DIRECTV (NASDAQ:DTV) has given decent returns since the beginning of 2009. Its stock price has risen gradually, from around $20 per share to $55 per share, with a sweet annualized return of nearly 28.8%. DIRECTV has also been a favorite stock of many famous investors, including Warren Buffett, Wallace Weitz, Steven Cohen, and Ray Dalio.
Warren Buffett holds more than 34 million shares in the company, with a total market value of more than $1.87 billion. Should we consider DIRECTV as a buy at its current price? Let’s find out.
A leading DTH digital TV service provider in the U.S.
DIRECTV (NASDAQ:DTV) is a leading provider of digital television entertainment, operating two direct-to-home businesses, including DIRECTV U.S. and DIRECTV Latin America. Furthermore, the company owns and operates three regional sports networks, and owns a 42% interest in Game Show Network.
The company is considered the largest provider of DTH digital television services and the second largest MVPD provider in the U.S., measured by subscriber number. In the U.S., it has 20.1 million subscribers, while there are around 15.5 million subscribers in total throughout the Latin America region.
Its has a greater number of subscribers in the U.S. than its direct competitor, DISH Network Corp (NASDAQ:DISH) . In 2012, DISH had more than 14 million subscribers, accounting for around 14% of pay-TV subscribers in the U.S. Another peer, Comcast Corporation (NASDAQ:CMCSA), the owner and operator of 15 national cable networks, and 11 regional sports and news network, has around 39 million subscribers across the U.S.
DIRECTV (NASDAQ:DTV) derived most of its revenue from DIRECTV U.S., which accounted for $23.2 billion, or 78.1% of total 2012 revenue, while DIRECTV Latin America contributed around $6.2 billion in sales in 2012. Both segments are generating operating profits. DIRECTV U.S. generated around $4.15 billion in profits, whereas DIRECTV Latin America produced around $955 million in operating income in 2012.
The fastest growing business but negative equity
The reason why I am interested in the company is for its cash generating capability. In the past ten years, DIRECTV (NASDAQ:DTV) has managed to grow its cash flow quite steadily. Its operating cash flow increased from $846 million in 2003 to more than $5.63 billion in the trailing twelve months, its free cash flow rose from $(12) million to nearly $2.3 billion during the same period.
Both DISH Network Corp (NASDAQ:DISH) and Comcast Corporation (NASDAQ:CMCSA) are also cash cows. In 2012, DISH generated more than $2 billion in operating cash flow and $1 billion in free cash flow, while Comcast produced $14.8 billion and $8.2 billion in operating cash flow and free cash flow, respectively. Among the three, DIRECTV is the fastest growing company with its 10-year EBITDA growth of more than 33%, while the average 10-year EBITDA growth of DISH and Comcast Corporation (NASDAQ:CMCSA) are 10.8% and 22.6%, respectively.
What makes me worried about DIRECTV (NASDAQ:DTV) is its weak balance sheet. As of December 2012, it had a negative equity of $5.43 billion, $1.9 billion in cash, and around $17.2 billion in long-term debt. However, as DIRECTV generated around $7.23 billion in EBITDA, its net debt/EBITDA stays at a decent ratio of 2.38. I believe that with a strong cash flow, DIRECTV’s debt is manageable.
The cheapest valuation
At $55 per share, DIRECTV (NASDAQ:DTV) is worth around $32 billion on the market. The market values DIRECTV at around 6.6 times EV/EBITDA. It has the lowest valuation compared to DISH Network Corp (NASDAQ:DISH) and Comcast.
At $41 per share, Comcast has a total market cap of $108.5 billion. The market values Comcast a bit higher, at 6.8 times EV/EBITDA. DISH is trading around $36.80 per share, with a total market cap of around $16.7 billion. It is the most expensively valued company among the three, at 7.33 times EV/EBITDA.
Recently, DISH Network Corp (NASDAQ:DISH) made an offer to buy Sprint Nextel Corporation (NYSE:S) for around $7 per share, including $4.76 in cash and $2.24 in stock. DISH thought that the combined company would offer customers the greatest possible bandwidth for video and data.
My Foolish take
DIRECTV (NASDAQ:DTV) seems to be a good bet at its current price due to its fastest growing operating performance, increasing cash flow, and low valuation. In addition, the company has been using low interest debt to finance its operations. The high debt level is not a burden for DIRECTV due to its strong cash flow generating ability.
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