DIRECTV Poised on Value-Added Services, Faces Competition

On Aug 28, 2014, we issued an updated research report on DIRECTV (DTV) – the leading U.S. satellite TV operator.

DIRECTV has delivered positive earnings surprises in all four quarters last year, with an average beat of 11.36%. Also, the company reported strong financial results for the second quarter of 2014 wherein both the top and the bottom line surpassed the Zacks Consensus Estimate.

DIRECTV has considerably improved its subscriber quality – i.e. shrank the proportion of subscribers with low credit ratings. With a higher-quality subscriber base, the company has implemented programming package price increases, and higher HD and DVR equipment service and lease fees in the U.S. This has led to higher APRU and margin expansion. Moreover, launch of value-added services coupled with continuous share buy-back plans are likely to act as catalysts for the company going forward.

On the flipside, severe competitive threat arising from large telecom and cable TV operators coupled with availability of low-cost video streaming companies like Netflix Inc. (NFLX) and Hulu will increase customer churn while moving ahead. Moreover, rising programming costs, foreign exchange currency risks and sluggish Latin American operations are near-term concerns plaguing the company.

Unlike other cable and large telecom operators, DIRECTV lacks the triple-pay service in its product portfolio which we believe is another disadvantage for the company. Meanwhile, the stock price has soared 50% over the last year and is currently trading at a 52-week high range.

Meanwhile, DIRECTV reached a definitive agreement with AT&T, Inc. (T) to sell its business to the latter for $48.5 billion. The proposed deal has been approved by the boards of directors of both the companies and now awaits the approval of regulators and DIRECTV shareholders. The deal is expected to close by the end of 2014.

Currently, DIRECTV carries a Zacks Rank #3 (Hold). Another stock worth considering in this sector is EchoStar Corp. (SATS) with a Zacks Rank #2 (Buy).