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Investment Overview for DirecTV (NASDAQ:DTV)
DirecTV is a direct broadcast satellite service based in California, which transmits digital satellite television and audio to households. The company makes money through subscriptions to its satellite TV service provided to consumers in the U.S. and Latin America. DirecTV competes with other satellite service providers such as Dish Network and EchoStar, cable operators such as Comcast and Time Warner Cable, and telcos such as AT&T and Verizon, which offer fiber optic TV service. Additionally, DirecTV makes money through advertising on some of its US channels.
In 2014, AT&T announced an agreement to acquire DirecTV in a stock and cash deal for $95 per share. The purchase price implies a total valuation of $67.1 billion for DirecTV including its debt. The companies expect cost synergies of over $1.6 billion annually within three years of completing the merger, primarily on account of the increased scale of their video subscriber base. The deal is currently pending approval with the regulatory authorities.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of DirecTV's value that present opportunities for upside or downside to the current Trefis price estimate for DirecTV:
US Satellite TV
- DirecTV pay-TV Market Share: We estimate this figure to increase slightly in the coming years and be around 21% by the end of our forecast period as opposed to 20.3% in 2014. However there could be about 10% upside to our price estimate if DirecTV can lift its market share to 23.5% by the end of our forecast period. On the other hand if this figure falls down to 18.5%, there could be downside of similar order.
- SG&A as % of Gross Profits: We estimate this figure to remain around current levels of 42-44%. However, there could be an upside of over 10% to our price estimate if this figure were to fall slowly to 38%. On the other hand, if the company can not handle the costs effectively and this figure were to rise to 48%, there could be downside of a similar order.
For additional details, select a driver above or select a division from the interactive Trefis split for DirecTV at the top of the page.
DirecTV US - Digital TV and HD/DVR
The majority of DirecTV's value comes from its US operations due to the size of DirecTV's U.S. subscriber base (more than 20.3 million in 2014) which is considerably larger than the size of its Latin America subscriber base (just over 12.4 million).
Additionally, DirecTV derives significant value from charges related to HD/DVR equipment rentals in the U.S.. Pricing of DirecTV's services are comparable across both markets (US and Latin America)
- US Pay TV Market Size: The U.S. Pay TV market includes cable providers such as Time Warner Cable, Comcast and Cablevision, satellite providers such as DirecTV and DISH Network, and telecom providers such as AT&T and Verizon that offer fiber optic TV services. Approximately 86% of TV households in the US subscribe to Pay TV services. In comparison, the Pay TV market in DirecTV's Latin American markets represents a fraction of U.S. pay-TV market.
- Pay TV Market Share: DirecTV had 20.3% market share in the U.S. Pay TV market representing 20.35 million DirecTV subscribers by the end of 2014. We forecast that DirecTV's market share will remain relatively flat with total U.S. DirecTV subscribers reaching close to 21.4 million by end of our forecast period. In comparison, we forecast DirecTV subscribers in Latin America growing to about 17.3 million by the end of our forecast period.
Competition rather than Cooperation with Telcos (e.g. AT&T and Verizon)
Before AT&T's U-verse and Verizon's FiOS fiber optic TV services were launched, telcos and satellite providers would team up to provide a bundled TV, Internet and phone service to compete with triple play offerings from cable operators such as Comcast and Time Warner Cable. However, the telcos now compete with satellite providers in certain areas and the level of competition will continue to increase as telcos continue to roll out their TV services.
Fiber-based providers represent one of the fastest-growing sectors in Pay TV market
Several large telcos are upgrading old copper wire lines with fiber optic lines in their markets. The fiber optic lines provide high capacity bandwidth, enabling these companies to offer increased HD content and ability to bundle services.
Fast growth in Latin America
DirecTV is witnessing fast growth in Latin America where its subscriber base grew from 3.3 million in 2007 to 12.47 million in 2014. Interestingly, this high growth is not coming at the expense of ARPU (average revenue per subscriber). Latin American consumers are increasingly adopting advanced services thereby providing room for ARPU growth in local currency terms as well. However, unfavorable currency impact has led to the decline of ARPU in dollar terms in recent years. Additionally, capital expenditures remain on higher side due to rapid expansion phase.
Alternative platform threat
DirecTV in particular, and pay-TV service providers in general, face threat from emerging online video platforms such as Netflix and Hulu. Although these platforms mostly provide content that is not running live on TV, they are now slowly penetrating into pay-TV provider's core turf. Netflix's success with its original content including shows such as House of Cards and Orange Is the New Black is also helping it gain prominence as an alternative to traditional pay-TV service.
Content owners demanding more money
DirectTV competitor Dish Network has had some conflicts with content owners in the past over the issue of their demand for higher carriage fees. Time Warner Cable has also faced such difficulties. DirecTV can not escape from this problem in the long term. Content owners want more fees for their content as advertising sales disperse across several media and DVD sales decline.
Trefis Forecast Rationale for DirecTV LatAm TV Subscribers
This refers to the size of DirecTV's subscriber base in the Latin American market.
The market consists of pay TV viewers in Central and Southern American markets. Brazil, Mexico and Argentina are the biggest markets within the Latin American market.
DirecTV is has been expanding at a rapid pace as the market is still dominated by cable operators and thus offers numerous growth opportunities.
DirecTV has grown at a rapid pace in Latin America and we expect the growth to continue. Driven by adoption of advanced services, investment in customer service and prepaid services, we expect the subscriber base to reach about 17 million by end of our forecast period. Note that this subscriber count does not include Sky Mexico which the company consolidates under equity method.
We considered the following factors for this forecast:
- Pay-TV penetration in Latin America is very low but growing
- Pay-TV penetration in Latin America is still on the lower side, much lower than the U.S. market.
- However the expected growth in penetration is large as the economy develops. This figure is expected to reach past 70% by 2018.
- Satellite TV accounts for a very small portion of the pay-TV market and is likely to continue to gain market share
- Cable operators dominate the Latin American pay-TV market and only a small portion is captured by satellite operators so far.
- DirecTV's recent subscriber growth in Latin America and state of the pay-TV market in the U.S. suggests that there is plenty of room for satellite companies to grow. DirecTV is spending significant amount of capital expenditures relative to its current business in Latin America to gain subscribers.
- DirecTV's experience of Spanish language operations in the U.S. helps it in understanding the Latin American market
- DirecTV is not a complete stranger to the region - it has been running very successful Spanish and other regional language programming in the U.S. for quite some time.
- This gives it sufficient expertise in the Latin American market as it is reasonably familiar with programming content and viewers' tastes and choices.
- Popularity of middle market and prepaid packages
- DirecTV is having tremendous success with its focus on relatively cheaper middle-market programming packages as well as prepaid packages. Brazil is DirecTV's biggest market in Latin American region, and is growing driven by popularity of middle market packages.
- DirecTV understands price sensitivity of Latin American subscribers.
Back to Company Overview
- Brazil opening pay-TV market
- After 2011, the local telephone companies and foreign players were allowed to offer pay TV services along with mobile, fixed line and broadband in Brazil. This has spiced up the competition for DirecTV as Brazil is single most important market for DirecTV in Latin America.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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