We downgrade our recommendation for DIRECTV (DTV) to Neutral, which means the stock will perform mostly in line with the broader market. The company is facing both intra-industry threat as well as inter-industry threat. Ongoing global economic downturn negatively impacted the pay-TV industry. Furthermore, the penetration of pay-TV households approaches 90% in the U.S., leaving very thin opportunity for significant future growth.
The DBS (direct broadcast satellite) operators are facing increasing competition from the cable operators. The cable service providers have the technical advantage of being able to offer the ‘triple play’ package of VOD (video-on-demand), local HD (high-definition video), high-speed Internet access and telephony. The DBS firms including DIRECTV cannot provide VOD, Internet access or telephony because their platforms lack two-way interactivity (no uplink).
Within the satellite TV industry, DIRECTV is facing increasing competition from its nearest rival DISH Network Inc. (DISH). DISH Network is aggressively going for promotional activities. As a result of this, while DISH Network added 249,000 net new subscribers in the U.S. during the fourth quarter of 2009, DIRECTV added only 119,000 net new subscribers during the same period, a reduction of 60% year-over-year. Moreover, both of these companies have filed legal suit against each other regarding advertisement campaign.
On the other side, DIRECTV continues to grow its earnings and cash flow at a significantly higher rate than its peers. DIRECTV continues to expand its subscriber base and improve overall subscriber quality. However, we believe that these positives are already reflected in the current valuation, leaving little room for above market gain.
Read the full analyst report on “DTV”
Read the full analyst report on “DISH”
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