Buffett Ups Bet on Satellite TV

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Warren Buffett’s Berkshire Hathaway has liked satellite TV for years. The firm began accumulating a stake in DirecTV (NASDAQ: DTV) in 2011, and now owns about 6% of the company.

In the most recent quarter, Berkshire bought shares of DirecTV’s competitor, DISH Network (NASDAQ: DISH). It’s a much smaller stake, only about 500,000 shares, but Buffett obviously sees something of value in the sector.

Should investors consider following Buffett into these stocks?

Reasons to own the satellite providers
Looking at DirecTV’s financials, it’s obvious why Berkshire has owned the stock for years: The company appears to be a classic Buffett pick.

For starters, it operates a fairly simple and predictable business: providing satellite TV to 20 million American subscribers (it also has 15 million Latin American subscribers through various subsidiaries). DirecTV derives almost all of its value from these subscribers, who do not vary significantly in number from quarter to quarter.

The company is profitable and generating cash flow. It doesn't pay a dividend, but it does return capital to shareholders in the form of a buyback -- back in February, it announced a $4 billion share repurchase program, at the time, about 12% of the company’s market cap.

Moreover, DirecTV is reasonably valued. With a price-to-earnings ratio of about 12.40, it’s cheaper than the S&P 500.

On the other hand, the reasons to own DISH Network are less clear. It too is profitable, but with a P/E ratio of near 80, it’s far more expensive.

It’s also a bit more complex. Like DirecTV, it derives most of its revenue from its satellite TV operation, but it has significant spectrum assets -- assets which it has spent billions on, but currently doesn't use.

DISH had planned to merge with Sprint in order to put its spectrum assets to use. But with that deal falling through, it isn't clear what DISH plans to do going forward.

DISH could try to merge with a different wireless provider, like T-Mobile. It could also sell its spectrum assets to a wireless carrier.

Could the two companies merge?
Or it could merge with DirecTV. John Malone, the chairman of Liberty Global, has urged DISH’s CEO Charlie Ergen to combine his company with DirecTV.

Malone has argued that the paid-TV industry needs to consolidate. Fewer players would drive down costs to the companies, and improve the experience of the consumer.

Content costs have spiraled out of control in recent years, leading to numerous spats between content companies and paid-TV providers.

Time Warner Cable, for example, is still embroiled in a fight with CBS, and has stopped carrying CBS and Showtime. But that’s just one example: DISH briefly stopped carrying AMC last year, and DirecTV dropped Viacom’s 17 channels for 10 days last summer.

If fewer paid-TV providers existed in the industry, content companies would be restricted in their ability to raise costs -- there would be fewer companies to negotiate with.

Threats to satellite TV
But while the traditional paid-TV providers mull consolidation, new alternatives are starting to appear.

Both Intel (NASDAQ: INTC) and Sony have plans to unveil Internet-based paid-TV services, and as written previously, those services could be devastating to the satellite providers.

While Sony has been relatively mum on the details of its forthcoming cable alternative, Intel has been fairly straightforward about its plans. The PC chip-maker says it hopes to roll out its service in some markets later this year.

Intel has said the service will offer a premium experience, and give users the ability to purchase more curated bundles of content.

If the service takes off, it could help to offset the decline of Intel’s core chip business, which has struggled as the demand for traditional PCs has declined.

DirecTV reported revenue of $7.7 billion last quarter. For comparison, Intel's second-quarter revenue came in at $12.8 billion. It would be naive to assume that Intel could amass a base of 20 million subscribers overnight, but Intel's paid-TV offering is solid, there's definitely an opportunity for the company.

Moreover, because it will be delivered over the Internet, Intel’s success could come at the expense of the satellite TV providers. As neither DirecTV nor DISH Network is a major Internet provider, the companies have no Internet subscribers to fall back on.

A company like Comcast or Time Warner Cable is insulated from Internet-based competition, largely because they control access to the Internet.

Investing in the satellite stocks
Buffett has been a fan of DirecTV for years -- and it’s been a good investment. But with Berkshire’s new stake in DISH Network, the firm is increasing its bet on the satellite TV space.

In terms of financial metrics, DirecTV is ideal: a simple, predictable business that’s generating cash flow and returning capital to shareholders. DISH Network is a more complex situation, but a merger between the two companies could benefit shareholders of both firms.

But investors in both firms should keep an eye on rising alternatives, like Intel’s offering, which could be available as early as this year. Because they don't provide Internet, both DirecTV and DISH are exposed to Internet-based competition.

Nevertheless, with Berkshire on board, both stocks are worth a look.

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Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends DirecTV and Intel. The Motley Fool owns shares of Intel. 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!

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