We reiterate our Neutral recommendation on NET Servicos de Comunicacao S.A. (NETC), which implies the stock will perform in line with the broader market. The company reported strong financial results for the second quarter of 2011 surpassing the Zacks Consensus Estimates.
NET Servicos is generating commendable Pay TV subscriber growth despite facing stiff competition from several aggressive wireless and satellite service providers in the Brazilian broadband market.
We believe NET Servicos is well positioned with respect to several key operating metrics, including increasing ARPU, better cash flow generation, and continued growth in revenues. On the other side, we believe growing operating expenses coupled with the volatility of foreign currency exchange rates are the main causes of concern. Meanwhile, the stock price has dropped by nearly 35% in the last year, which providing a cushion for further downslide.
The Pay-TV segment continues to deliver good results due to the consolidation of Vivax on May 2007. At present, NET Servicos commands 46% market share in Brazil. Growth in this segment was attributable to the launch of Net Digital HD Max, the first Pay-TV service in Brazil with high definition content.
NET Servicos has a smart mix of products creating synergies within all its business segments. The digital cable service provides high quality broadcasting and video-on-demand services. At present, the company has more than 23.5 million pay-TV subscribers.
Despite the stellar performance of the broadband and VoIP businesses, this industry remains quite competitive. There always remains the risk that competition will have a negative effect on the operating margin of NET Servicos.The company is facing stiff competition from Brasil Telecom S.A. (BTM), Tele Norte Leste Participacoes S.A. (TNE), and Telefonos de Mexico (TMX) in the Brazilian telecommunications market.
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