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From The Value Line 600: DIRECTV
DIRECTV (DTV) is a leading provider of digital television entertainment, primarily via satellite, to residential and commercial subscribers in the United States (19.9 million subscribers) and Latin America (13.7 million). The company’s revenues are broken down into three segments: DIRECTV U.S. (80.3% of 2011 revenues); DIRECTV Latin America, which is comprised of Pan Americana, Sky Brazil, and Sky Mexico services (18.7%); and DIRECTV Sports Networks, Eliminations, and Other (about 1%).
This widely recognized name is largely associated with its main competitor, DISH Network (DISH), a provider of similar satellite-delivered services. Throughout the years, it has been hard to avoid the typical “DIRECTV vs. DISH” undertones, as the notorious rivalry is vastly publicized. Thus, the companies continually attempt to outperform one another to gain a competitive edge (i.e., increase their number of subscribers), whether it is through international expansion or new product offerings. At this time, for DIRECTV, it is penetration in Latin America’s markets (particularly Brazil), and for DISH, it is product introductions such as the Hopper, its whole home HD DVR solution, or AutoHop, which will allow customers to “skip” commercials.
Digging deeper, the competitive landscape goes beyond DIRECTV’s industry peers (cable and telecom TV service providers), and continues to the network or station owners (content suppliers that have the broadcast licenses). Companies like DIRECTV and DISH pay a fee to other companies to carry the channels their consumers watch. And, because this generally gives networks leverage over providers, increased broadcast carriage fees are common over time, as providers have minimal options to prevent these rising costs. As a result, disagreements regarding contract terms tend to lead to programming disputes, and usually end with price hikes on subscribers’ bills. This industry-wide problem is relatively common in the pay-TV universe. According to DIRECTV, programmers “blacked out” viewers over 60 times in the first half of 2012. In fact, the company created a separate website, www.directvpromise.com, which is specifically designed to inform subscribers about any programming disputes.
On July 10th, DIRECTV’s subscribers experienced a 10-day “blackout” due to a conflict between the pay-TV provider and Viacom (VIAB). To clarify, Viacom is a global entertainment content company that creates, acquires, and distributes programming via television, motion picture, online, and mobile platforms. Viacom operates approximately 160 channels, including Nickelodeon, MTV, and Comedy Central, which were among the 17 channels dropped from DTV’s service. The cause of the dispute was a failure to negotiate new contract terms, which would specify how much programming fees would increase going forward. Viacom wanted a 30% bonus (approximately another $1 billion in total fees) for its services, and DIRECTV disagreed.
On June 20th, a new long-term agreement was finalized, but only after Time Warner Cable (TWC), Cox Communications, Mediacom, 850 members of the American Cable Association (ACA), and an endless amount of customers supported DIRECTV’s refusal to pay the exorbitant increase in service fees. (No financial terms were disclosed.)
The DIRECTV / Viacom dispute became more publicized than most, and Derek Chang, executive vice president of Content Strategy and Development for DIRECTV, had this to say: “The attention surrounding this unnecessary and ill-advised blackout by Viacom has accomplished one key thing: it serves notice to all media companies that bullying TV providers and their customers with blackouts won’t get them a better deal. It’s high time programmers ended these anti-consumer blackouts once and for all and prove our industry is about enabling people to connect to their favorite programs rather than denying them access.”
Shares of DIRECTV have been increasing in price since mid-June, albeit gradually, and are now near a new 52-week high (around $53 a share). Overall, the rise in price and the company’s better-than-expected performance in the first half of 2012 were driven by DIRECTV Latin America and share repurchases.
Specifically, middle market demand in Brazil, Argentina, Colombia, and Venezuela drove the company’s second-quarter results (ended June 30th). This segment saw both sales and net subscribers increase approximately 20% and 35% year-over-year, respectively. That said, there were some disappointments along the way. The company’s DIRECTV U.S. segment lost subscribers for the first time. The 52,000 drop in net subscribers was due to lower gross subscriber additions, as a result of a greater focus on higher-quality subscribers and stricter credit policies, as well as less contributions from its Telco sales channel.
During the first quarter of 2012, management approved a share repurchase program of up to $6 billion. As of June 30th, the company has spent $2.6 billion of that amount, which equates to 57 million shares, at an average price of $46.30 a share. This compares to $2.9 billion, or 63 million shares bought back a year ago. DIRECTV has $4.2 billion left on the share repurchase authority, which will likely boost earnings and shareholder value going forward. Indeed, this was already evident during the second quarter when earnings increased 20%, to $1.09, compared to the same period last year.
All in all, DIRECTV stock is looking good, and we are impressed with the company’s performance (even with its recent loss of U.S. subscribers). This is evident with its rising stock price, decent quarterly results, and growth in both revenues and earnings since 2004, among other things. For a more detailed evaluation of DIRECTV’s future business prospects and the particular investment merits of the stock, subscribers are encouraged to check our full page report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.