Don’t Just Invest in the Market, Direct the Market

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As the new year begins, I would like to pinpoint a leading provider of satellite home entertainment, DirecTV (NASDAQ: DTV).

 

Strengths:

  • Solid Revenue Growth: In 2006, DirecTV reported revenue of $14.75 billion; in 2011, the company announced revenue of $27.23 billion, representing year over year annual growth of 13.04%, a trend which is highly anticipated to sustain into the future, with projections placing 2016 revenue at $37.53 billion; this revenue growth is a result of an increase in the number of subscribers and the average revenue derived from each subscriber, both trends anticipated to continue into the future
  • Institutional Vote of Confidence: 83.58% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Reasonable Valuation: At the moment, DirecTV carries a price to earnings ratio of 12.20 and a price to sales ratio of 1.17, both of which point to a company trading with a fairly reasonable valuation when growth and future prospects are taken into consideration
  • Steady Business Model: DirecTV provides its millions of customers with entertainment services for a certain amount of time according to the contract specifications, and the majority of the time this contract is multi-year, locking in a solid revenue stream for the company for years to come, a business model which adds predictability and certainty to the company
  • Cash and Equivalents: Currently, the company holds $2.42 billion of cash and cash equivalents on their balance sheets, a major upside to the business

Weaknesses:

  • Lack of Dividend: At no time in the company’s history has a dividend been paid to shareholders, and no plans have been expressed by the company of implementing such a program in the near future, which is a major downside for long-term investors
  • Debt: DirecTV currently possesses $17.16 billion of debt on their balance sheets, a major downside to the business; much of this debt has been accumulated through advertising campaigns
  • Large Exposure to United States: 51.98% of DirecTV’s overall business is concentrated in its United States satellite-TV business segment, and this heavy dependence on a nation facing economic uncertainty and stagnation may prove to be a weakness for the company
  • Recent Problems with Viacom: Recently, DirecTV battled Viacom when they stopped service of their several channels to DirecTV customers because DirecTV did not pay Viacom an increased rate, displaying a weakness in the relationship between DirecTV and its content providers
  • Tight Margins: DirecTV currently holds a net profit margin of 9.58%, which is barely below the ideal double digit range, and leaves little room for unexpected expenditures; these tight margins are a result of DirecTV struggling to remain competitive and maintain their current market share

Opportunities:

  • Implementing Dividend: In an economic landscape in which so many major corporations are utilizing their piles of cash to reward investors, a dividend program being implemented by DirecTV could prove to be a major opportunity for investors
  • Growing United States and Latin American Customer Bases: DirecTV’s major regions of operation, the United States and Latin America, both enjoy growing customer bases, with the total number of US TV households increasing marginally over the past years, while Latin American markets provide faster paced growth
  • Capturing Exciting Offerings: DirecTV prides itself on offering premium content, especially through sports packages, and capturing further exciting offerings could excite customers and lead to an increase in market share
  • Gaining Market Share: In 2008, DirecTV held a 17.40% market share in the United States television industry; in 2011, the company boasted a 19.10% market share, and further increases in market share could lead to an explosion of growth

Threats:

  • Competition: The television industry is highly competitive, with several major corporations battling against DirecTV for the consumer’s business, and this fierce battle to offer the best product for the least amount of money can lead to margin compression
  • Lackluster Offerings: If DirecTV is not able to provide its customers with premium content, customer loyalty will dwindle, and DirecTV will lose business
  • Fiscal Cliff: If the United States was to fall off of the fiscal Cliff, tax rates would be raised on nearly all Americans, leaving them with less money to spend, possibly damaging DirecTV’s growth  

Competitors:

Major publicly traded competitors of DirecTV include Dish Network (NASDAQ: DISH), Comcast (NASDAQ: CMCSA), Time Warner Cable (NYSE: TWC), and CBS (NYSE: CBS). All of these companies offer products and services similar if not identical to those of DirecTV. Dish is valued at $15.99 billion, pays out no dividend, and carries a price to earnings ratio of 21.50. Comcast is valued at $97.10 billion, pays out a dividend yielding 1.78%, and carries a price to earnings ratio of 16.66. Time Warner is valued at $28.72 billion, pays out a dividend yielding 2.35%, and carries a price to earnings ratio of 13.71. Finally, CBS is valued at $23.41 billion, pays out a dividend yielding 1.30%, and carries a price to earnings ratio of 15.89.

The Foolish Bottom Line:

Financially, DirecTV is relatively strong. The company possesses solid revenue growth and a reasonable valuation. On the other hand the company holds a massive pile of debt that greatly outweighs its stash of cash and a lack of dividend. The company’s future is filled with opportunities that could lead to growth; however the fiscal cliff could pose a major threat to DirecTV’s core business. All in all, DirecTV appears to be a solid investment, however the lack of dividend and massive pile of debt leads me to favor the larger and more diversified Comcast.


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure