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Brian Kraft, an analyst with Credit Suisse, today cut his rating on DirecTV (NASDAQ:DTV) to Underweight from Overweight, and while increasing his price target on the stock to $20, from $19 (the stock is well above that level). He is recommending a pair trade of long EchoStar Communications (NASDAQ:DISH) and short DirecTV.

Overall, Kraft is cautious on the satellite broadcaststers. He says they both face an increasingly competitive environment, as the cable companies continue to roll out triple play service, weak Adelphia and Charter (NASDAQ:CHTR) cable systems are turned around, the Bells move aggressively to roll out their fiber optic video systems and video habits shift toward on-demand and away from live broadcasts. He also thinks EchoStar is better positioned than DirecTV to weather the storm.

There are several reasons he sees EchoStar with the upper hand: He thinks EchoStar’s distribution agreement with AT&T (NYSE:T) is more important to AT&T than DirecTV’s relationship with Verizon (NYSE:VZ) is to Verizon. He expects that with the close of AT&T’s pending acquisition of BellSouth (BLS), AT&T will switch satellite partners in BellSouth’s markets to DISH from DTV. He also contends that DISH benefits from having more rural customers as well as more favorable RBOC exposure. And he says there is potential for AT&T to acquire DISH, although the probability in his view is under 50%.

He cut his DirecTV EPS estimates to $1.19 a share from $1.25 for this year and to $1.25 from $1.27 for next year; he trimmed his 2007 estimate for EchoStar to $1.71, from $1.78.

Kraft says he thinks the 20% move in DirecTV shares on expectations that News Corp. (NASDAQ:NWS) will swap its stake in the company to Liberty (LCAPA) is unjustified.

Today, DirecTV is down 9 cents at $24.92; EchoStar is up 9 cents at $38.02.

Source: Credit Suisse Suggests Cable Pair Trade: Long EchoStar, Short DirecTV