Satellite TV Stocks: Now It's About the Fundamentals

For months now, a lot of the chatter about satellite television stocks - EchoStar (DISH) and DirecTV (DTV) - has involved potential transactions.

There were rumors that the two companies might try to merge (again); there was chatter that AT&T (T) might give on its fiber optic strategy and buy one of them, and there were the discussions about the sale, now underway, of News Corp.’s (NWS) stake in DirecTV to John Malone’s Liberty Media (LCAPA).

But in 2007, asserts Craig Moffett of Bernstein Research, “it will be operating results that matter.” And for investors, that is not such a good thing.

Mofffett notes that AT&T in its recent post-earnings conference call with analysts indicated that it was “sticking to Plan A” for video - rolling out IPTV - rather than switching to Plan B and buying a satellite TV company. Meanwhile, Moffett notes that the Rupert Murdoch/John Malone asset swap involving DirecTV “is now entering a lengthy limbo in Washington that could drag on for six months or more.”

So the Street will switch its sights to fundamentals. Moffett, for one, sees trouble ahead. He notes that subscriber growth for both companies in the third quarter was the slowest on record; triple-play offerings from the cable industry can’t be directly matched by the satellite services without partners. Moffett says the satellite companies will also be hampered by slower housing growth in the U.S. “If current trends persist, the drop in housing completes will shave 650,000 homes from Pay TV industry growth in 2007 versus 2005,” he writes.

With [the satellite companies] taking about 30% of gross additions, that translates into perhaps 200,000 fewer new satellite subscribers, or about 12% of 2006’s estimated [satellite TV] industry net additions of 1.72 million.

Moffett’s conclusion: “Neither DirecTV nor EchoStar appears attractively priced at current levels.” He rates both of them Underperform, though adds that EchoStar looks a little better on a valuation basis.

Today, EchoStar is down 36 cents at $39.08; DirecTV is up 12 cents at $24.31.

DISH vs. DTV 1-yr chart