Some of the fastest growth in the world comes from the Southern Hemisphere. Burgeoning middle classes in Brazil, Argentina, and Venezuela offer unprecedented opportunities for multinational companies. This satellite television provider spotted this opportunity early on, and it's paying off big-time.
Satellite TV giant DIRECTV
Growth at a value price
DIRECTV has two businesses in very different positions. The company's North American operations are mature, steady, and high-cash-generating. But DIRECTV's Latin American operations are delivering high growth through value-oriented products to a market of 140 million eligible households. Big growth isn't hard to find, but trading at only nine times forward earnings, DIRECTV offers investors a great deal on its future.
CEO Michael White recently told investors that in 2011, half of DIRECTV's revenue growth and 80% of its profits came from Latin American operations. The rapid growth of household formations in Latin America, along with the low but rising pay-TV penetration in those households, is a harbinger of a great future for a company that stands ready to pick up new customers and offer services at the right price.
The dichotomy between the two segments has been an interesting experiment for the company. In the U.S., DIRECTV is a premium brand. Besides gaining new customers, the company focuses on upselling the existing subscriptions. The result is, as White mentioned, a steadily growing, cash-rich business. But the highly successful value-oriented service in Latin America could be applied to tap into the lower-income families in North America. The company is now examining ways to bring that high-growth, low-cash model to the States.
President of Latin American operations Bruce Churchill cites Brazil's middle-class boom as a main revenue driver for DIRECTV LatAm. Pay TV has penetrated U.S. markets much more extensively, but with further separation between the 1% and 99%, it makes sense to offer low-cost subscriptions.
Dishin' it out
DIRECTV's longtime competitor, Dish Network
Dish also seems to be focusing more on buying spectrum and competing with telecoms. In the meantime, 2011 subscriber growth turned negative with a net loss of 166,000 subscribers. To put that into perspective, DIRECTV added more than 660,000 subscribers in the U.S. alone, on top of 2 million-plus in Latin America.
Buying up wireless spectrum and competing with the telecoms is a more complicated business -- and one that is subject to intense federal regulation and lobbying for "gimmes." I would rather stick to a business growing bread-and-butter segments and doing what it does best.
What could bring DIRECTV back down to Earth? The company spends quite a bit on installation costs. It's nice for consumers, who often get free satellites and installation, but it's a serious expense for the company.
Programming costs are another issue. By now, everyone is familiar with Netflix's content burden. The streaming video provider has gotten slammed in the markets lately because it is simply too expensive for the company to acquire its content. DIRECTV has a similar struggle, but it's cushioned by much higher subscription rates than Netflix's $8.99 for streaming service.
A wolf in sheep's clothing
The value in DIRECTV may be a surprise to some investors, even though it's owned by some of the best value investors of all time. People tend to think that value can only be found in hidden, no-name companies, but there is no reason to cast off the large, well-known businesses. DIRECTV may be disregarded by value-hunters who think every potential scenario is priced into the stock, but the company's Latin American business could be viewed as an under-followed value opportunity itself. It's important to know that one can find value in companies of any size.
If you are interested in uncovering some more hidden value stocks, take a look at Fool analyst Joe Magyer's coverage at the Mecca of value investing: the Berkshire Hathaway shareholders meeting. It's sure to be full of great ideas and some classic Buffett-isms.
Fool contributor Michael Lewis owns no shares of the companies mentioned above. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway and Netflix. The Motley Fool has a disclosure policy.
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