Sometimes you need look no farther than your boob tube for a decent investment
idea. Check out DirecTV (NYSE: DTV ), for instance, one of the top choices of my
stock-picking system this month. Its the largest satellite provider in the U.S.
with 19 million customers and a significant consumer base in Latin America of 9
million subscribers. DTV also owns 93% of Sky Brazil, 41% of Sky Mexico, and
100% of PanAmericana, as well as 65% of Game Show Network and three FSN regional
sports channels. DTV separates itself from the myriad subscription television
services by focusing on exclusive content and providing the most comprehensive
sports packages. DTV has an exclusive contract with the National Football League
to offer the NFLs premium content, but this contract expires in 2014, and there
should be tension when they renegotiate their contracts. For series creators,
DTVs size and nationwide following provides the securest and most accessible
means of reaching new and potential customers. As with almost all subscription
television providers, DTVs main strategy for attracting new clientele lies in
its limited time promotional discounts, hoping that consumers will continue with
their service. There is an inherent risk of people leaving after the promotional
period, but in the past DTV has been able to keep incoming numbers greater than
defecting customers. In the second quarter of this year, however, that was not
the case. DTV was able to add only 26,000 customers (a very small number for
this industry) and was not able to counter defections to other companies. DTV
claimed it was because of the competitive climate and economy, but as
Morningstar analysts noted, Comcast (NASDAQ: CMCSA ) has not shown any signs of
slowing growth. Luckily, DTVs Latin American business now accounts for 19% of
DTVs revenue and, excluding foreign exchange, these enterprises have increased
their revenue by 40% each year. However, this makes Morningstar analysts nervous
because DTV is subject to currency movements, political instability and economic
weakness in the region. Its recent second quarter contradicts the fact that DTV
is known for being able to increase margins when growth slows. When growth
slows, DTV has to spend more money on premium programming and customer
retention; this is supposed to be offset by the benefit of lower customer
spending. However, this quarter growth slowed and competition put pressure on
margins. In addition to the stress of slowing growth and margins, DTV has
authorized a $6 billion buyback of common stock. DTV has spent $1.5 billion of
the allotted money, and has $3 billion left to spend. This has brought the
company into $1.1 billion of debt, and while cash flow remains strong, it is
projected to outspend cash flow in 2011 with the $3 billion of buybacks and will
succumb to further debt. Its hard not to notice the changing television climate.
With more and more shows being offered free online and through companies like
Netflix (NASDAQ: NFLX ), the traditional television market is morphing.
Additionally, new corporations are moving in to take a piece of the television
market share. Verizon (NYSE: VZ ) and AT&T (NYSE: T ) have launched nationwide
advertising campaigns for their Internet based television services, and cable
companies have expanded their high-definition offerings to compete with the
specialty service providers. This may force DTV to increase its promotional
offerings, cutting into their margins further. In the long run, therefore, DTV
has a lot working against it. In the short run, DTV has to fear regulatory
changes, piracy, and satellite failures. Alongside this, the company has staked
much of its strategy on premium content, which it has no control over. Despite
the overwhelming negativity towards the future of DTV, the stock has been doing
well. Aside from a spill in July and August, which caused it to lose 20% of its
value over the course of two weeks, DTV has made a comeback, and has definitely
gained momentum this month. Looking at related industries over the past year we
can see positive growth in the television and telecommunications sectors.
Comcast is up 25.4%, AT&T up 5.2%, Verizon up 20.1%, and even Dish Network
(NASDAQ: DISH ), which had PR issues in 2008 when it came under fire for subpar
customer service and subsequently lost market control, is up 38.6%. The problems
that DTV will encounter are far enough removed that I dont believe they will
affect DTVs short-term momentum. Thus, keep holding at least through year-end.
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