As DirecTV (NASDAQ:DTV) battles increasing competition and a saturating U.S. pay-TV market, it still represents an attractive investment given its focus on financial metrics and diversification of risk with international expansion. It had a good last year but it is a different ball game now.
Our current price estimate of $54.55 stands at a premium of about 15% to the market price. We stay positive as DirecTV has been smart to realize the changing need of time and has demonstrated continued success in growing Latin American market. Its rivals such as Dish Network (NASDAQ:DISH) and Comcast (NASDAQ:CMCSA) are doing better than before, yet DirecTV has its ways of continuing its growth.
Improving ARPU In The U.S. Despite Slowdown In Subscriber Additions
As evident from the start of 2012, DirecTV’s net U.S. subscriber additions have come down a great deal. Compared to a net gain of 184,000 subscribers in Q1 of 2011, DirecTV just gained 81,000 net subscribers last quarter.  The issue is not DirecTV being less competitive, but rather the broader market getting saturated and rivals improving there performance which directly affects gross subscriber additions.
Despite this, DirecTV has a way to grow – growth in average revenue per user (ARPU). The ARPU increase can result from price increase, subscriber adoption of HD/DVR/pay-per-view movies and subscriber upgrades to higher priced programming packages. DirecTV has traditionally resorted to periodic price increases although they are driven more by rising programming costs rather than the intent to reap more profits. We believe that DirecTV will continue to increase prices to mitigate margin declines to an extent. It must be noted that we already price these expected margin declines in our price estimate for DirecTV.
The prime opportunity lies in advanced services (HD/DVR/pay-per-view) and higher priced programming packages. The company is focusing on acquiring and retaining subscribers with high credit quality. These subscribers are less sensitive to pricing change as well as more likely to pay additional amount for HD and DVR services. Furthermore, given their significant ARPU contribution, DirecTV will make every effort to keep customer service levels high. This is likely to reduce defections and thus mitigate the impact of reducing gross subscriber additions. Adoption of advanced services will also grow DirecTV’s ARPU and help it in mitigating rising programming costs.
Furthermore, as the U.S. economy improves, there is an opportunity for DirecTV to market higher priced programming packages to its subscribers as well as introduce paid streaming service, similar to what Comcast has done. The crux is that even though market is saturating and gaining subscribers is becoming difficult, there are still ways to grow and DirecTV is perfectly capable of capitalizing on those.
Expansion In Latin America
DirecTV has a major advantage as a company over its rivals in the U.S. – its presence and expansion in Latin American pay-TV market. DirecTV has been witnessing fast growth in this region and surpassed 13 million subscriber mark (including Sky Mexico) recently.  Although the pay-TV penetration is currently low, it is likely to surpass 50% by 2015.
So far DirecTV has had the most exposure to Brazil’s market but recent results indicate high growth in other countries as well which could lead to business diversification in this geography. This bodes well for DirecTV in case competition develops in Brazil due to market attractiveness. Furthermore, the rising per capita income in this region due to the emerging middle class will help DirecTV’s motive. The company has smartly deployed tailored programming packages keeping in mind subscriber sensitivity to price.Notes: