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Change the channel on DirecTV?
Stock Spotlight: Analysts like the bargain price, but can it fend off cable's 'triple-play?'
July 29, 2005: 6:26 AM EDT
By Steve Hargreaves, CNN/Money staff writer
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NEW YORK (CNN/Money) - There was a time when owning a satellite dish meant relegating half your yard to something that looked better suited for transmitting sensitive national secrets than casual channel surfing. And even then channel surfing seldom worked.

Then along came modern satellite dishes, reliable and not much bigger than a large pizza, from companies like DirecTV.

At first DirecTV (Research) used to enjoy clear advantages over cable. Satellites could reach homes that were off the cable grid and the signal was all digital, which meant better picture quality.

But cable companies have been switching to digital signals lately, and presenting a serious threat with what they call the "triple-play" -- the ability to offer phone, TV and Internet service in one package.

DirecTV has responded by partnering with some telecom companies to offer its own version of the triple-play. It's also trying to offer more exclusive content to distance itself from cable and its more closely related competitor EchoStar (Research).

Most notably, DirecTV recently extended a deal with the National Football League to exclusively offer the "NFL Sunday Ticket," a package that allows users to see every NFL Sunday game. The contract was set to expire at the end of this season but will now last until 2010. And with football season around the corner, the company could be gearing up for a wave of new subscribers.

As the company gets set to report second-quarter results next week, investors will want to hear what DirecTV has planned to add customers and boost earnings.

Analysts expect the company to post its first quarterly profit since it changed its name from Hughes Electronics Corp. in early 2004.

Still, many on Wall Street remain skeptical of the company. The stock is down about 8 percent so far this year.

A rising EchoStar

One cause for concern: DirecTV faces a tough challenge from EchoStar Communications Corp., the Colorado-based operator of the satellite TV Dish Network.

And even though DirecTV is a much larger company measured by sales and market value, analysts say EchoStar is formidable for one key reason: price. At $31.99 a month, a subscription to the Dish Network is a full $10, or 25 percent, cheaper than DirecTV.

Yet analysts say this shouldn't put pressure on DirecTV to lower prices since it has a stronger brand name and offers more exclusive content than EchoStar. To that end, analysts applauded the company's decision to spend $3.5 billion securing the NFL rights for the next five years.

"It's almost a must have for a football fan," said Rob Sanderson, an analyst at American Technology Research.

DirecTV also has another significant advantage over EchoStar. It is controlled by media mogul Rupert Murdoch, whose News Corp. (Research) has a 34 percent stake. DirecTV is essentially the American division of Murdoch's global satellite TV empire. So it has access to not only News Corp.'s deep pockets but can operate in concert with sister satellite operations, including Britain's BSkyB and Asia's Star TV.

Beware the 'triple play'

It would be one thing if DirecTV was just competing against EchoStar. But analysts say that the bigger threat comes from cable companies like Comcast (Research), Cox and Time Warner Cable, which like CNN/Money, is owned by Time Warner (Research). Cable firms are bundling television, phone and high-speed Internet services into one product.

"The opinion on Wall Street is that the 'triple play' is going to kill them," said Sanderson, explaining why shares of DirecTV continue to dawdle around the low end of their 52-week trading range. "But I think that view is a bit simplistic."

Sanderson said consumers won't save much by signing up for these 'triple play' services, especially after cheaper introductory offers expire. Moreover, DirecTV is partnering with telecom companies such as Verizon (Research) and BellSouth (Research) to offer these three services.

And despite the threat from cable, DirecTV is still reporting robust gains in new subscribers, adding 1.6 million last year, according to Steve Mather, an analyst at Sanders Morris Harris. Subscriptions at cable operators have been generally flat, he said.

But another analyst said DirecTV will need to add more interactive features and expand programming to stay competitive with cable. DirecTV is hoping that a switch to a digital video recorder made by another Murdoch-controlled company, NDS Group, will give it a unique edge over rivals. The company currently offers customers DVRs made by TiVo (Research).

"There are still legitimate concerns filling out the product palate," said Matt Harrigan, a managing director at Janco Partners. "It's a bit of a one-trick pony."

A clear stock signal?

DirecTV is not a cheap stock. Shares trade at about 33 times 2006 earnings estimates, a steep premium to EchoStar, which is valued at about 12 times next year's earnings projections.

But analysts said DirecTV should finally start to generate higher profits on a more consistent basis as big capital investments begin to pay off. (Launching a satellite isn't cheap).

As such, analysts expect earnings to grow about 30 percent a year, on average, for the next few years, according to Thomson/First Call.

What's more, DirecTV's valuation isn't too rich when compared to cable industry leader Comcast, which trades at about 32 times 2006 earnings estimates. And considering that DirecTV has a healthier rate of subscription growth than cable companies, it's reasonable for it to trade at a higher valuation.

So even if you don't have a DirecTV satellite dish on your roof, it may make sense to have one stashed in your portfolio.

Sanders Morris Harris' Steve Mather owns shares in DirecTV; his firm has no banking relationship with the company. Other analysts quoted in this story do not own shares of DirecTV and their firms have no banking relationship with the company.


For a look at Cablevision's failed attempt to get into satellite TV , click here.

And for a look at the satellite radio business, click here.  Top of page


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