DirecTV: Not A Buy Right Now
Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
DirecTV (NASDAQ: DTV) is a provider of more HD channels than any other cable provider. The company has struggled in the second half of last year after it was taken down by the troubles in Europe, and continues to face increased pressure on costs from providers of Fiber Optic Service. It wasn’t able to recover since then but that may be because the valuations suggest that it is trading close to fair value. In the following article, I will discuss reasons why I believe investors should avoid this stock for now.
In my analysis, DirecTV is faced with growing competition from popular online video platforms such as Netflix and Hulu. Even though these companies normally don't provide live televised content, they are beginning to move more toward this area. For example, Netflix recently gained rights to TV shows 'Lilyhammer' and 'House of Cards.' I believe the growth and popularity of alternative platforms such as Netflix and Hulu will gradually start to erode part of DirecTV's core business in 2012.
DirecTV's trailing 5 year valuation metrics suggest that the stock is undervalued as they are in the lower end of their respective 5 year ranges. DirecTV's current P/S ratio is 1.25 and it has traded between 1.2 and 1.9 over the 5 years. DirecTV's current P/E ratio is 14 and it has traded between 13.2 and 35.1 over the past 5 years.
The consensus price target for the analysts who follow DirecTV is $54. That is upside of about 20% from today's stock price and suggests that the stock is fairly valued at these levels. This also suggests that the stock has limited upside and should be avoided at its current stock price.
In my analysis, the forward relative valuation metric is the only one that suggests that the stock is a buy. DirecTV is currently trading at about $45 a share with analysts expecting EPS of $4.38 next year, an earnings increase of 30% y/y, for a forward P/E ratio of 10.3. Taking a look at the company's publically traded competition will give us a better idea of the stock's relative valuation. Comcast (NASDAQ: CMCSA) is currently trading at about $26 a share with analysts expecting EPS of $1.87 next year, an earnings increase of 24% y/y, for a forward P/E ratio of 14.1. Time Warner Cable (NYSE: TWC) is currently trading at about $74 a share with analysts expecting EPS of $6.59 next year, an earnings increase of 21% y/y, for a forward P/E ratio of 11.2. DISH Network (NASDAQ: DISH) is currently trading at about $28 a share with analysts expecting EPS of $2.7 next year, an earnings decline of 18% y/y, for a forward P/E ratio of 10.5. The mean forward P/E of DirecTV's competitors is 11.9 which suggests that DirecTV is undervalued relative to its publicly traded competitors.
Looking at the price action, the stock has had a mixed year, rising nearly 25% over the first half of last year before dropping over 20% and not being able to make a solid recovery off the lows. DirecTV is up 4% over the past year, slightly underperforming the S&P 500, which is up 5%.
I believe investors should hold off on buying DirecTV shares right now. DirecTV consumers are paying a premium price for a service that may eventually be outmatched by Fiber Optic Service from AT&T (NYSE: T) and Verizon (NYSE: VZ) This service provides increased capabilities to offer HD content through improved bandwidth. I believe this will have a negative impact on DirecTV's growth in 2012, therefore I would avoid buying this stock for now. On top of that, Verizon's recently announced streaming deal with Coinstar (owner of Redbox), which should help Verizon battle satellite companies like DirecTV and streaming services like Netflix in the future.
The Motley Fool has no positions in the stocks mentioned above. DividendKings has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
