DirecTV: Earnings Scorecard

| About: AT&T Inc. (T)

DIRECTV (DTV) posted excellent financial results for its second quarter 2010, beating the Zacks Consensus Estimate. The solid results were thanks to double-digit revenue growth and significant margin expansion.

During the reported quarter, the company started two new services, Whole Home DVR, as well as a bundle offering of three dedicated 3D channels. The recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for both the short-term and the long-term are covered in depth below.

Second Quarter Highlights

In the second quarter, revenue was $5,848 million, up 12% year over year and also well above the Zacks Consensus Estimate of $5,714 million. This improvement was primarily due to massive subscriber growth in both the U.S. and Latin America regions.

GAAP net income was $543 million or 42 cents per share, compared with a net income of $407 million or 40 cents per share in the year-ago quarter. However, in the reported quarter, DIRECTV incurred around $160 million of one-time charges related to a share transaction with former CEO John Malone and his family. Excluding this, second quarter 2010 EPS was 60 cents, which was above the Zacks Consensus Estimate of 59 cents.

Agreements of Analysts

For the third and fourth quarter of 2010, the earnings revision trend is mixed. However, for the full fiscal year 2010 and 2011, the earnings revision trend is positive.

For the third quarter 2010, four of 17 analysts covering the stock revised their estimates upward while four revised downward over the last 30 days. For the next quarter, four of 17 analysts revised upward and 3 analysts moved downward in 30 days.

For fiscal year 2010, ten of 18 analysts increased their estimates while only 2 revised their estimates downward during the same period. Similarly, for the fiscal year 2011, thirteen of 19 analysts revised their estimates upward, while only 1 analyst decreased the estimate.

Over the long term, we believe DIRECTV can achieve strong top-line and bottom-line growth, driven by several factors, including the rising Pay-TV penetration across Latin America, less competitive TV markets for DTV-LA, the competitive advantage from leveraging DTV-US buying power, HD and advanced product leadership, growth potential from pre-paid business and exclusive content, with focus on sports.

Magnitude of Estimate Revisions

In accordance with the overall trend of estimate revisions for DIRECTV, the Zacks Consensus Estimate for the third quarter 2010 remained flat in the last 30 days, while for the next quarter, the Zacks Consensus Estimate increased by 1 cent. For fiscal 2010, the Zacks Consensus Estimate increased by 2 cents in the last 30 days, while for fiscal 2011, the EPS estimate increased by a whopping 11 cents.

Our Recommendation

We believe DIRECTV continues to dominate the HD landscape by delivering more high quality national HD channels than any other television provider in the country through the most advanced technology. Nonetheless, we also believe that cable/telecom operators have closed their gap with DIRECTV in the HD segment. Moreover, customers in this industry are becoming more concerned with prices; hence, they are favoring bundled offers that are being provided by cable/telecom operators.

We also believe the company's disciplined focus on a superior video product offered to customers and its disciplined use of free cash flow to shrink capitalization will continue to act as a catalyst for the stock. DIRECTV currently retains a Zacks #3 Rank (short-term 'Hold' rating). We are also maintaining our long-term Neutral recommendation on the stock.

Disclosure: None