Looking for value in cable/satellite stocks


Wachovia Capital Markets broadcasting analyst Marci Ryvicker is now also the firm’s analyst for cable television MSOs and satellite television companies. Thus far, she’s published opinions on four, giving a thumbs-up to only one.

On the satellite side, Ryvicker likes that both DirecTV (DTV) and Dish Network (DISH) are under-leveraged, at 1.2 times and 1.6 times respectively. She also notes that satellite TV is less capital intensive and more efficient than the earth-bound competitors. On the other hand, satellite is limited by its lack of a high-speed broadband component and it is loosing its HD advantage over cable as the latter systems upgrade and reclaim spectrum by going all-digital. So, her overall view of the two-stock satellite TV sector is to give it a “market weight” ranking.

But, when she looks at the two companies, her views could not be more different.

“We believe DTV will continue to report industry-leading average revenue per unit (ARPU), churn, sub gains, revenue and operating profit before depreciation and amortization (OPBDA) growth throughout ’09 and ’10, due to a loyal customer base, which over-indexes in income, education, and home ownership, and due to an exclusive distribution agreement with AT&T. DTV is an outperformer with an inexpensive valuation (4.4x’09E OPBDA vs. the cable average of 5.0x) and we see a likely merger with Liberty Entertainment, as widely speculated in the media, as a potential catalyst,” Ryvicker wrote, giving the stock an outperform rating.

“DISH is a tough call. On the one hand, it is relatively inexpensive, has an excellent balance sheet, generates significant free cash flow and is run by a well-respected, hard-working management team, in our view. On the other hand, DISH has surprised the Street with its subscriber (sub) losses (102,000 in 2008) and high churn (1.86% in 2008 versus historical levels of 1.60%). We attribute this underperformance to intense competition, a difficult economy, and operational deficiencies. Management is aware of these issues and is responsive, but we feel a turnaround will be lengthy.  Street expectations appear low, but we just can’t get excited over an inexpensive valuation. We have resumed coverage of DISH with a Market Perform rating and an $11.00-13.00 valuation range,” she wrote.

Ryvicker also issued her first research reports on Comcast – “Not enough to get us excited yet.” – and Cablevision – “More pain before gain.” Both are rated market perform.