hollywood movies before their release on DVD. The company also seeks to produce its own content, which could potentially ease its reliance on purchased programming and help control costs.

DirecTV typically seeks a high-quality subscriber base that is less likely to default on payments and more likely to upgrade to pricier options. In accord with that long-term strategy, DirecTV abandoned many of the aggressive promotions used last year to grow its U.S. business (85% of 12-month revenue). Not surprisingly, customer attrition, or churn, is edging higher. But average revenue per subscriber is also on the rise, up 6% year-to-year to $85.47 in the U.S. during the March quarter.

Revenue at the Latin America unit (14%) rose 25% over the last year, helped by subscriber gains and higher revenue per subscriber. DirecTV is beginning to target lower-income households in the region and might also invest in wireless broadband, so that it can provide Internet access.

Conclusion

DirecTV’s shares have risen 39% over the last 12 months but just 3% so far in 2010. While the stock’s primary appeal is not its valuation, the Value score of 63 is not bad. DirecTV trades at 19 times trailing earnings, 7% below its three-year average P/E. The stock price has not caught up to profit estimates. Over the past two months, analysts have raised the 2010 consensus estimate 9% to $2.38 per share. DirecTV trades at 13 times the estimated year-ahead forecast, a 21% discount to the three-year average forward P/E ratio.

Buyback activity has shaved 24% off the share count in the last five years, including 8% in the past year. Management will not yet commit to a dividend but might do so later this year or in early 2011. 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

Mar '10 $0.59 vs. $0.20 + 14% $35.18 -

$29.83

24 - 21
Dec '09 0.48 vs. 0.31 + 13% 34.25 - 25.16 27 - 20
Sep '09 0.37 vs. 0.33 + 10% 27.99 - 22.81 23 - 18
Jun '09 0.40 vs.

0.40

+ 9% 26.00 - 21.13 21 - 17
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2010 $21.57 $1.46 $0.00 $34.25
-
$18.81 23 - 13
2009 $19.69 $1.36 $0.00 29.10
-
11.25 21 - 8
2008 $17.25 $1.20 $0.00 27.73
-
20.73 23 - 17
2007 $14.76 $1.13 $0.00 25.57
-
13.28 23 - 12
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
91 78 63 95 61 56 76

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


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com