Lawsuit Could Stunt DirecTV's Market Share Growth

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DirecTV ( DTV ) competes with satellite pay-TV providers like Dish Network ( DISH ), cable companies like Comcast ( CMCSA ) and Time Warner Cable, ( TWC ) as well as telecom operators like AT&T ( T ) and Verizon (VZ).

Our price estimate for DirectTV stands at $42.51 , 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. (See 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 acquisition tactics.

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 Change?

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 growth.

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 value.

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 DirecTV's stock.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CMCSA , DISH , DTV , T , TWC

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