Warren Buffett is, famously, not a fan of tech stocks. The celebrated investor says that he looks for "businesses in which I think I can predict what they're going to look like in ten or 15 or 20 years," and the tech sector certainly does not fit that bill.
In light of that, why does Buffett's Berkshire Hathaway (BRK.A 0.64%) (BRK.B 0.54%) own a huge position in satellite TV service provider DIRECTV (DTV.DL)?
Buffett 2.0
The short answer is, it wasn't Buffett who picked the stock. At the beginning of this decade, the Octogenarian investor and his now 90-year old partner Charlie Munger decided to bring on two relatively young portfolio managers, Todd Combs and Ted Weschler. The pair soon graduated to making large-scale stock picks for Berkshire Hathaway.
The first such buy was DIRECTV, and it became a big position. The company revealed in November 2011 that it began buying the stock, and the position eventually peaked at around 36.5 million shares at the end of last year. Since then, the company has sold off chunks of that position; it last reported that it held 23.4 million shares.
Compared to Buffett, Combs and Weschler are low-profile guys and give very few interviews or public pronouncements. What's more, the Oracle of Omaha has said little in Berkshire's famous annual letters to shareholders regarding the stock, likely because he didn't select it himself.
So it's hard to get inside the minds of the Berkshire brain trust to say conclusively why they pulled the trigger on DIRECTV. Regardless, the stock has numerous aspects that make it obviously appealing for value investors like Buffett and the boys.
One big satellite
In terms of publicly traded satellite TV providers, there are really only two companies in the space -- DIRECTV and DISH Network.
Of the two, DIRECTV is very much the larger in terms of revenue, market capitalization, and subscriber base. Of late it's also got the edge on bottom-line profitability, posting wider net margins than its rival.
DTV Profit Margin (TTM) data by YCharts
DIRECTV also has extensive operations in the juicy market of Latin America. Unlike the saturated United States, pay TV in the countries south of our border is still a growth industry, with the firm's subscriber count more than quadrupling since 2007.
Not every financial figure for DIRECTV is so rosy, though. Satellite operation is expensive, and the firm has racked up long-term debt of over $18 billion. That number is more than double its quarterly revenue, and comprises 83% of its total liabilities.
Calling up big profits
But for one giant investor, DIRECTV's positives far exceed its negatives. The investor is giant telecom AT&T (T 1.30%), which this past May announced a deal to buy the company for over $48 billion in a mix of cash and stock. AT&T is also to assume its target's net debt.
DIRECTV stock saw a boost of around 12% in the wake of the announcement. The buyout hasn't yet cleared the key regulatory hurdle of Federal Communications Commission approval, so investors are a bit wary; at the moment, DIRECTV trades almost $10 shy of the $95-per share amount of the deal.
Regardless, for Berkshire DIRECTV is already a windfall. In Q4 2011, when the investment company bought the bulk of its stake, the stock traded roughly in the $42 to $47 per share range; when Buffett's gang made its big sale earlier this year (at some point in Q2, not coincidentally the quarter AT&T made its announcement) it changed hands at $74 to $88.
That's quite a difference, and when multiplied by those 11 million-plus shares it unloaded Berkshire took home a payday well in the nine-figure range.
More where that came from
The AT&T-DIRECTV tie-up will probably get the nod from the Fed's regulators. Although there's recently been a wave of consolidation -- most notably the proposed Comcast/Time Warner Cable marriage -- enough competition remains in the TV broadcast market to allay fears of dominance by one or a group of providers.
Meaning that Berkshire Hathaway, with its 23 million remaining shares in DIRECTV, will almost certainly make even more from the stock's rise to full buyout price. Once again, the company is in front of a big payday. Warren might not be enamored of tech stocks as a class, but you can bet he likes the return DIRECTV's produced, and the gains it stands to make in the near future.
