What Does Latin America Hold for this Cable Company?
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Disputes between a channel and the satellite TV provider have been common in this industry, which often results in the satellite TV provider stopping telecasting a particular channel. The recent addition in this list is DirecTV (NASDAQ: DTV), which has been in a brawl with Time Warner Cable. Don't worry, DirecTV recently announced its settlement with Time Warner Cable and will now carry SportsNet, home of Los Angeles Lakers in Southern California.
The company has been in a tussle in the recent past too, which caused it to report earnings slightly weaker than expected in 3Q 2012, with EPS of $0.90 against the consensus estimate of $0.93. However, I won’t give this a lot of weightage, looking at how the industry has been performing in the recent past.
So how is it placed against its peers?
If we compare DirecTV with its peers, we can clearly see that even though the company has not met expectations, it still commands a leading position in key performance metrics. It has an ROA of 16.18%, whereas Comcast (NASDAQ: CMCSA) has 4.70% and Dish Network (NASDAQ: DISH) has an ROA of 8.88%. Apart from the financials, what makes this stock different from its peers is its industry leading position in the Latin American market, with very less competition from Dish. As the US market is maturing, this can become another growth area for DirecTV.
Additionally, it has a forward P/E ratio of 9.48, while Dish has a P/E ratio of 14.81 and Comcast has a P/E of 15.83. With a lower P/E and good growth potential, I think this stock is looking cheap at its current level and should provide good returns to investors in the future.
Let’s have a look at the growth drivers of DirecTV.
Growth in the US market
DirecTV continues to grow in the US market. In 3Q 2012 the company added ~67,000 subscribers, although this falls short of the estimation of ~100,000, mainly because of its dispute with Viacom, which resulted in a crippling blackout. But as the issue has been resolved now, this should not impact negatively in the coming quarters. One of the important points to consider from the last quarter is its NFL Sunday Ticket Promotion, which achieved a growth of ~50% compared to last year. The company posted revenue growth of ~6% year over year, backed by its increasing ARPU.
DirecTV has always been the premium player in the sector, and its customers are increasingly using its premium services like NFL Sunday Ticket, pay per view services, premium channels, etc. One of the important factors to consider here is that ~90% of its new subscribers used these services which show higher affinity to the service provider. These premium services will continue to provide the company an edge over its competitors and will drive higher revenue.
DirecTV experienced a solid ARPU of $55.97 in the Latin American market in 3Q 2012, with a net addition of ~543,000 subscribers. The company has grown around 30% annually in the last three years, and commands about 30% of market share in the Brazilian market. With its leadership position and its overall growth in the under penetrated market, it is expected to get a growth rate of 20% in the coming quarters. The company is also focusing on providing more advanced services based on the subscribers’ requirements across the region.
Additionally, the company is also exploring purchasing GVT in Brazil. This possible acquisition could provide DirecTV a commanding position in Brazil in the Broadband and Pay TV business.
New Innovative product Launches
DirecTV has various new innovative products in the pipeline, which should reduce its churn rate in the US market. At the same time this will attract more new subscribers to its offerings.
- New Genie DVR platform: This platform provides better user interface and predictive recording of content. One of the most attractive factors for this product is its cost effectiveness. For a household with 3 TVs with DVR service this platform would cost ~$320, compared to $470 from the earlier generation of boxes. This product will help the company to maintain its leadership position in the pay TV business.
- New DVR lite: The company will soon be launching its new DVR lite product in the Brazilian market, which is an HD and non-DVR box. It offers the consumer the unique feature of having DVR services, with a connecting external drive and downloading software. This will attract more value-conscious consumers in the large Brazilian market.
Additionally, there is speculation going on about the possible merger of Dish and DirecTV. Both these companies tried this earlier in 2002 too, but the deal was stopped by the anti-trust authorities. Looking at the current market conditions that have changed significantly, I think this merger should now be allowed by the authorities. This combined entity is expected to generate a synergy of ~$2 billion annually from the reduced programming cost and shared infrastructure. This will also help the company to reduce the attrition rate and lower its customer acquisition cost.
Summing up, I feel DirecTV looks promising with its planned new launches set to get higher revenue in both the US and Latin American markets and also benefiting from the favorable Latin American market conditions. Additionally, with the expected free cash flow of ~$627 million for 4Q 2012, we can expect share repurchase of ~$1.25 billion. I think at this point DirecTV is a safe bet for investors.
ShwetaDubey 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!