Is satellite entertainment giant DirecTV
Sure, first-quarter results out yesterday were heartening: Subscriber growth helped DirecTV stem losses, prompting the market to push the stock up 5%. All the same, it's hard to find a good reason to buy into DirecTV right now.
DirecTV added 505,000 net additional subscribers, ending the quarter with 14.45 million. On the surface, that's great news. But investors expecting subscriber growth to translate into financial turnaround anytime soon may want to think again. The cost of acquiring and holding on to subscriptions remains high for DirectTV, and it's likely to stay that way as more and more players -- including cable operators and telcos -- grab for slices of the couch potato marketplace.
Then there is the additional spending -- about $1.2 billion needed this year alone -- to launch new Ka band satellites needed to deliver high-definition signals around the country. That kind of capital expenditure will hold free cash flow and earnings down. And until it gets the last of its new birds up in 2007, DirecTV will be handicapped compared to satellite rival Echostar
Then there is the "Murdoch" factor. Since Rupert Murdoch's News Corp.
DirecTV's valuation is at an all-time low. But trading at well above 60 times 2005 earnings, the stock looks pricey. By comparison, Echostar trades at just 17 times earnings.
Of course, there is the possibility that earnings could materialize from back-end-loaded growth. Over the long term, DirectTV's costs could drop significantly as the business begins to mature and its investments start to pay off after 2007. But until then, it's probably best to keep your enthusiasm for DirecTV grounded.
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Fool contributor Ben McClure doesn't own shares of any companies mentioned in this article.
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