Grab This Cheap Stock With Solid Upside Potential
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Earlier this year, Warren Buffett announced a $1 billion stake in DirecTV (NASDAQ: DTV), the largest provider of household satellite television in the United States with a customer base over 18.5 million. Berkshire Hathaway’s 13F fillings show that the company has added to its position in DirecTV last quarter. Let’s analyze what’s so special about this satellite television provider that is keeping Warren Buffet interested.
Even in the middle of recession, DirecTV saw a steady improvement in its subscriber count. I expect the trend to continue as subscribers cut cords and switch to satellite from cable companies like Comcast (NASDAQ: CMCSA). Moreover, DirecTV seems to be trading at a highly discounted valuation with respect to its peers despite having better growth prospects. The following chart summarizes forward P/E and estimated growth for DirecTV and its peer group of Comcast and Dish Network (NASDAQ: DISH).
|
Company |
DirecTV |
Comcast |
Dish Network |
|
Forward P/E |
9.98 |
15.17 |
12.50 |
|
Est. Growth Next Year |
23.10% |
15.10% |
3.20% |
|
Est. Annual Growth (Next 5 Years) |
16.66% |
14.26% |
1.08% |
Source: Yahoo Finance
DirecTV has “best-in-class” growth rate yet it has the lowest multiple. Thus, the consensus estimates (for future growth) clearly suggest that DirecTV is highly undervalued.
Last month, the company reported mixed Q2 results quarter with some really nice beats and some disappointing misses. While investors may be surprised by the magnitude of the U.S. sub loss, management is achieving its goal of profitability, with U.S. OPBDA up 9.6% year over year. In my view, the company has a strong US franchise with substantial cash flow to drive share buybacks and growth potential from its Latin American business. The company is focussing on growth in Latin America and profitability in United States which seems to be a good strategy going forward.
Focus on Profitability in U.S. Business
In the United States, the company continues to exhibit strong execution and momentum. In order to increase ARPU (Average Revenue per Subscriber), the company is targeting higher-end customers who can afford $100 per month for TV. U.S. 2Q results showed that the management’s new focus of putting profitability ahead of subscriber growth is starting to have an impact. The company is benefitting from tighter cost controls and productivity improvements and posted the best EBITDA margin in two years (US EBITDA margin expanded to 28.1% in Q2 showing a 70 bps year-over year). Moreover, Domestic ARPU growth accelerated to 4.2% vs. 3.6% in 1Q12, driven by stronger than expected pay-per-view, premium channel and advanced services sales. In addition, Domestic churn improved to 1.53% vs. 1.59% in 2Q11 due to increased upgrade efforts, more customers agreeing to auto bill pay, and tightened credit policies. Encouragingly, the management also indicated U.S. ’12 gross adds have a 20+% higher lifetime value vs. those from ’11.
Fast growth in Latin America
DirecTV Latin America is the leading provider of digital television services throughout Latin America, which includes South America, Central America, and the Caribbean. Latin American consumers are increasingly adopting advanced services and DirecTV saw a 22% increase in the number of subscribers in Latin America last year. Most importantly, the growth is not coming at the expenditure of ARPU (Average Revenue per Subscriber). In the recent quarter, consolidated Latin America businesses added 645,000 subscribers with churn and gross adds both ahead of expectations. Moreover, the latest multichannel video subscriber data (for the Brazilian Pay TV marketplace) released by Anatel (the Brazilian Ministry of Communication) suggests that DirecTV’s Q3 net adds (so far) are showing a good year over year improvement. The macroeconomic conditions in Latin America are improving and there is a very low penetration of cable providers. Thus, Latin America offers a huge growth opportunity going forward.
The company has a competitive advantage as it offers exclusive programming such as the NFL SUNDAY TICKET package and over 95 Spanish and international language channels, which are not available via cable or other satellite service providers. I think the market is under-appreciating the equity value of DirecTV’s Latin American business. Warren Buffer recognized this investment opportunity quite early and the stock has seen an impressive gain of over 26% year to date. However, the company is still highly undervalued and offers a great upside from the current levels. Thus, I recommend buying it.
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