Latin America is an important market for DirecTV (DTV), constituting almost 25% of its total value by our estimates. In order maintain its competitive position, DirecTV is planning to increase its satellite capacity in the region along with focusing on certain key markets such as Brazil, Venezuela, Columbia, and Argentina. DirecTV intends to add three new satellites over the next few years and could consider acquiring local player GVT in order to offer bundled services. The increased satellite capacity will help DirecTV provide HD services in Brazil and other countries, which will be additive to the company's revenues and profits. Brazil will continue to remain one of the key markets for DirecTV. The region has 60 million households and pay-TV penetration is still low at less than 30%.
How Has DirecTV’s Latin American Business Done Recently?
In Q4 2012, DirecTV's gross additions in Latin America stood at close to 1.18 million while net subscriber additions amounted to 658,000. Revenues grew by 20% despite higher growth in subscribers due to negative exchange rate effects. 2012 was a stellar year for DirecTV in terms of Latin American expansion, and the company believes that its good run will continue in 2013 as well. The Latin American market is still underpenetrated, and DirecTV is witnessing great success from its prepaid and middle market products.
Almost 37% of DirecTV’s Latin American subscribers are middle market customers and 54% of gross additions in the Pan-American region (excludes Brazil and Mexico) came from prepaid packages. The Latin American customers are more value-conscious, so these packages have been successful. The company expects its revenues from the region to grow by roughly 20% in 2013. However, ARPU may come down due to increasing penetration of middle market packages, which are priced lower.
We currently forecast DirecTV's Latin American subscriber base to reach close to 20 million by the end of our forecast period. This is based on our expectation that DirecTV will maintain its lead and continue to grow its base at a high rate. However, if the churn increases and other competitors start offering competitive pay-TV packages or landline bundles, this growth could taper off. In an event where DirecTV can reach only 15 million subscribers instead of 20 million by the end of our forecast period, there can be downside of about 10% to our price estimate.
Our price estimate for DirecTV stands at $58, implying a premium of about 20% to the market price.
Disclosure: No positions.