Latin America Booms As U.S. Growth Stalls For DirecTV

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DirecTV (NASDAQ:DTV) recently reported its Q2 2012 earnings and the results were mostly in-line with our expectations. The U.S. performance was dismal, as DirecTV lost 52,000 net subscribers compared to a gain of 26,000 net subscribers in Q2 2011. The company attributed its focus on quality subscribers as the reason behind the reduction in gross additions, which led to net subscriber losses. However, this does not shadow the fact that other pay-TV companies such as Comcast (NASDAQ:CMCSA) have been able to improve their subscriber trends while Dish Network’s (NASDAQ:DISH) losses were fewer than DirecTV’s even as it focused on subscriber quality just like its arch rival.

DirecTV can not deny that pay-TV competition is getting fierce and investors should be aware of the same.

While the U.S. growth stalls, Latin America is a different story. DirecTV maintained its high paced growth and increased its full year outlook for its Latin American business in terms of subscribers.

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See our complete analysis for DirecTV

High Growth

DirecTV now expects to grow its Latin American subscriber base by 25% to 30% for full year 2012 compared to its earlier guidance of 20%. This implies that it may surpass 10 million subscribers in Latin America (excluding Sky Mexico which is equity accounted) by the end of the year, which is slightly higher than our current estimates. Bulk of this growth comes from the middle-market segment and growing popularity of prepaid programming packages. Additionally, although Brazil is currently DirecTV’s biggest market in Latin America, the other regions are witnessing higher growth rates which bodes well for the company.

Risk To Investors

Due to the growing popularity of prepaid packages, there is a risk as competition grows in Latin America. The prepaid subscribers are not likely to be as sticky as postpaid subscribers and that makes one wonder if DirecTV is experiencing a phase similar to that seen by Netflix (NASDAQ:NFLX). Netflix demonstrated explosive growth till competition started to develop and the non-stickiness of its subscribers was revealed due to management’s missteps. DirecTV will need to market multiple services and promote bundles overtime to establish more subscriber stability.

There is also the risk of currency fluctuation which ate up a notable amount of revenues in Q2 2012, especially from Brazil. Additionally, capital expenditure remains high due to which cash flows are negligible or negative. This is likely to continue as long as subscriber additions remain high. Currently, Latin America is more about future prospects for DirecTV rather than profits.

We are in process of updating our pricing model for DirecTV in light of the recent earnings and will have an update ready soon.

Our current price estimate for DirecTV stands at $54.50, implying a discount of about 60% to the market price.

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