DirecTV’s U.S. Growth Slows on Competition But Shares Still Have Upside

A few days back we wrote that we may see fewer net subscriber additions for DirecTV (NASDAQ:DTV) as the biggest satellite pay-TV service provider in the U.S. announces its Q4 2011 results (see article DirecTV Earnings: Heightened Competition Could Weigh on Subscriber Additions). Although U.S. subscriber growth was healthy, it slowed considerably compared to the previous quarter and fourth quarter of 2010. The company claims that this is a result of higher churn resulting from a dispute with News Corp’s (NASDAQ:NWS) Fox as well as better performance by its peer Dish Network (NASDAQ:DISH).

See our complete analysis for DirecTV

U.S. Subscriber Gains Slow But Remain Solid

DirecTV gained 125,000 net U.S. subscribers in Q4 of 2011. ^[1] This shows healthy growth given the saturation in pay-TV market and a sluggish housing market which is highly correlated to pay-TV subscriber market growth. The fact that Comcast’s (NASDAQ:CMCSA) subscriber losses slowed a great deal in Q4 also played a role. Nevertheless DirecTV’s net additions pale in comparison to the 327,000 net subscriber additions in Q3 2011 and 289,000 in Q4 of 2010. Thus the quarter-over-quarter decline in net additions was about 61% and year-over-year decline was about 57%.

We believe that heightened competition is to blame. Dish Network has been trying to recover from a slump in growth with the help of Blockbuster and Comcast has improved its subscriber losses tremendously. Going forward, competition will only get stronger and subscriber growth will become more difficult for DirecTV.

What To Expect In 2012

The company expects that the U.S. revenue growth will primarily come from ARPU (average revenue per user) growth rather than subscriber growth. The latter will become difficult as we mentioned above. Higher ARPU increase will result from price increases which are being passed due to higher programming fees as well as greater usage of pay-per-view and premium movie channels.

As long as DirecTV’s customer service remains solid, the company should be able to achieve the required ARPU growth. Although there is a risk of the company being a stand-alone provider pay-TV services and it may need to make a push into broadband.

We are in process of updating our pricing model for DirecTV in light of these recent results.

Our price estimate for DirecTV stands at $53.26, implying a premium of more than 15% to the market price.

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1. DirecTV’s Q4 2011 Earnings Transcript [↩]