Overlooked gem in the media distribution industry??
Before we get into the business analysis of the company below, I would like to highlight the things that I look for in a business. In the article below, I hope to highlight each of the important metrics. You can also call this as a rough check list to identify a business or portion of a business (stocks) to purchase:
* Is it a good business?? High Return on Capital Employed? Debt load is manageable?
* Is the business growing? Revenue as well as profits?
* Is the management any good? Operational as well as capital allocation?
* Is it Cheap relative to current sales, profit and potential future?
* Current shareholders of the company any good? Are they intelligent/successful investors?
Business:
DIRECTV is a leading provider of digital television entertainment in the United States and Latin America. It operates two direct-to-home, or DTH, business units: DIRECTV U.S. and DIRECTV Latin America, which are differentiated by their geographic location and are engaged in acquiring, promoting, selling and distributing digital entertainment programming primarily via satellite to residential and commercial subscribers. In addition, they own and operate regional sports networks and own a 42% interest in Game Show Network, LLC, or GSN, a television network dedicated to game-related programming and Internet interactive game playing.
DIRECTV U.S:
DIRECTV U.S is the largest provider of DTH digital television services and the second largest provider in the multi-channel video programming distribution industry in the United States. As of June 30, 2013, DIRECTV U.S. had approximately 20.0 million subscribers.
DIRECTV Latin America:
DIRECTV Latin America is a leading provider of DTH digital television services throughout Latin America. It is comprised of: PanAmericana, which provides services in Argentina, Chile, Colombia, Ecuador, Puerto Rico, Venezuela and certain other countries in the region, and Sky Brasil Servicos Ltda., or Sky Brasil, which is a 93% owned subsidiary. DIRECTV Latin America also includes their 41% equity method investment in Innova, S. de R.L. de C.V., or Sky Mexico, which they include in the PanAmericana segment. As of June 30, 2013, PanAmericana had approximately 5.9 million subscribers, Sky Brasil had approximately 5.2 million subscribers and Sky Mexico had approximately 5.6 million subscribers. Management now expects net subscriber additions to be in the range of 1.5 million to 1.75 million.
DIRECTV Sports Networks:
DIRECTV Sports Networks LLC and its subsidiaries, or DSN, is comprised primarily of two wholly owned regional sports networks based in Denver, Colorado and Pittsburgh, Pennsylvania, and a regional sports network based in Seattle, Washington in which DSN retains a noncontrolling interest, each of which operates under the brand name ROOT Sports. DSN transferred 100% of its interest in a regional sports network based in Seattle, Washington, or DSN Northwest, to NW Sports Net LLC. The Seattle Mariners have a majority interest in NW Sports Net LLC and DSN retains a noncontrolling interest, which they account for using the equity method of accounting.
Financials from latest quarter:
Before we get into the business analysis of the company below, I would like to highlight the things that I look for in a business. In the article below, I hope to highlight each of the important metrics. You can also call this as a rough check list to identify a business or portion of a business (stocks) to purchase:
* Is it a good business?? High Return on Capital Employed? Debt load is manageable?
* Is the business growing? Revenue as well as profits?
* Is the management any good? Operational as well as capital allocation?
* Is it Cheap relative to current sales, profit and potential future?
* Current shareholders of the company any good? Are they intelligent/successful investors?
Direct TV (NASDAQ: DTV)
Business:
DIRECTV is a leading provider of digital television entertainment in the United States and Latin America. It operates two direct-to-home, or DTH, business units: DIRECTV U.S. and DIRECTV Latin America, which are differentiated by their geographic location and are engaged in acquiring, promoting, selling and distributing digital entertainment programming primarily via satellite to residential and commercial subscribers. In addition, they own and operate regional sports networks and own a 42% interest in Game Show Network, LLC, or GSN, a television network dedicated to game-related programming and Internet interactive game playing.
DIRECTV U.S:
DIRECTV U.S is the largest provider of DTH digital television services and the second largest provider in the multi-channel video programming distribution industry in the United States. As of June 30, 2013, DIRECTV U.S. had approximately 20.0 million subscribers.
DIRECTV Latin America:
DIRECTV Latin America is a leading provider of DTH digital television services throughout Latin America. It is comprised of: PanAmericana, which provides services in Argentina, Chile, Colombia, Ecuador, Puerto Rico, Venezuela and certain other countries in the region, and Sky Brasil Servicos Ltda., or Sky Brasil, which is a 93% owned subsidiary. DIRECTV Latin America also includes their 41% equity method investment in Innova, S. de R.L. de C.V., or Sky Mexico, which they include in the PanAmericana segment. As of June 30, 2013, PanAmericana had approximately 5.9 million subscribers, Sky Brasil had approximately 5.2 million subscribers and Sky Mexico had approximately 5.6 million subscribers. Management now expects net subscriber additions to be in the range of 1.5 million to 1.75 million.
DIRECTV Sports Networks:
DIRECTV Sports Networks LLC and its subsidiaries, or DSN, is comprised primarily of two wholly owned regional sports networks based in Denver, Colorado and Pittsburgh, Pennsylvania, and a regional sports network based in Seattle, Washington in which DSN retains a noncontrolling interest, each of which operates under the brand name ROOT Sports. DSN transferred 100% of its interest in a regional sports network based in Seattle, Washington, or DSN Northwest, to NW Sports Net LLC. The Seattle Mariners have a majority interest in NW Sports Net LLC and DSN retains a noncontrolling interest, which they account for using the equity method of accounting.
Financials from latest quarter:
| DIRECTV U.S (June 30, 2013): | ||
| 2013 | 2012 | |
| Revenues($M USD) | 5,943 | 5,647 |
| Operating profit($M USD) | 1,241 | 1,216 |
| Total number of subscribers (in thousands) | 20,021 | 19,914 |
| ARPU($USD) | 98.73 | 94.4 |
Selected Key Financials($M USD): Revenue - 7,700 Operating Profit - 1,350 Interest Expense - 2,19 Pretax Income - 1,075 Net Income - 661 Net Income per share - 1.19 Cash on Balance sheet - 2,365 Satellites & PPE - 8,660 Debt - 18,516 Business Returns: ROCE = Pretax Income/ Tangible capital = 5085/8660 = 58% The business is growing even when increasing the price per customer in US. It shows the business quality, pricing power and customer retention. Latin American business revenue per customer appear to be decreasing, that is because of the currency devaluation relative to the USD and inflation in those countries (mostly Brazil & Argentina). Eventually the business can command higher price per customer in the region as it is half of the US prices. Valuation: Cheap?? YES The company is trading at $59/share, it translates into $32.8B. Enterprise value = Market cap + Net Debt EV = $32.8B + 16.15B = $48.95B EBITDA = 7.81B EV/EBITDA = 6.26 CF = $5.62B Market cap/CF = ($32.8/$5.62)B = 5.83 Capital allocation: Any good? YES The company management has been excellent in capital allocation as they bought back ~50% of the company shares in last 6 years while they grew the business in double digits. They are utilizing the current low interest environment for issuing debt as the interest payment is only 1/7 of the operating income(The debt isn't excessive, although people will look at the debt amount & negative equity and think the business is in poor health). If you want to understand share buybacks and shareholder returns, one should read about Teledyne company history and its founder Henry Singleton. The majority owners of this company are successful investors of our era. Here are the big shareholders: Warren Buffett - 6.75% South Eastern/Long Leaf partners - 5.7% John Malone - 2.3% Risks: Technological obsolescence. Latin American division hits the bump in terms of growth/revenue per customer. More competition in US media distribution business. Inability to pass on increase in content costs. Conclusion: The company fulfills all the things that I look for in a business: Good business, growing with the capable management trading at a low valuation. Latin American division grows in double digits with the price parity with US division although the US business appears to be mature. Disclosure: I own shares of this company. | |||||||||||||||||||||||||||
