Here's Why DISH Network Doesn't Offer Any Value

The higher relative value that DISH Network trades at compared to DirecTV reduces any thoughts of the stock being an attractive investment at the current level.

May 23, 2014 at 1:00AM

With the recent buyouts in the video subscriber area, DISH Network (NASDAQ:DISH) becomes a speculative target for other cable and wireless network operators. The second-largest satellite provider offers investors a large subscriber base of 14.1 million and a unique asset, assuming DirecTV (NASDAQ:DTV) consummates the merger with AT&T (NYSE:T). At the same time, DISH faces tougher competition going forward from a DirecTV, now backed by the bigger AT&T that offers the potential triple play of pay TV, broadband, and wireless services.

DISH Network offers a unique asset to the market, whether via an acquisition from a major cable operator or a wireless provider such as Verizon (NYSE:VZ). In a lot of cases, the integration of a major competitor can leave the independent provider with an advantage of being focused on the target market. Unfortunately, a potential acquirer must overcome some hurdles to justify any deal.

Not cheap
The investment decision gets difficult when reviewing the valuation. With DISH more than doubling over the last couple of years, it doesn't offer investors a clear bargain, despite the unique asset. For the last 12 months, DISH generated adjusted EBITDA of $3.24 billion. Using the metric from the DirecTV deal, AT&T was only willing to pay 7.7 times that 2014 metric. With DISH trading at slightly above that metric already, investors don't have much in the way of upside potential on any deal.

Another issue is that adjusted EBITDA might be a tough metric to justify paying up for the second-largest satellite provider. The company isn't nearly as profitable with interest expenses causing a big hit to net income. For the first quarter, the company spent $37 million more on interest than in the prior-year period, to reach $161 million for the quarter.

With DISH trading at 30 times 2015 earnings, and DirecTV selling for around 14 times next year's earnings, potential suitors will have a difficult time justifying a higher price than the current market price.

Struggling margins
DISH Network generates meager profits, considering the size of the company. But it isn't unusual for a secondary company in any business to see lower margins. Right now, subscriber-related costs eat up roughly 58% of revenue. By the time satellite and general administrative expenses are added up, the company only pushes roughly 20% to the EBTIDA line. At that point, high depreciation and interest expenses, combined with taxes, leave only roughly 5% for the bottom line.

DirecTV gets about 7.5% to the bottom line from subscriber costs that eat up only about 50% of revenue. In fact, excluding Venezuelan currency devaluation charges, DirecTV has a profit margin approaching nearly 10%.

AT&T forecasts saving $1.6 billion via cost synergies, so an acquirer of DISH Network would need a plan to substantially improve costs in order to justify a deal at a valuation in excess of that paid by AT&T.

Bottom line
With video subscribers a hot area, and DISH Network offering a unique asset via the remaining independent satellite network, investors will have a lot of interest in the stock. The numbers just don't add up for other cable or wireless providers to make a bid, with the stock already trading at a premium over the deal value obtained by DirecTV. On top of that, the prime candidate for a buyout offer -- Verizon -- made it clear that the $60 billion in debt added to the balance sheet to buy the rest of Verizon Wireless takes it out of the market for DISH.

Based on these facts, an investment in DISH Network at these prices doesn't add up.

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Mark Holder owns shares of AT&T and DirecTV. 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.

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