DirecTV (DTV) exhibited robust growth in the U.S. last year, and now has an aggressive expansion plan in the South America for 2013. 2012 was a significant year for DirecTV and we expect the trend to continue going forward. It added more than 100K (fourth quarter) net subscribers in the U.S., and approximately 650K in the Latin American markets. The revenue increase in the U.S. was nearly 5%, underpinned by hike in the prices and a superior product portfolio.
Nonetheless, the revenue growth from the Latin American markets was roughly 22%, and the revenues are only expected to grow with the increasing popularity of prepaid products. What tells us that going forward the stock price may rise further are the efforts made to increase the subscriber base in the Latin American markets. The Subscriber growth in the U.S. has stagnated to some extent as the market is saturating and the competition is only getting fiercer. Going forward, the company must figure out various strategies to increase the APRU (average revenue per user) to sustain the current gross margins, as the cost is expected to rise.
DirecTV made a staggering addition of more than 100K subscribers only in the U.S. during the fourth quarter of 2012. This brings DirecTV close to 200K net subscribers added in 2012. The performance is excellent compared with competitors like Dish Network (DISH), as the overall pay-TV industry in the U.S. is facing a slowdown and has stagnated to a certain extent in the last few years. Like DirecTV, Comcast (CMCSA) also faced stagnation, however its numbers improved considerably in 2012 and the outlook for 2013 certainly seems positive. Leading into 2012, both Comcast and Dish Networks were considerably losing net subscribers in the pay-TV segment, nonetheless, conscious efforts on the part of DirecTV and Comcast saw a significant decrease in subscriber loss during the period.
Potential in Latin America
The gross addition during the fourth quarter of 2012 in the Latin American markets was nearly 1.8 million. The net subscribers added were more than 650K. The subscriber growth did not reflect in the total revenues as, the U.S. dollar appreciated considerably against all currencies during the period. Hence, the reported growth in revenues from the Latin American markets was lower than expected. The Latin American markets still have a massive growth potential as the market still seems under penetrated unlike the U.S. market that is very close to saturation. The key success for DirecTV is through its middle market and prepaid product offerings, as the major chunk of the Latin American is a middle market consumer and prefers value offering products. The Latin American market is highly price sensitive and values more economical propositions, thus the prepaid products have been extremely successful. The company guidance for 2013, suggests it expects the revenues from Latin America to increase by 20%. We expect DirecTV to offer middle-market products to the Latin American markets and if the company exceeds its current expectation from the region, then there may be a strong upward rally in the stock price as we move deeper into 2013.
Dish Networks primarily offers satellite TV and DVR services. It has a market cap of $7.8 billion, and it reported a total revenue and gross profit of $14 billion and $6.8 billion respectively in 2012. Revenues generated through satellite TV contribute roughly 66% to the overall revenues. Comcast also competes in the same space as the other two companies. It has a market cap of $110 billion, as it generated an overall revenue and EBITDA of $63 billion and $21 billion respectively in 2012. The highest revenue generating stream is cable TV followed by broadband internet services.
Going forward, the pay-TV market share will be highly crucial. It is the second largest pay-TV service provider behind Comcast. The current market share in this segment is approximately 19%, moving ahead if the figure goes past 21%, then we may see an upward rally in the stock. However, if the market share reduces below 19%, then we may see a downside in the stock price. Another significant aspect that contributes to an upward or downward trend to a stock is the SG&A% cost to gross profits. The current SG&A level is close to 48%, however if the company develops further on its cost management strategy and reduces the level to 45%, then we may see an upward rally. Nevertheless, if this figure goes past the 50% mark, there might be a heavy downside as the bottom line profitability will be impacted. Key ratios such as EPS and PE are commonly used to evaluate companies and these are directly related to the overall firm profitability. The HD and DVR segment have a huge growth potential in 2013. Latin America can be bread and butter for DirecTV moving forward as the HD and DVR services are growing in popularity exponentially. DirecTV will face stiff competition in Latin America from Comcast and other competitors, however if it continues the growth pattern it exhibited in 2012, we see no reason why the stock can't exceed all expectations.