Is DirecTV Still a Winner?

With shares of DirecTV (NASDAQ:DTV) trading at around $49.19, is DTV an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

directv_lrgDirectTV is bucking the trend by continuously growing while competitors are losing customers to streaming. However, it can be debated whether or not DirecTV will be capable of keeping this positive trend going. One big issue is NFL Sunday Ticket, which expires in 2015. The big question here: Has DirecTV established a strong enough brand to eliminate NFL Sunday Ticket when it expires? A logical follow-up question: How many customers will leave if DirecTV doesn’t renegotiate with the NFL for an extension? Of course, this isn’t something to worry about now considering its only 2013, but it’s already beginning to play on investors’ minds. If DirecTV cuts the deal, it will save a lot of money, but the risk is also high due to potential loss of customers. If DirecTV is continuously growing and making a profit with NFL Sunday Ticket, then it wouldn’t make much sense to cut it unless the cost substantially increased, which is a possibility.

DirecTV has been growing by about 5 percent in the United States, but that’s nothing compared to the growth seen in Latin America, where DirecTV is seeing 22 percent growth. DirecTV is still a novelty in countries like Brazil, Venezuela, Columbia, and Argentina. And there is still a lot of room for growth. Better yet, there isn’t much competition.

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Overall, DirecTV saw a 1 percent increase in subscribers in 2012. DirecTV is going to alter its strategy in the United States in an attempt to spur a little more growth. This strategy will focus on investing in new shows that will be exclusive to DirecTV. The company already has a good head start since the retention rate is solid. DirecTV will continue to focus on retention more than acquisition in the United States, which will benefit margins, but not growth. There will still be plenty of growth in Latin America.

There are a couple of negatives to point out. One, programming fees are likely to increase going forward. Two, Venezuela decided to devalue its currency, which led to a $161 million charge for DirecTV.

Let’s take a look at some important numbers prior to forming an opinion on the stock.

E = Equity to Debt Ratio Is Weak       

The debt-to-equity ratio for is based on a five-year average. The debt-to-equity ratio for Comcast Corporation (NASDAQ:CMCSA) and Dish Network Corp. (NASDAQ:DISH) are current.

Debt-To-Equity

Cash

Long-Term Debt

DTV

3.98

$1.90 Billion

$17.53 Billion

CMCSA

0.61

$12.42 Billion

$40.46 Billion

DISH

69.46

$6.40 Billion

$10.39 Billion

 

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T = Technicals on the Stock Chart Are Mixed

DirecTV has had a good run over the past three years, but that momentum has stopped over the past month. It remains to be seen whether this is a short-term hiccup or a reversal.

1 Month

Year-To-Date

1 Year

3 Year

DTV

-7.24%

-1.93%

9.36%

55.42%

CMCSA

3.23%

10.39%

44.18%

179.30%

DISH

-2.17%

1.46%

30.79%

112.30%

 

At $49.19, DirecTV is trading below all its averages.   

50-Day SMA

51.50

100-Day SMA

51.06

200-Day SMA

49.95

 

E = Earnings Have Been Steady              

Earnings and revenue have shown steady improvement over the past few years, but it would be difficult for this pace to continue on the bottom line.   

2008

2009

2010

2011

2012

Revenue ($)in billions

19.69

21.56

24.10

27.23

29.74

Diluted EPS ($)

1.37

0.95

2.30

3.47

4.58

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue and earnings. This is always a good sign.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue ($)in billions

19.69

21.56

24.10

27.23

29.74

Diluted EPS ($)

1.01

1.07

1.09

0.90

1.55

 

Let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

With streaming gaining popularity by the day, the industry is hurting. However, DirectTV is still growing. Therefore, industry trends aren’t as much of a factor. If anything, trends support the company due to current growth as well as future potential in Latin America.

Conclusion

Valuation is good with a forward P/E of 8.32, margins are solid and likely to grow, cash flow is solid, and there is a lot of growth potential in Latin America. On the other hand, the balance sheet is weak, programming fees are likely to increase, and growth might slow in the United States. Overall, there are many positives as well as several concerns, which makes DirecTV a WAIT AND SEE.

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