Time to Buy a Cable TV Stock

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

Ten years ago, the merger between DirecTV (NASDAQ: DTV) and Dish Network (NASDAQ: DISH) was blocked by regulators. However, the outlook has significantly changed since then and now the merger idea looks even more interesting. The deal looks attractive to both the sides because of the synergies expected from the combined entity of ~$2 billion annually. However, from the regulatory perspective the deal looks a little difficult and there are bound to be some hurdles for both the companies. I think this deal could benefit Dish Network in a bigger way with the shared framework and resultant reduced costs. The company posted slightly disappointing results in its 3Q12, mainly because of its settlement losses. The company has lost around 19000 net subscribers in this quarter and is expected to post its lowest profit of three years in 2012. This can be a selling point for the regulators to approve the deal to save the company from further losses. Aside from the deal, Dish Network is constantly working to improve its subscriber base in the light of growing competitive pressures. The company is planning to build its wireless services in 2013 and offer broadband bundles to remain more competitive. It will launch these services in a few regions in 2013 and will further expand its wireless capability. Also, I expect Dish to further increase its prices as the frozen prices period ended in 2012, to reduce the pressure of shrinking margins. It will increase prices of its core TV bundles by 7-20% starting in Jan. 2013. It will be an important move by the company after not increasing rates for the last two years to push its revenue growth back on track in 2013.

On similar lines, the other players in the industry are also increasing their prices because of the rising programming costs. Comcast (NASDAQ: CMCSA) is following the same trend and has announced a rate hike of ~4% starting in 2013. It will include a rate hike for Xfinity Triple Play Customers that have not seen any increases since 2010. The company is also planning to add more content, channels, and features to its triple play packages without any additional charge to justify the price hike. Comcast has achieved significant success in its on-demand video business and there is still a huge opportunity for the company to capitalize in this market. This prompted the company to launch its own on-demand video streaming subscription service Streampix in early 2012 that was recently rolled out across 95% of its operators. For around 2 million subscribers, this service is free and for the rest the company will charge a monthly fee. I feel this service will gradually penetrate among its subscribers which would lead to additional revenue for the company in the next 1-2 years.

Moving on to DirecTV, the company is always rated highly in the industry. Since the appointment of Mike White as the CEO of the company in Jan 2010, DirecTV has actually come out of a rough patch. The company has gained new pay TV subscribers in the last 1-2 years, while its competitors were losing subscribers during that period. This was a result of the high standards of customer service which generally lacks in quality in this industry. It has also remained very active in bringing out HD channels and latest DVR technologies in the market. This is the reason why I am highly inclined towards this company. Let us see some more factors in detail which are expected to further enhance the company’s position in the industry.

Continued Momentum in Latin America: Latin America has been one of the biggest growth drivers for DirecTV over the last three years. It commands a solid ~30% market share in the Brazilian market. The structural competitive advantages in Latin America are higher than that in the US which gives DirecTV a huge scope for further expansion. The interesting point here is that despite this rapid growth in Brazil, the pay-TV penetration is still low at only around 26% of television households. This is again a big opportunity for the company as there are ~60 million households in Brazil. Therefore, I expect the company is on track to end 2012 with ~5 million subscribers with a net addition of around 350k in the last quarter. Apart from Brazil, the other regions such as Argentina and Venezuela are also witnessing higher growth rates. Consequently, the overall subscriber base in Latin America will improve by ~25-30% for the full year earnings of 2012.

Impressive DVR Platform: Year 2012 for DirecTV ended with its most advanced HD home DVR 'Genie'. It allows the users to record up to 5 HD shows at the same time. The product has already created a buzz in the market with its innovative features. The company is planning for further improvements in Genie in 2013. The additional features will include a wireless set-top box and a voice search command using Smartphone with a DirecTV app. I also feel that the company would reduce the costs going forward in 2013 to remain competitive in the market. With such promising products, DirecTV is all set to retain its leadership position in the pay TV segment.

To sum it up, I believe DirecTV is placed in a better position among its peers. The company's strong performance in Latin America continues to outperform its investors’ expectations. I expect a strong revenue growth in 2013 for the company in the pay-tv category and improved market share in Latin America. Talking about the financials, its P/E ratio of 12.32 against the industry average of 15.41 makes it an attractive buying option at this moment. Looking at the company's growth trajectory, I feel this would be a good entry point for the 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

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