Change the channel on DirecTV?
Analysts like the bargain price, but can it fend off cable's 'triple-play?'
July 29, 2005: 6:26 AM EDT
By Steve Hargreaves
CNN/Money staff writer
http://money.cnn.com/2005/07/29/markets/spotlight/spotlight_directtv/
NEW YORK (CNN/Money) - There was a time when owning a satellite dish meant
relegating half your yard to something that looked better suited for
transmitting sensitive national secrets than casual channel surfing. And
even then channel surfing seldom worked.
Then along came modern satellite dishes, reliable and not much bigger than
a large pizza, from companies like DirecTV.
At first DirecTV used to enjoy clear advantages over cable. Satellites
could reach homes that were off the cable grid and the signal was all
digital, which meant better picture quality.
But cable companies have been switching to digital signals lately, and
presenting a serious threat with what they call the "triple-play" -- the
ability to offer phone, TV and Internet service in one package.
DirecTV has responded by partnering with some telecom companies to offer
its own version of the triple-play. It's also trying to offer more
exclusive content to distance itself from cable and its more closely
related competitor EchoStar.
Most notably, DirecTV recently extended a deal with the National Football
League to exclusively offer the "NFL Sunday Ticket," a package that allows
users to see every NFL Sunday game. The contract was set to expire at the
end of this season but will now last until 2010. And with football season
around the corner, the company could be gearing up for a wave of new
subscribers.
As the company gets set to report second-quarter results next week,
investors will want to hear what DirecTV has planned to add customers and
boost earnings.
Analysts expect the company to post its first quarterly profit since it
changed its name from Hughes Electronics Corp. in early 2004.
Still, many on Wall Street remain skeptical of the company. The stock is
down about 8 percent so far this year.
A rising EchoStar
One cause for concern: DirecTV faces a tough challenge from EchoStar
Communications Corp., the Colorado-based operator of the satellite TV Dish
Network.
And even though DirecTV is a much larger company measured by sales and
market value, analysts say EchoStar is formidable for one key reason:
price. At $31.99 a month, a subscription to the Dish Network is a full $10,
or 25 percent, cheaper than DirecTV.
Yet analysts say this shouldn't put pressure on DirecTV to lower prices
since it has a stronger brand name and offers more exclusive content than
EchoStar. To that end, analysts applauded the company's decision to spend
$3.5 billion securing the NFL rights for the next five years.
"It's almost a must have for a football fan," said Rob Sanderson, an
analyst at American Technology Research.
DirecTV also has another significant advantage over EchoStar. It is
controlled by media mogul Rupert Murdoch, whose News Corp. (Research) has a
34 percent stake. DirecTV is essentially the American division of Murdoch's
global satellite TV empire. So it has access to not only News Corp.'s deep
pockets but can operate in concert with sister satellite operations,
including Britain's BSkyB and Asia's Star TV.
Beware the 'triple play'
It would be one thing if DirecTV was just competing against EchoStar. But
analysts say that the bigger threat comes from cable companies like Comcast
(Research), Cox and Time Warner Cable, which like CNN/Money, is owned by
Time Warner (Research). Cable firms are bundling television, phone and
high-speed Internet services into one product.
"The opinion on Wall Street is that the 'triple play' is going to kill
them," said Sanderson, explaining why shares of DirecTV continue to dawdle
around the low end of their 52-week trading range. "But I think that view
is a bit simplistic."
Sanderson said consumers won't save much by signing up for these 'triple
play' services, especially after cheaper introductory offers expire.
Moreover, DirecTV is partnering with telecom companies such as Verizon
(Research) and BellSouth (Research) to offer these three services.
And despite the threat from cable, DirecTV is still reporting robust gains
in new subscribers, adding 1.6 million last year, according to Steve
Mather, an analyst at Sanders Morris Harris. Subscriptions at cable
operators have been generally flat, he said.
But another analyst said DirecTV will need to add more interactive features
and expand programming to stay competitive with cable. DirecTV is hoping
that a switch to a digital video recorder made by another
Murdoch-controlled company, NDS Group, will give it a unique edge over
rivals. The company currently offers customers DVRs made by TiVo.
"There are still legitimate concerns filling out the product palate," said
Matt Harrigan, a managing director at Janco Partners. "It's a bit of a
one-trick pony."
A clear stock signal?
DirecTV is not a cheap stock. Shares trade at about 33 times 2006 earnings
estimates, a steep premium to EchoStar, which is valued at about 12 times
next year's earnings projections.
But analysts said DirecTV should finally start to generate higher profits
on a more consistent basis as big capital investments begin to pay off.
(Launching a satellite isn't cheap).
As such, analysts expect earnings to grow about 30 percent a year, on
average, for the next few years, according to Thomson/First Call.
What's more, DirecTV's valuation isn't too rich when compared to cable
industry leader Comcast, which trades at about 32 times 2006 earnings
estimates. And considering that DirecTV has a healthier rate of
subscription growth than cable companies, it's reasonable for it to trade
at a higher valuation.
So even if you don't have a DirecTV satellite dish on your roof, it may
make sense to have one stashed in your portfolio.
================================
George Antunes, Political Science Dept
University of Houston; Houston, TX 77204
Voice: 713-743-3923 Fax: 713-743-3927
antunes at uh dot edu
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