Thursday, January 31, 2013

5 Reasons to Be Bullish About DIRECTV

DIRECTV (NASDAQ: DTV) has made it into the portfolios of many top investing gurus, including Warren Buffett, Wallace Weitz, Joel Greenblatt, and Chuck Akre. Among the four, Warren Buffett held the largest position in the company: more than 29.55 million shares. With the current trading price of $50.14 per share, the value of DIRECTV in his portfolio is nearly $1.5 billion. What is it about the company that attracts a lot of attention from some of the best investors in the world? Should we follow Warren Buffett into this stock?
Leading US Market Player in MVPD Field
DIRECTV is considered to be the top digital TV entertainment provider in the US and Latin America, with nearly 20 million subscribers in the US and 14.55 million in Latin America. In the US, it was reported that DIRECTV currently owned around 20% of total Multichannel Video Programming Distributor (MVPD) subscribers at the end of 2011. The number of subscribers of the company was a little higher than one of its peers, DISH Network Corporation (NASDAQ: DISH), with 14 million subscribers, accounting for around 14% of total MVPD subscribers, at the end of 2011. Currently, DIRECTV US represented more than 80% of the company's total revenue, whereas DIRECTV Latin America accounted for 18.7% of the total revenue.
Highest ARPU With Low Churn Rate
DIRETV’s ARPU (Average Revenue Per User) has increased from $89.71 in 2010 to $93.27 in 2011. With 1.56% churn rate, thus the average lifetime of subscribers would be around 64 months. The gross lifetime value of one subscriber was nearly $6,000, whereas the average subscriber acquisition costs per subscribers (SAC) was around only around $813. DISH experienced increasing ARPU over time as well, but it was much lower than that of DIRECTV, of around $76.93.  DISH's churn rate was 1.63% in 2011, which means that the average subscriber’s lifetime was around 61 months. The gross lifetime subscriber value would be nearly $4,700, whereas the SAC was only $771.
Definitely a Cash Cow
In the last 5 years, DIRECTV has been a cash cow, generating substantial operating cash flow and free cash flow. Trailing twelve months, with EPS of $4.08, the operating cash flow was more than $5.70 billion, and free cash flow was $2.46 billion. With the significant cash flow generated, the company has been returning cash to shareholders in the form of share buybacks. In 2002, it had more than 1.12 billion shares outstanding. Currently, the number of shares outstanding has been reduced to nearly 612 million common shares. Interestingly, as of September 2012, DIRECTV booked negative $5 billion in total stockholders’ equity. This was due to the long-term debt of more than $17.1 billion and a significant amount of share buybacks. In the last 6 years, DIRECTV has spent a whopping $24 billion to repurchase shares. 
Creating Shareholders’ Value via Debt Financing
How about its long-term debt? Is that worth worrying about? The senior notes DIRECTV has issued totaled $13.5 billion in principal amount in 2011, with the low rate of 3.550% to 6.375% due anytime as soon as 2014 and as far as 2041.
 Source: 10-K 2011 filing
In 2012, the company issued more debts, including $1.25 billion 2.4% Senior Notes due 2017, $1.5 billion in 3.8% Senior Notes due 2022, and $1.25 billion in 5.15% Senior Notes due 2042. Investors have been getting many advantages from the share buybacks, financed by low interest debt financing with varying long maturity due time. I am not worried about the high level of the company’s debt, because of its strong cash flow and comfortable interest coverage of 5.7x. It took the debt at 3%-7% interest range to finance for its operation with return on capital of 51% - 77%, creating massive value for shareholders.
Fastest Growing
In terms of valuation, all three players in the industry had the comparable EV multiples. DIRECTV had its EV/EBITDA valuation of 6.32x, whereas Comcast Corporation(NASDAQ: CMCSA) is valued at 6.42x EV/EBITDA. The market is valuing DISH at 6.53x EV/EBITDA. However, in terms of growth, DIRECTV has been the fastest grower. Its 10-year EBITDA growth is 33.4%, whereas Comcast’s EBITDA growth is only 17.1%, and DISH is growing its EBITDA at a rate of 25.9%.  
My Foolish Take
Indeed, that’s why many investing gurus are taking long positions in this company. In 3-5 years I would expect DIRECTV to generate much more benefits for its shareholders. Investors should feel safe when parking their cash in this leading digital television entertainment service provider. 

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