DIRECTV (NASDAQ: DTV) Analyst: Varun James Vincent Industry: CABLE TV August 7, 2013 Recommendation: BUY 1 Price Target $74.09 Price (08/07/2013) $61.11 52-WK ($) 47.71 - 67.85 Market Cap ($M) $34,000 Outstanding Shares 556 Insider % 7.0 Revenue $30,750 TEV ($M) $50,590 EBITDA ($M) $7,480 EV/EBITDA 6.8x Forward P/E 10.6x Long Term Debt/Equity N/A Total Debt/T12M EBITDA 2.4 Net Debt/EBIT 3.1 Total Debt/Capital 140.3 Return on Equity (ttm) N/A Return on Assets (ttm) 15.8% Return on Invested Capital 23.8% Asset Turnover 1.5 Tax Burden 0.7 Interest Burden 0.9 Leverage Ratio -5.0 Cash Ratio 0.3 Current Ratio 1.0 Quick Ratio 0.8 CFO/Avg. Current Liab 1.1 CFO/Capex 1.7 TEV Margin (mrq) 164.5% Gross Margin 47.4% Operating Margin 15.7% EBITDA Margin 24.3% Profit Margin 8.6% Revenue 11.5 EBITDA 12.8 Net Income to DIRECTV 15.2 Earnings Per Share 30.5 Free Cash Flow 18.8 Du Pont Analysis Liquidity Indicators Margins Growth - 5 year (%) Debt Management Valuation Profitability Company Overview The DIRECTV Group, Inc. is the world's leading provider of digital television entertainment services. It markets satellite-based Pay-TV services through two geographic business segments. Through its subsidiaries and affiliated companies in the United States, Brazil, Mexico and other countries in Latin America, DIRECTV provides digital television service to 20.11 million customers in the United States and 10.91 million customers in Latin America. DIRECTV reported revenues of $7.7 billion in the second quarter of 2013. DIRECTV is composed of two main operating units - DIRECTV U.S., and Latin America, as well as DIRECTV Regional Sports Networks. DIRECTV U.S. is the largest direct-to-home (DTH) provider and the second largest Pay TV provider in the United States. As of March 31, 2013, DIRECTV U.S. had average monthly revenue per subscriber (ARPU) of $96.05. DIRECTV Latin America is a leading provider of DTH in Latin America. The business segment consists of PanAmericana, which provides services in Venezuela, Argentina, Chile, Colombia, Puerto Rico and certain other countries. It has a 93% owned subsidiary in Sky Brazil and a 41% stake (equity method investment) in Sky Mexico. Investment Thesis We issue a Buy recommendation on DIRECTV with a price target of $74.09. The target price represents approximately 6.8x the 2014E EBITDA and is an
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DIRECTV (NASDAQ: DTV) Analyst: Varun James Vincent
Industry: CABLE TV August 7, 2013 Recommendation: BUY
1
Price Target $74.09
Price (08/07/2013) $61.11
52-WK ($) 47.71 - 67.85
Market Cap ($M) $34,000
Outstanding Shares 556
Insider % 7.0
Revenue $30,750
TEV ($M) $50,590
EBITDA ($M) $7,480
EV/EBITDA 6.8x
Forward P/E 10.6x
Long Term Debt/Equity N/A
Total Debt/T12M EBITDA 2.4
Net Debt/EBIT 3.1
Total Debt/Capital 140.3
Return on Equity (ttm) N/A
Return on Assets (ttm) 15.8%
Return on Invested Capital 23.8%
Asset Turnover 1.5
Tax Burden 0.7
Interest Burden 0.9
Leverage Ratio -5.0
Cash Ratio 0.3
Current Ratio 1.0
Quick Ratio 0.8
CFO/Avg. Current Liab 1.1
CFO/Capex 1.7
TEV Margin (mrq) 164.5%
Gross Margin 47.4%
Operating Margin 15.7%
EBITDA Margin 24.3%
Profit Margin 8.6%
Revenue 11.5
EBITDA 12.8
Net Income to DIRECTV 15.2
Earnings Per Share 30.5
Free Cash Flow 18.8
Du Pont Analysis
Liquidity Indicators
Margins
Growth - 5 year (%)
Debt Management
Valuation
Profitability
Company Overview
The DIRECTV Group, Inc. is the world's leading provider of digital
television entertainment services. It markets satellite-based Pay-TV
services through two geographic business segments. Through its
subsidiaries and affiliated companies in the United States, Brazil,
Mexico and other countries in Latin America, DIRECTV provides
digital television service to 20.11 million customers in the United
States and 10.91 million customers in Latin America. DIRECTV
reported revenues of $7.7 billion in the second quarter of 2013.
DIRECTV is composed of two main operating units - DIRECTV U.S.,
and Latin America, as well as DIRECTV Regional Sports Networks.
DIRECTV U.S. is the largest direct-to-home (DTH) provider and the
second largest Pay TV provider in the United States. As of March 31,
2013, DIRECTV U.S. had average monthly revenue per subscriber
(ARPU) of $96.05.
DIRECTV Latin America is a leading provider of DTH in Latin America.
The business segment consists of PanAmericana, which provides
services in Venezuela, Argentina, Chile, Colombia, Puerto Rico and
certain other countries. It has a 93% owned subsidiary in Sky Brazil
and a 41% stake (equity method investment) in Sky Mexico.
Investment Thesis
We issue a Buy recommendation on DIRECTV with a price target of $74.09.
The target price represents approximately 6.8x the 2014E EBITDA and is an
DIRECTV (NASDAQ: DTV) Analyst: Varun James Vincent
Industry: CABLE TV August 7, 2013 Recommendation: BUY
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average of the discounted cash flow and residual income analyses. While there are concerns in the medium-term
regarding the U.S. pay TV industry, the company’s solid free cash flow generation in the U.S. business, the scope of
growth in Latin American business and the management’s willingness to repurchase company shares leads us to a
positive outlook.
Integration of recent Results
Revenue growth in the 3Q13 and 4Q13 estimated to 6.2% and 5.9% y-o-y. This shows the beginning of the trend in a
possible consolidation of the cable TV industry. EPS increases to $5.04 from $4.58 (base case) and picks up slowly as the
company tries to cope with its current challenges in Brazil and the volatile FX rates.
Industry trends and competitive landscape
The U.S. Pay TV industry consists of many regional and national providers that deploy various forms of technology. As of
2012, the top 5 providers, by subscriber count, accounted for approximately 63.5% of all Pay TV subscribers in the U.S.
The industry as a whole has undergone significant change in recent years and can be characterized by primarily by
declining growth rates and markets share shifts among competitors. Since 2007, the U.S. pay industry had been terribly
affected by the macroeconomic factors. The collapse of the subprime market coupled with depressed employment rates
and weakened housing markets stunted the growth of the industry. In addition, the number of subscribers being added
is growing at a decreasing rate. In 2012, the U.S. pay TV industry added only 91,000 subscribers (versus 332,000+ in
2011), ending the year with approx. 99.8 million subscribers. )
Exhibit 1: Top 5 Pay TV providers in the U.S.
Comcast
DIRECTV
DISH
Time Warner Cable
Verizon FiOS
Total Pay TV
U.S. Households
Pay TV penetration
(Subscribers in ‘000s)
Source: Company filings
115,033
63.5%
2012
Subscribers
21,995
20,084
14,056
12,218
4,726
73,079
DIRECTV (NASDAQ: DTV) Analyst: Varun James Vincent
Industry: CABLE TV August 7, 2013 Recommendation: BUY
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1
Risks
- The U.S. Pay TV industry growth could be negatively affected by the emergence of a more disruptive
technology/business plan.
- A merger between AT&T and DISH could cost DIRECTV one of its largest reselling partners.
- Competition, economic and political instability in Latin America could negatively affect growth prospects.
- Increase in volatility in the FX rates.
Competitive Analysis
Standing as one of the industry leaders, DTV managed to beat the industry average in sales growth than its competitors
with a corresponding high EBITDA growth rate. This can highlight management’s ability to reduce costs. ROIC and ROA
are the best in the industry.
1 Company filings
Exhibit 2: U.S. Pay TV market Net Subscriber Additions
Name Mkt Cap (USD) Sales Growth (%) EBITDA Growth (%) EBITDA Margin Capex/Sales (%) ROIC ROA ROE
Average $35,608.1 5.5 (0.4) 29.5 12.0 11.9 4.7 (13.1)