This morning, rural DirecTV reseller Pegasus Communications (Nasdaq: PGTV ) reported a marginal year-over-year decline in fourth-quarter revenue. A net loss, though improved for the quarter, nonetheless exceeded $37 million. It's perhaps fitting that the stock's symbol is PGTV; investors may want to seek parental guidance before jumping in.
At the very least, they should expect a wild ride. Over 52 weeks, the stock is up more than 150%, including a near double in the first three weeks this year. The latter was spurred by Fox Entertainment's (NYSE: FOX ) acquisition of 34% of DirecTV owner Hughes Electronics (NYSE: HS ) . Speculators hoped that Fox parent News Corp. (NYSE: NWS ) would settle and acquire Pegasus to resolve a legal dispute that had been under court-ordered mediation for over a year. Didn't happen. When Hughes terminated the discussions in February, Pegasus plunged 32% in a single day, only to recover lost ground in the ensuing weeks.
At heart, the dispute focuses on the length of the contract between DirecTV and Pegasus, the right to renew substantially the same terms, premium service fees, and launch fees. In other words, it's a dispute over a wide array of very important details.
The company's quarterly report notes that direct broadcast operating profits, as a percentage of revenue, increased to 28.4% from 24.8% -- before accounting for depreciation and amortization. The report and the conference call stressed that free cash flow was increasing sharply, while the call highlighted the credit quality of its customers. It would all sound good but for the declining sales.
After all, DirecTV, the leader in direct-broadcast satellite TV, reported a 39% fourth-quarter jump in owned-and-operated customers. Its largest competitor, EchoStar (Nasdaq: DISH ) , saw 20% growth in subscriber revenue. Satellite TV is clearly a growing business and the leaders are expanding rapidly. Even worse for Pegasus, while sales were declining, debt grew $100 million year over year.
Those considering the stock might also ponder the words of Hughes CEO Chase Carey: "We believe that Pegasus has an unrealistic view of its contractual position and, therefore, of its resulting business prospects and fundamental valuation. With every day that passes, both Pegasus' significance to DIRECTV and its value as a standalone enterprise diminish."
Carey is biased to be sure, but he may have a point. And the point is that with almost $1.4 billion in long-term debt and revenues that are stable at best, Pegasus needs to patch its relationship with DirecTV. Until it does, and sales start to increase, the parental rating for Pegasus remains "ES" -- extremely speculative.
Disagree? Knock it around on the Pegasus Communications discussion board.
Fool contributor W.D. Crotty owns stock in News Corp.
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