DirecTV (Photo credit: Wikipedia)
August 3
DTV : NASDAQ : $48.80 Buy , Target US$68.00
Thesis intact
Summary
DTV 2Q12 results fed the bears’ concerns with greater US sub losses and declining LatAm OPBDA growth.
If it were only so simple. Fortunately for DTV holders, we expect US 3Q12 sub adds will more than offset 2Q’s losses and LatAm 2H12
OPBDA margin will improve. And although DTV’s results were messier than we expected, we believe they are still positioned to generate the best balance of overall customer and OCF growth – all while repurchasing 15-17% of shares per year and trading at a discount to their cable peers (5.0x vs mid 6’s).
Maintain BUY
Highlights
• 3Q12 sub adds likely 150k plus. Should gross adds decline by 10% (in line with mgmt expectation) and churn increase to 1.66% (above 1.62% in 3Q11), net adds would amount to 158k. See table below. While this is below our 180k est, its would assuage concern that DTV has lost its competitive edge.
Helping 3Q sub growth is the Sunday Ticket. With 1.5mm customers taking the NFL package last year, DTV could double the number of typically renewing customers (and renew 200k subscribers) with just half the typical renewal rate (or 15%).
• FY12 US OPBDA likely exceed guidance. With 1H12 US OPBDA up 6.6%, the division could beat guidance by growing 2H12 OCF by just 7.4%. 3Q12 OPBDA growth might amount to below 7.4% due to the extra NBA game in September, but that could be offset in 4Q12. See table on the following page.
• LatAm OPBDA growth of 13-14% appears achievable. With 13.1% 1H12 OPBDA growth, the division needs to grow by 13% to 14.8% to reach FY12 growth of 13-14%, the new, slightly lower guidance. While some of 2Q12’s higher cost structure will continue into 3Q12 (such as the labor for the new call center and Columbia soccer programming costs), others will not, enabling a sequentially higher growth rate.
