Picking the best value between two similar-seeming stocks can sometimes be tricky -- but not always. In the contest between DISH Network (NASDAQ:DISH) and DIRECTV (NASDAQ:DTV), for example, there's simply no contest: DIRECTV stock is clearly the better value. Why?
DIRECTV is cheap
Priced at just 12.2 times trailing earnings, DIRECTV stock looks like a bargain by just about every measure imaginable. First off, its P/E is less than half that of pricier DISH Network, which costs a hefty 26.7 times trailing earnings.
Valued on projected (forward) earnings, the relationship holds up, with DISH costing 15.6 times what it's expected to earn next year, but with DIRECTV selling for less than 10 -- a valuation cheaper than most stocks in the Dow Jones Industrial Average (DJINDICES:^DJI).
And if the discount narrows a bit when considering free cash flow rather than GAAP net income, it doesn't disappear entirely: DISH stock sells for 16.6 times FCF. DIRECTV stock costs only 14.
DIRECTV has the best record -- and the best prospects
DIRECTV stock looks great in the rearview mirror, and even better when viewed through the windshield. Over the past five years, DIRECTV grew its annual sales twice as fast as its satellite-TV rival -- 11.6% per year on average, versus DISH's 5.2%. Going forward, earnings are expected to grow even faster than sales have in the past, with most analysts agreeing that DIRECTV will post compound annual earnings growth of 14.2%, versus DISH's plodding pace of just 5.2%
DIRECTV pays you best
Perhaps most important to investors, though, is that in getting a great deal on price, they're not giving up anything on quality. Even though DIRECTV stock costs so much less than DISH, the stocks' free cash flow yields are nearly identical. In fact, DIRECTV's is slightly superior to DISH's.
Measured by dividing a company's market capitalization (the price you pay for DIRECTV stock) into its free cash flow (the money your investment generates for you), DIRECTV offers investors a slightly superior "free cash flow yield" to DISH's. For every dollar you invest in a share of DIRECTV stock today, you can expect the company to generate nearly 6.25 cents' worth of real, cash profits on your investment.
DIRECTV may ultimately use this cash to begin paying a dividend, to buy back shares (increasing the size of your stake in the company for every share it takes off the table), or to reinvest in its business and maintain its lead over DISH for years to come. Any way you look at it, though, DIRECTV's ability to generate cash offers investors a great reason to invest.
And that, Fools, is the reason I think now's a great time to buy DIRECTV stock.
Fool contributor Rich Smith and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.