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DIRECTV After Earnings: Positioned to Outperform

Source: DIRECTV.

DIRECTV (NASDAQ: DTV  ) is being hurt by unfavorable currency fluctuations in Latin America, but the company is still generating healthy growth rates while outperforming competitors such as Time Warner Cable (NYSE: TWC  ) and DISH Network Corporation (NASDAQ: DISH  ) by a considerable margin. In terms of growth versus valuation, DIRECTV could be an attractive alternative for investors.

Solid performance
Sales during the first quarter of 2014 came in at $7.86 billion, a 4% increase versus $7.58 billion during the first quarter of 2013 and below analysts' forecast of $7.92 billion. Adjusted earnings per share were better than expected, though; DIRECTV delivered a 14% increase in adjusted earnings per share to $1.63, versus the average Wall Street forecast of $1.49.

In the U.S., DIRECTV is mostly relying on rising average revenues per user -- ARPU -- as the main growth driver, since a high level of market penetration in a mature industry limits the company's ability to grow its subscriber base.

Revenue in the U.S. increased by 5% to $6.09 billion during the quarter. The company added only 12,000 net subscribers during the period, ending the quarter with a total of 20.26 million U.S. subscribers, an increase of 0.8%, versus 20.1 million U.S. subscribers at the end of the first quarter of 2013. 

Growing ARPU was responsible for the lion's share in terms of sales growth in the United States. ARPU increased 4.3% to $100.16 versus $96.05 in the same quarter of the prior year. This was due to higher advanced receiver service fees, price increases on programming packages, higher fees for a new enhanced warranty program, and increased ad sales and commercial business revenues. Higher prices were partially offset by increased promotional offers.

DIRECTV Latin America owns approximately 93% of Sky Brasil, 41% of Sky Mexico, and 100% of PanAmericana, which covers most of the remaining countries in the region. 

The company was hurt by economic headwinds and unfavorable currency fluctuations in Latin America during the quarter, but DIRECTV is still delivering healthy growth in its subscriber base in Latin America and sound financial performance when adjusting for currency fluctuations.

DIRECTV Latin America ended the period with 11.93 million subscribers, up 9.3% versus 10.91 million subscribers in the first quarter of 2013. Adding the 6.15 million subscribers from Sky Mexico, which is not consolidated, would bring the total subscriber base in Latin America to 18.08 million.

Currency devaluations had a big negative impact during the quarter. While U.S dollar sales in Latin America declined by 0.4% in the period, revenue in the region increased by a remarkable 20% when excluding currency fluctuations. 

DIRECTV vs. Time Warner Cable and DISH Network
DIRECTV has materially outperformed competitors Time Warner Cable and DISH Network in recent years, and recent earnings reports confirm that the company continues beating the competition.

DTV Revenue (TTM) Chart

DTV Revenue (TTM) data by YCharts.

Time Warner Cable reported a 2% revenue increase during the first quarter of 2014 to $4.57 billion. However, the company lost subscribers and sales in its residential video segment during the period, so DIRECTV seems to be widening the gap against Time Warner Cable in pay TV.

Time Warner Cable lost 34,000 residential video subscribers during the quarter, ending the period with 11.16 million. Sales in that segment declined by 6.6% to $2.5 billion, versus $2.7 billion in the first quarter of 2013. 

DISH Network is scheduled to report earnings for the first quarter of 2014 on May 8. However, the company doesn't enjoy the same growth opportunities as DIRECTV in Latin America, so subscriber growth is likely to continue lagging that of DIRECTV in the coming quarters.

DISH Network ended 2013 with 14.057 million pay-TV subscribers, almost flat versus 14.056 million subscribers at the end of 2012. Pay-TV average monthly revenue per subscriber performed much better, though, rising to $80.37 during 2013 versus $76.98 in 2012.

In spite of its superior financial performance, DIRECTV trades at a lower valuation level than both Time Warner Cable and DISH Network. The company carries a P/E multiple in the area of 15.8, versus almost 20 for Time Warner Cable and a much higher P/E ratio of 35.5 for DISH Network.

When considering growth and valuation, DIRECTV looks well positioned for solid returns in the years ahead.

Foolish takeaway
In spite of the negative impact from economic headwinds in Latin America, DIRECTV continues delivering solid performance while outgrowing competitors such as Time Warner Cable and DISH Network by a substantial margin. Considering both growth and valuation levels, the company looks well positioned to deliver above-average returns for investors.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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