DIRECTV (DTV), DISH Network Corp. (DISH): Keeping Television Competitive

Television is changing. Faced with stiff competition from new kinds of media, TV companies are often forced to rethink their traditional business models. The challenge these companies face is often to remain competitive when much, if not all, content can be accessed through the Internet for free. One of the companies at the forefront of this development is DIRECTV (NASDAQ:DTV). The company is growing earnings impressively and has had a good run recently. Moreover, in my view it is trading at a bargain price right now despite the rally.

Stock Overview

DIRECTV provides digital television in the US and Latin America, delivering digital entertainment programming to people’s homes mainly through satellite connections. It also owns a number of regional sports networks and has a large stake in the Game Show Network. The company has over 20 million subscribers and enjoys a generous market cap of around $32.3 billion. With a beta of .88, the stock isn’t too volatile. It is up about 15.9% in the last year, 12.8% year to date.

Earnings and Strategy

Despite huge changes in the traditional television industry, DIRECTV (NASDAQ:DTV) has been managing to deliver very impressive earnings over the last few years. EPS growth has easily outpaced the industry going back to 2010, and revenue growth has done the same since 2008 with the exception of a 2% lag in 2011. Annual EPS has consistently beaten analyst expectations since 2009, with EPS tripling in the same period to $4.44. Analysts are looking for $4.81 in 2013, with an expected 3-5 year EPS growth rate of 37.2%. The company capped off 2012 with a 25% beat in Q4.

One of the ways in which DIRECTV (NASDAQ:DTV) is trying to adjust to shifting consumer preferences is the introduction of a new DVR nicknamed the Genie, which increases the number of simultaneous HD recordings and available storage space. The move comes as competitor DISH Network Corp. (NASDAQ:DISH) released a DVR of its own called the Hopper, which allows consumers to skip through ads.

This is obviously a controversial step, but probably one that is necessary to compete with the popularity of watching content on the Internet, as the traditional advertising model is starting to become obsolete. In the words of Dish co-founder and chairman, “Customers skip commercials. We can’t ignore that fact.” In the last few years, DISH Network Corp. (NASDAQ:DISH) has been working on aggressively expanding its portfolio of spectrum assets, recently having showed interest in the purchase of around 24% of Clearwire Corporation (NASDAQ:CLWR)’s spectrum assets. Clearly, the company is looking to become a bigger player in the satellite arena.

Comcast Corporation (NASDAQ:CMCSA), easily DIRECTV’s largest competitor with its hefty $89.1 billion market cap, appears to be focused on the acquisition of content producers in order to facilitate growth. The company has completed its acquisition of NBC Universal, which gives the television titan control over NBC’s television network, Universal movie studio and Universal theme parks. The company’s large cash balance will allow it to continue investing in content and infrastructure, as well as return cash to shareholders in the form of buybacks and dividends. Still, the company isn’t growing earnings quite as fast as DIRECTV (NASDAQ:DTV) and saw a decline in subscribers over the last few years.

With the domestic market highly saturated and competition in the space fierce, DIRECTV is naturally looking towards its Latin American operations as a means to continue and expand its growth. So far, this is paying off. The region is currently good for about 25% of the company’s value, and the powerful annualized subscriber growth of around 25% here means this number could go a lot higher in the next few years. DirecTV now has around 10.3 million subscribers in Latin America and is looking to expand aggressively in the region.

Valuations and Metrics

Of the three TV companies discussed in this article, DIRECTV (NASDAQ:DTV) is by far the cheapest. The TTM PE is around 12.36x, easily lower than Comcast Corporation (NASDAQ:CMCSA)’s 18.41 and DISH Network Corp. (NASDAQ:DISH)’ 26.88. The same is true for the price to sales, at 1.1 versus 1.76 and 1.21. The PEG ratio of only 0.68 paints a similar picture. The company has an operating margin of 17%, which is pretty decent. The operating cash flow of around $5.63 billion is healthy, although the company has just over half its market cap in debt and only $1.9 billion in cash.

The Bottom Line

With a quickly changing industry, it is becoming increasingly hard for cable and satellite television providers to keep up. However, DIRECTV (NASDAQ:DTV) has been doing very well in terms of growing earnings and revenue as of late, with especially strong growth in its Latin American division. Analysts expect this high growth to keep up in the next few years. Additionally, the company is trading at a steep discount to the industry at the moment. I’m positive on the company’s prospects going forward.

The article Keeping Television Competitive originally appeared on and is written by Daniel James.

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