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DIRECTV (NASDAQ: DTV ) and DISH Network (NASDAQ: DISH ) are unquestioned competitors, both solidified as pay-TV leaders. Over the last five years, both have been tremendous investments, but looking ahead to 2014, which will prove to be the best investment?
What's the difference?
DISH is most certainly the market's favorite of the two companies. In five years it has rallied a whopping 440%, including 63% in 2013. DIRECTV's five-year 230% and one-year 40% returns are impressive, but much more modest.
The two companies have very different approaches. DISH is flashy, led by a charismatic chairman, Charlie Ergen, who has taken advantage of historically low interest rates to raise debt, finance high-profile acquisitions, and pursue mergers.
While DISH was able to acquire Blockbuster in bankruptcy, a proposed merger with DIRECTV and acquisition attempts of both Sprint and Clearwire were a failure by Ergen. However, in 2013, it was speculation and the attempted acquisitions that helped to produce such large gains. Even today we're seeing DISH soar higher on the prospects of a T-Mobile acquisition, which is yet to materialize.
DIRECTV is much quieter, producing under-the-radar growth and continuing to penetrate Latin America as an upside opportunity.
Sports will be most watched in 2014
Looking ahead, 2014 will be an important year for both DISH and DIRECTV, one that investors will watch closely.
DISH must reach an agreement with Walt Disney's (NYSE: DIS ) ESPN, which is one of the fastest-growing networks in the country.
Forbes estimates that ESPN is worth $40 billion, and this despite many of its large contracts with pay-TV providers not having been renewed in several years. However, in 2014, DISH and Disney will enter aggressive negotiations for a deal that could both affect margins for DISH and produce further growth for Disney.
Particularly, some analysts estimate that carriage fees could rise from a current industry-high $5.54 per subscriber to $7.65. This will be a closely watched development for DISH, and depending on the outcome could drastically increase the value of ESPN. Hence, Disney could have yet another good year with increased margins on ESPN.
DIRECTV is still under a 10-year contract with ESPN that was signed in 2005, meaning that bridge won't be crossed in the immediate future. However, 2014 will be the year of NFL negotiations.
In December, Bloomberg reported that DIRECTV and the NFL were nearing a contract for rights to Sunday Ticket. The current four-year, $4 billion contract expires at the end of 2014.
Sunday Ticket has been a growth driver for DIRECTV, and it's very important that DIRECTV completes a new deal quickly, as rumors that online-streaming providers (possibly Netflix) are interested in acquiring rights to the service.
Clearly, both DISH and DIRECTV will have to negotiate new contracts with ESPN and the NFL, respectively, giving both a catalyst and also a potential risk. But as an investor, you almost have to like that DIRECTV is "nearing a contract" for rights to Sunday Ticket, while DISH is expected to negotiate aggressively with ESPN, thus creating an overhang. Moreover, when you consider DISH's prior programming issues with AMC, threatening to remove The Walking Dead from DISH subscribers, investors have to believe that the ESPN/DISH ordeal could linger.
Will 2014 be a good year?
While increased programming costs have been a hot topic throughout the pay-TV industry, both DISH and DIRECTV look poised for rather strong years.
Of the 24 analysts who cover DISH, the consensus is for expectations of 2.7% sales growth in 2014. Yet, due to expansion in Latin America and continued new subscription growth, DIRECTV is actually expected to grow faster, at 5.6% year over year.
Moreover, DIRECTV is expected to outperform DISH in growth despite less of a price hike. Reportedly , DIRECTV will increase the price of its base packages by 4.4% versus 5.5% for DISH, thus making DIRECTV's growth even more impressive.
Lastly, if we want to incorporate 2013, investors should also note that DIRECTV is coming off a year with 6.4% growth compared to just 0.7% growth for DISH.
With all things considered, it seems that DIRECTV is a better-performing company, and not to mention, in an industry where margins are expected to be pressured due to increased programming costs, DIRECTV is guiding for 15% annual earnings-per-share growth for the next two years.
Where's the value?
Now, for the real value clincher: DISH trades at 1.8 times sales and 30 times next year's earnings; DIRECTV trades at just 1.1 times sales and 12 times forward earnings. Investors might wonder how this is possible, especially considering DIRECTV's superior growth. Honestly, there's no real explanation.
Perhaps the premium placed on DISH is a result of its acquisition attempts over the last year, and the upside speculation it created. For the most part, DISH's stock never came down after these attempts failed to materialize. As a result, this has left a massive disconnect between the fundamental performance and valuation of these two companies.
Essentially, DISH has become the investment favorite due to speculation, while DIRECTV has quietly been producing industry-best growth. For investors, the real upside value is apparent: DIRECTV has the most to gain, the least to lose, and is poised to be the better-performing company for 2014.
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