Why We Are Revising Dish Network’s Price Estimate To $74

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Dish Network (NASDAQ:DISH) reported its second quarter earnings recently. During the earnings call, CEO Charlie Ergen conceded that Dish’s future plans might be severely affected if the FCC cancels the $3.3 billion discount the company received in the AWS-3 spectrum auction. An additional liability of that magnitude could stall future M&A activity and cripple Dish’s plans to bid for spectrum at future auctions. With the cancellation decision seeming imminent, we have made the required adjustments to our price estimate for Dish, which now stands at $74. The new price estimate also takes into account the improved pay-TV subscriber numbers due to the inclusion of Sling TV subscriber additions into Dish’s overall pay-TV subscriber base.

See our complete analysis for Dish Network

Cancellation Of Spectrum Discount Reduces Free Cash Flows

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The issue of the discount received by Dish first came to light after the results for FCC’s Auction 97 came out. Dish spent close to $10 billion at the auction and acquired 25 MHz of AWS-3 wireless spectrum. [1] However, the company also received a discount of 25% (Approximately $3.3 billion) as it bid through small partners Northstar and SNR. The discount did not go down well with others and the FCC subsequently ordered a review. According to latest reports, the FCC now feels that Dish’s bidding partners do not qualify for the small business discount and the commission has resultantly notified Dish about its intention to cancel the discount. [2] Dish CEO Charlie Ergen also acknowledged the looming cancellation on the latest earnings call. [3] We believe that it is only a matter of time before the FCC asks Dish to pay the disputed amount.

With the FCC decision seeming imminent, we have increased Dish’s liabilities by $3.3 billion in our calculations of the company’s Net Debt (Total Debt – Cash & Cash Equivalents). In our previous price estimate calculations, we had used reported Net Debt of $12.3 billion ($26.47 per share) which gave us a price estimate of $81 for Dish. [4] With the addition of $3.3 billion, the Net Debt for our calculations effectively increased to $15.6 billion ($33.60 per share). The increase in net debt reduced the present value of total cash flows available to the company’s stakeholders. Consequently, our new price estimate for Dish is $74, which is essentially a decrease of 9%.

A bigger worry for Dish is the cascading effect the $3.3 billion payment will have on the company’s business. Dish CEO Charlie Ergen stated on the latest earnings call that the cancellation of the discount might derail the company’s future plans. [3] Dish’s ability to spend is already severely weakened by the fact that it paid out around $8.7 billion in AWS-3 FCC license deposits during Q1 2015 and has around $13.8 billion of debt on its balance sheet. [5] Paying more than $3 billion to the FCC will undoubtedly be a major blow to the company. The additional outflow of cash could pour cold water over the rumored merger with T-Mobile (NYSE:TMUS). Regarding the T-Mobile deal, Ergen stated that “from our perspective, the discount was the most complicating factor.” The additional liability could also affect Dish’s plans to bid for spectrum at future auctions. As the FCC is almost certain to scrap the small business bidding credit rule, the company will now have to compete on an equal footing with cash-rich companies such as AT&T (NYSE:T) and Verizon (NYSE:VZ) and could find it difficult to mobilize finances. (Read more – Dish Might Find It Harder To Acquire Future Spectrum, Limiting Stock’s Potential Upside)

Sling TV Is Dish’s Silver Lining

We estimate that the satellite TV operations contribute close to 27% to Dish’s value. Even though Dish had managed to maintain its pay-TV subscriber base over the past few years despite a slowdown in the overall pay-TV industry, the slowdown has finally caught up to the company. Dish has consistently lost subscribers since Q1 2014 and lost a staggering 134,000 pay-TV subscribers during the first three months of 2015. [4] However, the company’s new online streaming service Sling TV has emerged as a ray of light amidst all the doom and gloom. Dish has started including metrics of its streaming service into its reported pay-TV numbers, which has helped reduce the rate of decline in the company’s subscriber base. Sling added 169,000 subscribers during Q1 2015, while traditional pay-TV operations lost 134,000 subscribers. [4] Consequently, the end result was a net addition of 35,000 to the overall subscriber base. Similarly, Dish lost 81,000 subscribers during Q2 2015 which would have been much worse without the inclusion of Sling TV numbers.

We believe that offering an online alternative such as Sling TV is a good strategy for Dish. The traditional pay-TV market has become increasingly saturated and pay-TV companies have lost thousands of customers over the past few years. The availability of content on online streaming platforms such as Netflix (NASDAQ:NFLX), Sling TV, Hulu, HBO Go, etc., is encouraging traditional pay-TV subscribers to shift to such platforms. Offering Sling TV at competitive pricing will help Dish in reducing the pace of decline in its subscriber base. This leads us to believe that Dish’s pay-TV subscriber base will continue to shrink, albeit at a reduced pace. For the year 2015, we believe that the company’s pay-TV operations will lose around 120,000 subscribers, as opposed to our earlier projected  loss of 300,000+ subscribers. Taking a long-term perspective, we believe that Dish’s pay-TV market share will drop to around 12.5% by the end of our forecast period, as opposed to the earlier projection of below 12%.

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Notes:
  1. AWS-3 AUCTION RESULTS: AT&T leads with $18.2B, Verizon at $10.4B, Dish at $10B and T-Mobile at $1.8B, January 30, 2015, Fierce Wireless []
  2. Dish Responds to FCC’s Move to Deny Spectrum Auction Discounts, July 22, 2015, Wall Street Journal []
  3. DISH Network (DISH) Charles William Ergen on Q2 2015 Results – Earnings Call Transcript, August 5, 2015, Seeking Alpha [] []
  4. Dish Network’s SEC Filings [] [] []
  5. Dish Network’s SEC Fillings []