Why Is Buffett A DIRECTV subscriber?

BERKSHIRE HATHAWAYAccording to Berkshire Hathaway’s 13F filing for the second quarter, Warren Buffett’s holding company increased its stake in DIRECTV (NASDAQ:DTV) by 24% between the beginning of April and the end of June. Berkshire Hathaway owned 28 million shares at the end of the second quarter, allowing the stock to squeak into its top ten holdings according to the 13F (find more of Warren Buffett's favorite stocks). Berkshire had initiated a position last summer, increased it dramatically in the fourth quarter of 2011, and had added shares in the first quarter of this year as well. DIRECTV was a favorite of other investors as well: D.E. Shaw, a hedge fund named after its billionaire founder, substantially increased its own position in the stock to 3 million shares (see more stock picks from D.E. Shaw).

DIRECTV’s 10-Q for the second quarter showed a significant increase in the company’s revenue, rising to $7.2 billion from $6.6 billion in the second quarter of 2011 (an increase of 9%). Net income was about even, but a fairly large reduction in the number of shares outstanding- 655 million, down from 767 a year earlier- meant that earnings per share actually increased by 20%. This figure is about the same when looked at for the first half of 2012: EPS came in at $2.16, compared to $1.76 in the first half of last year. Over the first six months, the $2.6 billion the company spent repurchasing shares amounted to nearly all of its $3 billion in cash flow from operations. We’re not sure DIRECTV will be able to maintain this degree of commitment in returning cash to shareholders, but it’s encouraging to know that management is focused on that area.

DIRECTV now has a trailing P/E of 14, and while we wouldn’t expect too much growth in its business going forward we do think that continued buybacks could drive this ratio down further if income holds steady. The forward multiple based on sell-side expectations is 10, which makes the company look like an even better value on a quantitative basis, and looking out further the five-year PEG ratio is 0.8. DIRECTV does not pay a dividend yield, but given the buybacks it certainly doesn’t need to do so. The stock also carries a beta of 1.0, and has been in line with that statistical trend over the last year with a 24% return versus the S&P 500’s 22%.

The company’s closest peers are Comcast Corporation (NASDAQ:CMCSA) and DISH Network Corp. (NASDAQ:DISH). We looked at Comcast earlier this week. The larger cable company, which also owns a number of media properties through NBC Universal, trades at 20 times trailing earnings and 16 times forward earnings estimates, notably higher than DIRECTV in both cases. However, Comcast has seen more growth in its business recently, reporting a 32% rise in earnings last quarter compared to the same period a year ago. DISH saw a fall in earnings of a similar magnitude, and posts trailing and forward P/E multiples of 11. It is cheaper than DIRECTV, but we are more worried about its business. Two additional peers are Time Warner Cable Inc (NYSE:TWC) and Viacom, Inc. (NASDAQ:VIAB), and these companies trade at small premiums compared to DIRECTV. Time Warner, which saw modest earnings growth in its most recent quarter versus the second quarter of 2011, trades at 17 times trailing earnings; Viacom’s business has declined over the last year yet still trades at a higher multiple than DIRECTV does (trailing P/E of 15). We’d rather invest in DIRECTV than in Comcast or Dish Network, but it’s possible that Time Warner Cable makes sense as an investment at a slightly higher earnings multiple.

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