As a consumer, I'm a big fan of EchoStar Communications' (NASDAQ:DISH) Dish Network satellite-television service. Just a couple of nights ago, in fact, my wife and I used the digital video recorder (DVR) that came gratis with our subscription to plow through umpteen episodes of Time Warner (NYSE:TWX) unit HBO's "Curb Your Enthusiasm."
Now I realize that Larry David's low-budget (but endlessly hilarious) sitcom probably isn't the best example to cite when extolling the virtues of satellite television's visual superiority to cable. I will say, however, that Larry's bald head looks amazing relative to the reception we were getting back when we had digital cable, an experience that, comparatively speaking, was akin to watching TV with aluminum-foil-wrapped rabbit ears.
Still, satisfied Dish Network customer that I am, I'm not nearly so sanguine about EchoStar as a prospective investment.
To be sure, with a stock price currently hovering near a 52-week low of roughly $27, the thing looks cheap by any number of financial metrics. Its current price-to-earnings ratio, for starters, is under 10, a figure that's roughly half that of the broader market and just a quarter that of the company's industry peers. EchoStar looks relatively inexpensive on a price-to-sales and price-to-cash flow basis, too.
Looking ahead
Sometimes, however, decent companies with good products sport relatively moribund multiples for good reasons: Their forward-looking prospects are hazy, and their backward-looking financial metrics are erratic, making it tough to arrive at a valuation for the firm with much confidence.
Let's take the former point first. Just now, Mr. Market seems to be offering shares of EchoStar at a discount, at least in part because the firm operates in a cut-throat competitive environment. DirecTV Group (NYSE:DTV) represents, um, a direct threat, while well-heeled cable concern Comcast (NASDAQ:CMCSA) continues to ramp up revenue by upselling additional services such as high-speed Internet connections and digital telephony to its core cable television customers.
Time Warner looms large in EchoStar's space, too, as does the Bethpage, N.Y.-based Cablevision Systems (NYSE:CVC), a company that may soon be taken private.
Turn the page
With that as a backdrop, let's turn to the topic of valuing the company and borrow a page from Warren Buffett's playbook. One of the Oracle of Omaha's cardinal precepts is that, while the market may be a voting machine in the short term, over the long haul it's a weighing machine. With that insight in mind, the $64,000 valuation question quickly becomes this: Should you wish upon an EchoStar right now? Or to put it in less musical, but more financially correct terms, what is the present value of the firm's future earnings?
One way of answering that question is to use discounted cash flow (DCF) analysis. As it happens, the Fool's Inside Value newsletter service provides a handy-dandy DCF calculator designed -- as newsletter chief Philip Durell puts it -- "to give a rough-cut valuation of a company so that you can decide in a matter of minutes whether additional research is warranted."
Being a rough-cut-to-the-chase kinda guy, I love that "matter of minutes" part. And sure enough, after collecting and assessing the information required for such calculator fields as "Discount Rate" -- i.e., the rate of return you require as an investor given a company's business risk -- and the earnings growth rates that analysts expect of EchoStar over various time periods, it turns out that, even with its seemingly depressed multiples, the company is just about fairly valued right now.
Back to the future
That, however, is just the number-crunching portion of the valuation show and, given EchoStar's rather erratic financial history and uncertain future, it's best to take that quantitative result with a grain of salt -- and perhaps even with a full shaker of the stuff.
Ultimately, the investment case for (or against) a relatively racy growth company like EchoStar has to be built as much upon scuttlebutt as quant work. And perhaps even more.
With that in mind, I wouldn't count on this Star, at least not at its current price. Indeed, in a recent conference call with analysts, even CEO Charlie Ergen, while noting "some improvement on the margins," characterized the Direct Broadcasting Satellite (DBS) industry in general as being in a holding pattern. He also noted a number of, ahem, "challenges" that lie ahead. Among other things, Ergen pointed to emerging competitive threats from both cable and telephone companies.
I admire the candor there, and make no mistake: Ergen certainly feels that EchoStar is strategically well-positioned to rise to the occasion. The firm's major competitors, however, feel the same way. And with all the above in mind, I'd wait for a greater discount before trying to catch this Star.
Time Warner is a Motley Fool Stock Advisor recommendation.
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Shannon Zimmerman is the lead analyst for Champion Funds and doesn't own shares of any of the securities mentioned. The Fool has a strict disclosure policy, and you can read all about it by clicking right here
