We reiterate our long-term Neutral recommendation on
) as we believe the stock is currently fairly valued. The company
posted strong financial results for the fourth quarter of 2012,
easily beating the Zacks Consensus Estimates.
Why at Neutral?
DIRECTV continues to enjoy huge net subscriber addition in
both the U.S. and Latin America, growing average revenue per user
in the U.S. and higher operating margin and operating profit
before depreciation and amortization. The company is
trying to establish itself as a premier pay-TV operator targeting
high-quality subscribers. Management is confident that it will be
able to achieve its financial goals for 2013 easily.
However, macroeconomic fluctuations, huge programming costs
and growing competitive threats may restrict the company's upside
potential. Already, the rate of subscriber addition in the U.S.
has moderated due to a stricter credit standard and reduced
promotional discounts. DIRECTV currently has a Zacks Rank #3
Risk/Reward Virtually Balanced
DIRECTV has improved its subscriber quality - shrinking the
proportion of subscribers with low credit ratings - by
restructuring dealer incentives (changed the commission and
penalty structure), cutting the proportion of third-party dealer
sales, and implementing a credit card policy for new
Both DIRECTV and its closest rival
DISH Network Corp.
) are gradually transforming their respective business models
from being a low-priced operator to a premium service
Meanwhile, DIRECTV is trying hard to acquire Vivendi SA's
subsidiary unit Global Village Telecom (GVT) - a Brazilian
telecom carrier. GVT offers voice, broadband and pay-TV services
in Brazil. At present, DIRECTV is Brazil's No. 2 pay-TV service
If successful, the company will generate substantial synergies
from the acquisition by offering bundled voice, broadband, and
high quality pay-TV services in Brazil. Apart from DIRECTV, other
major bidders for GVT are
America Movil SAB
Liberty Global Inc.
) and a private equity group.
Nevertheless, a major near-term headwind for DIRECTV is the
recent currency devaluation in Venezuela. The government of
Venezuela has devalued its currency Bolivar by 32%. This was
Bolivar's fifth devaluation in a decade. Venezuela contributes
approximately 3.5% of the total revenue of DIRECTV.
The company has already declared that it will incur a one-time
pre-tax charge of $160 million in 2013 related to the devaluation
of Bolivar. This will negatively impact DIRECTV's Latin American
revenue, net earnings and cash flow growth.
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