DirecTV Hits Our Target

Mar. 4.14 | About: AT&T Inc. (T)

Best Ideas portfolio holding DirecTV (DTV) recently released better-than-expected fourth-quarter results. The firm has also hit our valuation target. For our new readers, we highlighted in June of last year the significant undervaluation of the firm as well as its near-pristine ranking on the Valuentum Buying Index (our stock-selection methodology). We think this is great public affirmation of the process. Please take a read of that article here.

DirecTV's revenue in the fourth quarter advanced 7%, while operating profit before depreciation and amortization (OPBDA) jumped 6%. Though we would prefer to see profits advance at a faster pace than revenue, both the top-line and bottom-line numbers beat the consensus forecast. The firm's $1.53 per share in earnings during the period was an impressive $0.24 better than the consensus forecast, largely contributing to the strong stock price performance after the release. For all of 2013, DirecTV hauled in $2.61 billion of free cash flow, about 8.2% of revenue and a 14% increase from the same period a year ago. We liked the better-than-expected performance and strong cash-flow generation and have no qualms with the company's new share repurchase program of $3.5 billion, especially given the company's current underpricing. Though management qualified the near term with macroeconomic concerns and foreign currency headwinds, DirecTV's commentary about its growth-engine Latin America over the long haul was encouraging.

Valuentum's Take

The media (cable TV) industry as a whole generates revenue primarily from monthly subscription fees and by selling advertising time. Though barriers to entry are high, firms face competition from a broad range of companies and ongoing threats from higher programming/content costs. Customers can cancel cable services during economic contractions, but the strong, recurring cash flow stream that large subscriber bases provide is quite attractive.

Competition continues to heat up in the space as well, with Comcast's (NASDAQ:CMCSA) decision to merge with Time Warner Cable (TWC) creating a larger, formidable foe (see details here). However, it also increases the likelihood of a long-anticipated DirecTV-Dish Network (NASDAQ:DISH) tie-up. Though we acknowledge the risks related to a fast-changing industry landscape, DirecTV continues to be a holding in the Best Ideas portfolio. We expect to update our full 16-page report on DirecTV soon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: DTV is included in the portfolio of our Best Ideas Newsletter.