), is the largest satellite pay-TV provider in the U.S. Its main
competitors in the pay-TV business include Dish Network (
), AT&T (
), Comcast (
), Time Warner Cable (
), and Verizon (
Although DirecTV's Latin American division is experiencing fast
subscriber growth, it constitutes only 8% of the company's stock
price according to our estimate, making it the least important
division. The Latin America business contributes relatively little
to DirecTV's share value because of its high indirect costs,
including capital expenditures and sales, general and
administrative expenses (SG&A).
We see a potential 13% upside to the
$38.53 Trefis price estimate for DirecTV's
if the company can reduce its Latin America expenses to match U.S.
levels. Our analysis follows below.
Growth equals cost
Unlike the U.S., Latin America is not a saturated pay-TV market.
DirecTV is aggressively pursuing new subscribers and market share
in Latin America, which explains the company's higher indirect
spending in this market.
DirecTV is spending significantly on marketing and advertising
to create brand awareness among Latin American consumers. This
helps explain the division's high SG&A expenses, which we
measure as a percentage of gross profits. You can drag the
trend-line in the chart below to create your own SG&A forecast
for DirecTV's Latin America business and see how it impacts the
company's estimated share value.
DirecTV's capital spending in Latin America consists mainly of
satellite and set top box expenses. We expect capital spending to
remain high in the initial phase of expansion. In the next
interactive chart, you can drag the trend-line to create your own
forecast for DirecTV's capital spending as a percentage of gross
profits for Latin America.
Costs down, stock up
We currently expect very slight declines in DirecTV's SG&A
and capital spending in Latin America during the Trefis forecast
period. Sharper spending declines could significantly boost the
company's share value.
In the U.S. market, we expect SG&A as a percentage of gross
profits to stabilize around the 45% level by the end of our
forecast period, versus 53% in Latin America. We estimate a
potential stock price upside of 5% if DirecTV can quickly achieve
its Latin America growth targets and then cut SG&A spending to
Similarly, we expect U.S. capital spending as a percentage of
gross profits to stay between 17% and 20% levels during our
forecast period. We expect capital spending in Latin America
to decline from 38% today to 30% by 2016. However, we see a
potential upside of nearly 8% for DirecTV's stock if capital
spending in Latin America declines to 20% by 2016.
Combining these two scenarios, we conclude that DirecTV's stock
could see a total upside of 13% in the event that the
company's indirect expenses in Latin America decline to U.S. levels
during the Trefis forecast period.
You can see
the complete $38.53 Trefis price estimate for
DirecTV's stock here.