In case you haven't noticed, DIRECTV (NYSE: DTV ) is doing a great job. At a recent investor meeting, CEO Michael White discussed the numbers in front of a small army of analysts, and the numbers were good. But you don't need to stare at financial statements to see the earnings power of this company -- the strategy is what's really creating value, and what will make this company a portfolio powerhouse.
So what makes DIRECTV a better business than, say, DISH Network (NYSE: DISH ) ? Well, for one, DIRECTV is focusing on its core business whereas DISH is eagerly buying up spectrum in hopes of creating a tremendous 4G network. Spectrum is a tough game, with heavy government oversight and fierce competition from the bigger and better-funded cable giants like Comcast (NYSE: CMCSA ) .
In the meantime, DIRECTV is growing subscribers at a record rate -- mainly because of Latin America. As I mentioned in a previous article, Latin America offers DIRECTV a market of 140 million households eligible for pay TV. DISH Network is not focused on penetrating this emerging market, so it's essentially DIRECTV's for the taking. And they are taking it: In the first quarter of this year, net additions to the LatAm segment doubled year over year. The company added over 600,000 net subscribers in one quarter! Countries such as Argentina, Venezuela, and Colombia are driving growth, all places where pay TV penetration is still in its infancy and offers immense opportunity.
DIRECTV's approach to the Latin American middle class is spot-on. The company is offering value-priced services that bring customers in the door and allow for up-selling down the line. As opposed to U.S.-operations, which are a higher-yielding yet much slower growing business, the Latin American offerings are showing tremendous traction.
The director of LatAm for DIRECTV is Bruce Churchill and he could be the company's greatest asset currently. Bruce is the mastermind of the strategies outlined above and has helped lead the company to its 11th consecutive quarter of double-digit revenue growth.
Other impressive figures
DIRECTV bought back over a $1 billion worth of shares in the first quarter alone, which drove EPS to grow 26% year-over-year. The company's SKY brand has been growing in the double digits in Brazil and Mexico -- driven, again, by a growing middle class.
As for U.S. growth, it's obviously a much more mature market, with growth rates in the mid-single digits. Revenue growth for the quarter was up 7% in the United States, an industry-leading number. The U.S. model is a higher-margin business that continues to be the bread and butter for DIRECTV while it focuses the majority of its attention on LatAm.
The main problem facing DIRECTV today is the cost of installing and upgrading systems for consumers. For years now, both DIRECTV and DISH have been offering new customers free or nearly free equipment and installation when they sign on to a programming contract. It's a necessary move to compete with cable companies, but it costs a fortune.
The exchange rates, especially with Brazil's real, are hurting bottom-line growth for DIRECTV. With such a huge emphasis on LatAm comes the inevitable battle over currency. A year ago, this was not as big of an issue for the company, but the stronger currencies down south are weighing heavily on DIRECTV's ability to grow net income in line with its massive revenue growth.
Still the best
DIRECTV's core operations will ultimately push the company beyond its competitors. I'm not sure who's looking at the numbers over at DISH, but while the company is lobbying and battling over airwaves (and dropping AMC), its subscriber growth rates are not in the same league as DIRECTV's. The billions of dollars DISH is spending may end up paying off if it can get its 4G network off the ground, but that is years away and subject to too many external forces for me to feel comfortable making an investment.
Comcast is similarly investing billions in other businesses beyond core TV operations. It is a different beast altogether, and a much bigger one than either satellite provider.
At nine times forward earnings, you can pick up a high-growth company at a value price. DIRECTV is a value investors' dream. It's not dirt cheap, but the margin of safety given its future earnings power makes this company severely undervalued in the long term.
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