DirecTV (NASDAQ:DTV) gave investors yet another reason to rally behind the stock this week as it reported a better-than-expected bottom line. As opposed to many pay-TV businesses that have a hard time maintaining video subscribers in the mature, disrupted U.S. market, DirecTV continues to add new users to its legions and further solidify its position as the biggest pay-TV business in the industry. Though the biggest news revolves around a potential merger between DirecTV and telecom giant AT&T (NYSE:T), there are plenty of reasons to love this king of satellite.
More of the same
It's wholly unsurprising but nonetheless impressive to see that DirecTV tacked on another six-digit round of net subscriber gains for its fiscal first quarter, led again by huge growth in Latin America. Passing 38 million subscribers total, the company added on 361,000 net users in LatAm, with an additional 12,000 in North America.
DirecTV's approach for the last few years has been meaningful subscriber growth as the biggest pay-TV presence in Latin America, with improving profitability sourced from the more mature domestic market. The company has steadily increased ARPU (average revenue per unit) in North America, with a recent gain of roughly 4%. Though year-over-year subscriber gains were slower in the segment (the company tacked on 14,000 in 2013's first quarter), total additions and churn rate remained consistent with prior periods.
Free cash flow increased a massive 25% to $886 million.
Capturing the attention of most is last week's reported story that AT&T had approached DirecTV about a takeover. If it happened, the combined company would be the second biggest pay-TV operator in North America, right behind Comcast. It would also have considerable pricing power in content-fee negotiations -- strongly benefiting investors in the newly formed company. Whether a deal will emerge is still to be determined.
Why it'll keep moving
This business is built for long-term gains. Things would, of course, change substantially if a deal emerges between DirecTV and AT&T, but until there is a final answer on that, investors are wise to remain focused on the operating business.
DirecTV has already rewarded investors with a two-year gain of nearly 70%, even while naysayers tout Internet streaming and content costs as a huge headwind facing the company. While the concern is valid, the company's competitive position remains strong, especially in Latin America, where pay-TV penetration is relatively low (below 50%) and competition is minimal.
Going ahead, investors will want to keep an eye on the usual suspects -- ARPU growth in the North American segment, and net subscriber gains in Latin America. These are the two most important things to watch, even if subscriber gains slow in the U.S. and Canada. All in all, DirecTV remains a great pick for price-conscious investors with an eye for growth.
Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.
Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends DirecTV. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.