Is DirecTV Unstoppable?

With shares of DirecTV (NASDAQ:DTV) trading at around $63.99, 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

Understanding the DirecTV situation is simple. Business is slowing on the domestic front, but it’s exploding in Latin America.

Latin American subscribers have increased 28.9 percent year-over-year, and it’s also still early in the game. Remember when DirecTV was new and exciting in the United States? Well, that’s the situation in Latin America. If Latin American trends follow U.S. trends, then there are many years of growth ahead before DirecTV loses momentum. And losing momentum isn’t a guarantee. Since DirecTV has already experienced slowing growth in the United States, it’s likely to do its best to formulate a plan to not let the same thing happen in Latin America. Perhaps some form of innovation will take place. It’s doubtful that the company will rely on cutting costs to keep the bottom line steady when growth slows.

As far as the domestic market goes, the situation isn’t as bright. The good news is that out of Comcast Corporation (NASDAQ:CMCSA), Time Warner Inc. (NYSE:TWX), Dish Network (NASDAQ:DISH), and DirecTV, only DirecTV saw an increase in net subscribers in 2012. However, the rate of growth has slowed substantially, and future losess in net subscribers seems to be inevitable. DirecTV is doing its best to retain customers.

Overall, DirecTV expects EPS growth between 20 percent and 25 percent in the coming years. It’s also committed to buying back stock. The biggest headwinds are increased programming costs and slower growth in the United States. Another smaller headwind is Venezuelan currency devaluation. The Venezuelan market accounts for approximately 3.5 percent of revenue. However, these headwinds should be overcome. Just take a look at the last quarter as a recent example.

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The chart below compares fundamentals for DirecTV, Comcast, and Dish Network.

DTV CMCSA DISH
Trailing P/E 13.57 18.21 35.77
Forward P/E 10.75 15.59 16.66
Profit Margin 9.61% 10.18% 3.46%
ROE N/A 14.21% 360.32%
Operating Cash Flow 5.41B 14.83B 1.84B
Dividend Yield N/A 1.80% N/A
Short Position 1.90% 1.10% 2.10%

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

T = Technicals Are Strong

DirecTV has outperformed its peers year-to-date. It’s also the best-situated going forward.

1 Month Year-To-Date 1 Year 3 Year
DTV 14.17% 27.57% 34.52% 70.05%
CMCSA 2.83% 16.14% 49.80% 157.8%
DISH 3.14% 6.62% 29.38% 97.06%

At $63.99, DirecTV is trading above its averages.

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50-Day SMA 57.12
200-Day SMA 52.47

E = Earnings Are Strong

Earnings have been very impressive. Revenue has also increased for three consecutive years. This is impressive, considering many companies throughout the broader market suffered a revenue decline in 2012.

Fiscal Year 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.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in billions 7.05 7.22 7.42 8.05 7.58
Diluted EPS ($) 1.07 1.09 0.90 1.542 1.20

Now 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 Might Support the Industry

Trends don’t support the industry in the United States. The losses in net subscribers throughout the industry are an example. Many consumers would prefer not to pay for programming they don’t watch. That said, trends strongly support the industry in Latin America.

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Conclusion

Revenue and earnings have consistently improved on an annual basis, capital allocation is superb, and the stock should be somewhat resilient if any stock market corrections should occur. In addition to those factors, analysts love the stock: 12 Buy, 10 Hold, 1 Sell.

DirecTV is simply in the right place at the right time in Latin America, and it’s still early in the game. Therefore, DirecTV is still an OUTPERFORM.

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All content posted should never be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions.

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