DirectTV's premier sports package has helped shield it from the worst of the recession. Now, solid subscriber growth is flashing a buy signal.
SIRIUS XM RADIO'S FLIRTATION WITH BANKRUPTCY and Dish Network's shrinking subscriber base are creating static in the satellite-entertainment sector. But the picture is prettier for the nation's largest satellite-TV provider, DirecTV Group. The El Segundo, Calif., company is adding subscribers at a healthy clip and is on track to post solid profit gains this year. And its stock, at 21, could continue to outpace the market over the next 18 months.
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| Courtesy of DirectTV |
| CEO Chase Carey argues that his shares are "woefully undervalued." |
DirecTV (ticker: DTV) is winning eyeballs during the economic collapse, thanks in part to its NFL Sunday Ticket, which broadcasts out-of-market National Football League games. The close-to-$300-a-season Ticket is must-see programming for consumers such as Heather Polinsky in Alma, Mich., who watches it to track her beloved Pittsburgh Steelers. Declares Polinsky, an assistant professor and audio unit manager at the School of Broadcast & Cinematic Arts: "I won't give it up."
That's music to the ears of DirecTV, which is using its premier sports package and the loyalty of its high-end subscribers to shield it from the worst of the recession. The satellite broadcaster added 301,000 new subs in its fourth quarter, its best showing since 2005, while lowering customer churn to a record-low 1.42%. This year, subs could easily top 18 million, from 17.62 million now, if full-year churn says about flat with 2008's 1.47%.
DirecTV leads the pay-TV industry with more than 130 high-definition channels, and it aims to keep that edge by launching its 12th satellite this year, enhancing its ability to provide high-tech features such as video-on-demand to more than 100 million homes.
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The company also replaced rival Dish in a partnership with AT&T ; the two will sell each other's services in bundled packages. This hookup, notes Goldman Sachs, lessens the risk of DirecTV not having a broadband product and increases the chances that it will keep the Ticket after its deal with the NFL ends after the 2010 season.
Overall, solid subscriber growth could drive '09 earnings 7% above 2008's, to $1.6 billion, or $1.63 a share, on revenue of $21 billion. Next year, profits could hit $2 billion, or $2.17 a share, aided by share buybacks. DirecTV made $1.5 billion, or $1.37, on $19.7 billion last year.
After hitting 29 last summer, the company's shares are down 8% this year and sell for 13 times estimated 2009 earnings. The market is valuing each DirecTV subscriber at $1,343, based on estimated enterprise value, about half the figure for cable giant Comcast (CMCSA). Indeed, DirecTV stock was around the same level four years ago when Barron's recommended the stock ("Beam Me Up," April 11, 2005), although the company's market share has risen to 18% from 16% then. As he did four years ago when the shares were at 15, CEO Chase Carey argues that his shares are "woefully undervalued."
Paul Wright, an analyst with Loomis Sayles, owner of more than two million shares, thinks better-than-expected EPS results this year should push DirecTV toward 30 in 12 months. "They are executing tremendously," he says. The same can't be said for rival Dish Network (DISH). At five times earnings estimates, it's cheaper than DirecTV, but its subs tend to be less affluent, and its turnaround is uncertain.
That being said, DirecTV's fourth-quarter results suggest that it, too, faces persistent challenges. The satellite provider pays a lot to capture subscribers -- $724 per individual -- and employs aggressive marketing, such as offering free DVR boxes. Quarterly profit slipped 5% on higher promotional spending, and average monthly revenue per subscriber (ARPU) continued its year-long slide.
While applauding DirecTV for "defying gravity" in the fourth quarter, Goldman Sachs maintained its Neutral rating, fearing growing churn and slower ARPU growth. "The HD content gap has closed," says analyst Ingrid Chung. "Marketing and promotions by competitors have increased." Furthermore, some critics worry that the recession will force even die-hards such as Steelers fan Polinsky to ditch the NFL Ticket.
The Bottom Line
Carey maintains that DirecTV doesn't depend on the Ticket and suggests he won't overspend for renewal rights. The fewer than two million DirecTV customers who buy the service generate less than $1 billion of annual revenue, estimates Gregory Lundberg of Soleil. DirecTV paid $3.5 billion for the franchise in 2004 and will likely fork over much more to keep exclusive rights. It has the money: The balance sheet is solid, and annual earnings before interest taxes depreciation and amortization (Ebitda) is close to $6 billion.
DirecTV eventually could be acquired by a telco such as AT&T or even Liberty Media (LINTA), which bought a 41% stake from News Corp. (NWS), Barron's parent, early last year and now owns 53.6%. Liberty's John Malone is DirecTV's chairman. Carey, a former News Corp. executive, declines to comment. Either deal might be a sweet endgame for investors. For now, DirecTV's ability to weather the economic storm is burnishing its appeal as one of TV Land's top bets.
