We reaffirm our long-term Neutral recommendation on
). The company reported mixed financial results for the first
quarter of 2013. While revenues outpaced the Zacks Consensus
Estimate, net income fell below the same. DIRECTV currently has a
Zacks Rank #3 (Hold).
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Why Kept 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 & amortization. However, the rate of subscriber
addition has slowed down due to a stricter credit standard and
reduced promotional discounts. 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 long-term financial goals in 2013 without any
Nevertheless, growing saturation in the U.S. pay-TV market and
increased competition from the low-cost online video streaming
service providers are forcing established pay-TV operators to
restructure their business models. A recent Reuter report stated
that DIRECTV offered $1 billion to acquire Hulu, the online video
streaming service provider. Hulu is jointly owned by
Walt Disney Co.
The U.S. pay-TV market is extremely competitive. In addition to
the traditional Cable TV and satellite TV operators, telecom
giants are also offering fiber-based high-speed video services.
In contrast, low-cost online video streaming services have also
become very popular especially when the economy is still reeling
We believe that DIRECTV needs to restructure its business model
and the decision to bid for Hulu is one such step. Hulu commands
over 4 million subscribers and generates revenues of about $700
million per annum through subscriptions and a free ad-based
service. Hulu will enable DIRECTV to offer low-cost online video
in addition to the company's expensive premium-brand pay-TV