There are conflicting views floating in the market from two big brokerage firms on DirecTV’s (NASDAQ:DTV) stock. While Nomura Securities is maintaining a ‘reduce’ rating with a $32 price target, Citigroup (NYSE:C) has ‘buy’ rating with a $59 price target.   Citigroup is positive on DirecTV as it feels that the growth in Latin America is undervalued. We agree with this sentiment.
Our price estimate for DirecTV stands at $53, implying a premium of about 10% to the market price. A big portion of this price estimate is DirecTV’s Latin American business. This is something that puts it in a better position compared to rival Dish Network (NASDAQ:DISH)
We estimate that DirecTV’s Latin American business constitutes about 27 % of its value. The company has seen stellar growth in Latin America in recent years. Although the gross profit margin and SG&A expenses (as a percentage of revenue) for the Latin American business are not substantially different from what DirecTV has in the U.S., the capital expenditures (as a percentage of revenues) are significantly higher. Therefore the division’s free cash flow has remained consistently negative, including 2011 when it stood at a little under -$100 million. Perhaps this is the cause of concern for some investors who might be doubting DirecTV’s ability to churn positive cash flows in Latin America.
However, we feel that given the tremendous growth potential, this is the right time to invest in additional equipment and infrastructure to build on the momentum and gain market share. DirecTV will be able to leverage a higher subscriber base to be competitive on pricing and therefore continue gaining market share despite lower incremental capital expenditures. We expect that this resulting higher revenue base will justify the incremental capex and lead to strong long-term cash flows.Notes:
- Nomura Securities Maintains a ‘Reduce’ on DIRECTV (DTV); Questions Ahead of Analyst Day, StreetInside.com, Mar 27 2012 [↩]
- UPDATE 1-Citigroup raises DirecTV to buy on LatAm growth, Reuters, Mar 28 2012 [↩]