) competes with satellite pay-TV providers like Dish Network (
), cable companies like Comcast (
) and Time Warner Cable, (
) as well as telecom operators like AT&T (
) and Verizon (VZ).
Our price estimate for DirectTV stands at
, about 6-7% ahead of market price. We estimate that the company
generates about 64% of its value from US Satellite TV.
We've previously written about DirecTV's strong Q3 2010 results,
including continued subscriber gains and improvements in Latin
America that caused us to raise our price estimate for the company.
DirecTV's Subscriber Gains Continue
) We've also discussed the company's high-quality subscriber base
and brand name recognition as potential sources of upside in the
years ahead. (See
Can DirecTV Grow Subscriber Fee Revenue
However, the result of lawsuits alleging that the company
engaged in deceptive advertising practices and violated consumer
practices could potentially affect DirecTV's brand name as well as
consumer sentiments towards the company. DirecTV reportedly
utilized hidden fees and misleading advertisements in its customer
Although these accusations, which sparked a two-year
investigation, have not hindered the company's growth in the recent
past, the ruling could potentially alter future growth prospects.
Here we examine the key metrics to watch and one potential scenario
that could play out as a result of the legal ruling.
DirecTV has Continued to Thrive, but Could this
Despite the ongoing lawsuit, the company has continued to thrive
and maintain subscriber growth. As we've previously written, the
company's continued subscriber base growth has come at a time when
competitor Dish Network has observed a loss of subscribers. (See
DirecTV's Subscriber Gains Continue)
However the recent lawsuit ruling could potentially alter the
course of this trend. A 2-year investigation concluded that DirecTV
violated consumer practices, and as a result, will be ordered to
pay a total of $14.25 million to all 50 states. Although the
aggregate payment amount is relatively minimal in regard to
DirecTV's total value (market cap at roughly $35 billion), it could
potentially deteriorate its brand image and affect future
We maintain our current price estimate for DTV at $42.51, which
stands about 6-7% above market price. However, if brand name
deterioration and a shifting consumer sentiment stunt market share
growth, there could be downside to our base case forecasts. If
DTV's pay-TV market share falls back to 2008 levels of 17% by the
end of our forecast period, there could be over 5% downside to our
price estimate, bringing our number in line with market price.
Drag the trend-line in the chart below to see the impact of
various pay-TV market share scenarios on DirecTV's stock
As DTV maintains an affluent customer base, small fluctuations
in subscription pricing might not be the type of impetus to spark a
decline in market share. However, the customers' perceived
relationship with the company is critical to pay-TV providers'
ability to sustain a subscriber base, and the negative publicity
from this type of lawsuit could hamper growth prospects in the
years ahead. It will be interesting to observe the extent of the
consumer reaction in the wake of the ruling.
You can see
the complete $42.51 Trefis price estimate for