At DirecTV, growth is in the picture


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At the U.S. Open, DirecTV ($23; NASDAQ: DTV) made a flashy entrance with the world’s largest high-definition TV (a screen that stretched 30 feet by 70 feet) affixed to a blimp. For millions of viewers, that image was transmitted by the company’s less visible but far more powerful assets, about $2 billion worth of orbiting satellites. Those satellites, along with new partnerships and a high rate of retention for subscribers, have helped make DirecTV America’s largest satellite TV provider.

With its stock up slightly this year, DirecTV has performed fairly well despite the uncertain economy. DirecTV’s CEO and other media executives say Americans don’t usually cut back spending on cable or satellite TV during periods of financial difficulty. Consumers apparently consider TV a cheaper alternative than other entertainment options — and prefer to cut back on other discretionary spending. DirecTV, initiated as a Buy in the Sept. 29 issue, is being added to the Focus List.

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In the six months ended June, DirecTV managed sales growth of 13% on net customer growth of 2.4% in the U.S. market, and 48% revenue growth on 11.7% customer growth in Latin America. The company now has more than 17 million subscribers in the U.S. and another 3.6 million in Latin America.

Over the last year, DirecTV has made a big push into high-definition programming. DirecTV skunked Dish Network ($17; NASDAQ: DISH) last month, convincing AT&T ($26; NYSE: T) to switch partners and sell DirecTV’s service starting in February.

The partnership should help DirecTV better compete with the popular phone-Internet-cable bundles offered by cable companies, potentially boosting customer growth in coming years. DirecTV now has deals with all major phone companies in the U.S. Also, a partnership with TiVo ($6; NASDAQ: TIVO) will let customers record shows in high definition.

DirecTV credits much of its revenue growth to subscriber upgrades to expensive packages, such as the NFL Sunday Ticket. Aggressive marketing is the key to these upgrades.

Latin American operations span Puerto Rico, Mexico, and several South American countries. Operating profits at the Latin America business more than tripled in the six months ended June, and profitability should improve further over the next year.

DirecTV’s balance sheet is solid relative to those of most rivals, giving the company flexibility to make acquisitions or spend heavily on expansion if necessary. That strong balance sheet could also make the company appealing as a takeover target. However, at 14 times projected year-ahead earnings of $1.66 per share, DirecTV represents an attractive value on its own merits, even if no suitor emerges. Consensus estimates project per-share-profit growth of 22% in 2008 and 32% in 2009.

Liberty Media ($10; NASDAQ: LINTA) owns a 49.7% stake in DirecTV and plans to spin off that stake and other assets to form Liberty Entertainment Group ($20; NASDAQ: LMDIA) in December or January. An annual report for DirecTV is available from 200 N. Sepulveda, El Segundo, CA 90245; (310) 964-5000,

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