DIRECTV (DTV +0.00%) continues its upward trajectory, again flirting with its 52-week high and posting higher figures than Wall Street had expected. While the satellite giant's Latin American operations have been its selling point in recent years, this past quarter showed strong resilience in the mature U.S. market. DIRECTV is an easy company to understand with two parallel paths to success: tacking on subscribers by the hundreds of thousands in developing areas and increasing average revenue per unit, or ARPU, in the mature ones. While the ultimate future of pay television remains up in the air due to the advent of streaming services in the competitive landscape, investors can bet that this top-notch management team will guide the company forward regardless.
Strong results
DIRECTV had a great 2013. The company saw its Latin American business grow sales by 10% and its subscriber base by a net of 1.2 million. On the domestic front, the company posted 6% revenue growth on the back of the aforementioned ARPU growth -- 5.4% for the year.
Free cash flow increased an impressive 14% to $2.61 billion. The operating efficiency is impressive considering that DIRECTV's Latin American growth program involves much thinner margins as the company scales up rapidly and offers bottom-cost products to the underserved Latin American pay-TV market.
Perhaps the biggest news to come from DIRECTV this week was the authorization of a massive $3.5 billion share buyback. While the market at large tends to rally behind these moves that encourage a higher EPS in coming years, buybacks are only truly effective if the stock is fundamentally undervalued. DIRECTV CEO Mike White mentioned the intrinsic value of the stock in management's fourth-quarter comments, saying that he believed the company is trading at a substantial discount to its underlying value.
If the past year is any indication of coming performance, White may be right. But still, some big-picture questions linger regarding the business.
Looming ahead
It's not news, but streaming-video services continue to make tremendous gains in the traditional pay-TV market. Many cable businesses struggle with declining video subscriber counts on a consistent basis, growing their own sales via broadband products instead.
DIRECTV is rumored to be prepping a "game-changing" streaming service. Details are scarce, but management has described the product as one that has a similar user experience to Netflix or Hulu, but on a smaller, more targeted scale. If DIRECTV is successful in this, it will be the first cable or satellite company to put out a formidable product in the space. Comcast's Xfinity streaming service, while improving, is still a clunky, unpredictable experience.
Beyond a streaming service, there are other questions surrounding DIRECTV's future that do not involve ARPU or Latin American subscriber growth. Speculation ran throughout last year suggesting that DIRECTV and DISH Network would join forces, uniting the former's industry dominance with the latter's ambitious broadband plans. Depending on the ultimate outcome of the proposed Time Warner Cable and Comcast deal, we may see even more pressure on this theory in 2014.
In the meantime, DIRECTV is sticking to its core business and winning at it. It remains one of the only traditional pay-TV providers that is seeing more customers come through the door. Its Latin American presence dominates the competitive landscape. If the company continues its outperformance, the $3.5 billion-share buyback will prove valuable to shareholders. Overall, this is still one stellar company that is worth investors' attention.
