This Is the Telco I'm Shorting

The worst telco isn't even a full-fledged telecommunications provider. Rather, DISH Network (Nasdaq: DISH  ) is a satellite-TV operator that, for me at least, provides:

  1. A lousy, overpriced product.
  2. Poor customer service.

Others say that DISH doesn't have the services to attract high-margin clients. "DISH has always gone for the bottom barrel customers and the current economic downturn is impacting that segment the most," wrote CAPS investor Ficus55 in April. "Also, in order to compete with the quality of other providers (cable, FiOS, DTV) huge infrastructure investments would be required. This company is a dud."

Ma Bell apparently agrees. AT&T (NYSE: T  ) recently switched to satellite peer DirecTV (Nasdaq: DTV  ) and will market its phone and Internet services as a bundle for DirecTV's customers.

Interestingly, this isn't the first time we've seen this. DirecTV is partnered up with all of the major U.S. telcos, including Verizon (NYSE: VZ  ) , Sprint Nextel (NYSE: S  ) , and DISH's hometown phone company, Qwest (NYSE: Q  ) , The Wall Street Journal reports. DISH, as you might expect, has no equivalent deals.

But that's not why I'll be shorting DISH in our Motley Fool CAPS investor intelligence database today. Why, then? I'm concerned about its balance sheet, which includes hundreds of millions of dollars of convertible debt that Ma Bell had wanted DISH to buy back. It didn't.

Today, DISH Network carries roughly $6.5 billion in debt, charging between 3% and 8%. DirecTV, by contrast, doesn't carry a convertible, but has $6.1 billion in debt, charging between 6% and 8.4%. Sound similar? Yes, but DirecTV wins here, too, because it has nearly twice the cash that DISH does.

Balance sheets still matter. DirecTV has a decent one, DISH Network doesn't, and I think that shareholders, sadly, will pay the price. Do you agree? Disagree? Let us know by signing up for CAPS today. It's 100% free to participate.

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Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. He hunts for the best of tech as a contributor to Motley Fool Rule Breakers. Here's how to try this market-beating service free for 30 days. Get access to all of Tim's Foolish writings.

Sprint Nextel is an Inside Value pick. You'll have to pardon The Motley Fool's disclosure policy. It left early to set its DISH DVR to record tonight's episode of Heroes.

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  • Report this Comment On October 07, 2008, at 6:17 PM, barleyguy wrote:

    I don't think this got a lot of views, since it may have never been on the front page. But for those that are here, I have some comments.

    - The comment on Dish Network's infrastructure needing upgrading is way off base, for two reasons. First, I'm very familiar with their technical infrastructure, and it is truly world class. 14 satellites (12 owned, 2 leased), and world class DBS uplink centers. (I would guess the person who made a comment on their infrastructure has never even seen it.) Second though, Dish does not own the infrastructure. They split into two companies, DISH and SATS, the first of January. Dish is the television company, in charge of acquiring programming agreements and selling the service to customers. Sats (Echostar) is the technical infrastructure, in charge of flying the satellites, uplinking signals, and most other technical duties.

    - Related to this split, Dish got most of the debt and Sats got most of the tangible assets. So from a debt survival perspective the split puts most of the risk on the DISH half of the company. Dish does still however have most of the external income, with a subscriber base of about 14 million. Sats gets most of their income by selling technical services to Dish, but now has the freedom to take on other contracts. Strategically, this also allows Dish to pursue delivery methods other than satellite sometime in the future.

    - Though Dish does have 6.5 Billion in debt, a significant part of this debt is a part of customer acquisitions. They essentially give away equipment and installation services to customers with the expectation that they will recoup the debt through subscription fees. This is of course a risky bet, much like Sony's bet of selling the Playstation 3 below cost. But at least the debt has a plan for being recouped.

    - Also on the topic of debt, Charlie Ergen (CEO and majority shareholder) has a net worth of 14 billion I believe, so his net worth is higher than the debt of the company. I have the honest belief that he is willing to keep the company alive that he has helped build over the last 25 years. Not guaranteed, but something to consider.

    That said, Dish stock is not a perfect bet in terms of short term gain. But I do have the belief that they are stable in the long term as a company. If I was personally investing in this direction, my money would go into SATS, the technical side of the company.

    ( Disclosure: I am a former Echostar employee (two jobs ago), and as a side effect of being an employee, I hold company stock in my 401K)

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