Earnings Scorecard: DirecTV

Mar. 3.11 | About: AT&T Inc. (T)

DIRECTV (DTV) (Feb. 25) reported excellent fourth quarter 2010 financial results, where both the earnings per share (EPS) and revenues exceeded the Zacks Consensus Estimate. The robust result was combined with a massive $6 billion share buy-back program. Management is also confident that the company’s full-year EPS will jump to $5.0 in 2013 from $2.30 in 2010.

During the quarter, both the U.S and Latin American segment experienced huge growth in revenue supported by strong subscriber growth.

Fourth Quarter Highlights

Fourth quarter 2010 total revenue came in at $6,621 million, an improvement of 10.7% year over year, surpassing the Zacks Consensus Estimate of $6,519 million.

This was primarily attributable to massive subscriber growth in the U.S. and Latin America regions, as well as average monthly revenue per subscriber (ARPU) growth of 4.6% at DIRECTV U.S. and $59 million of net revenue generated by DIRECTV Sports Networks, which was acquired as part of the transaction with Liberty Media Corp. (LINTA) in November 2009.

Quarterly GAAP net income was $618 million or 74 cents per share compared with a net loss of $32 million or a loss of 3 cents per share in the year-ago quarter. Fourth quarter 2010 EPS of 74 cents was way ahead of the Zacks Consensus Estimate of 62 cents.

Operating profit in the fourth quarter of 2010 came in at $1,062 million, up 23.2% year over year. At the end of fiscal 2010, DIRECTV had $1,502 million of cash & cash equivalents and $10,510 million of outstanding debt on its balance sheet compared with $2,605 million of cash & cash equivalents and $8,010 million of outstanding debt at the end of fiscal 2009.

Agreements of Analysts

Of the 18 analysts covering the stock in the last 7 days, 4 analysts upwardly revised their estimates for the first quarter of fiscal 2011, while only 1 analyst revised its estimate downward for the same period. Likewise, for the second quarter of fiscal 2011, out of the 17 analysts, 5 analysts increased their estimates, while only 2 analysts revised their estimate downward.

For fiscal 2011, out of the 20 analysts, 11 raised their estimates, while 3 of the analysts decreased their estimates. For fiscal 2012, out of the 17 analysts, 7 revised their estimates upward, while 1 moved in the opposite direction.

We believe the positive sentiment results from the strong fundamentals and better subscriber growth across all its segments.

Currently, the Zacks Consensus EPS Estimate for the first quarter of fiscal 2011 is pegged at 70 cents. The projected annual growth is 18.93%. Similarly, for the second quarter, the current Zacks Consensus EPS Estimate of 83 cents indicates a gain of 37.65% year over year.

Magnitude of Estimate Revisions

In relation to the upward revision of estimates, the Zacks Consensus Estimate inched up 2 cents to 70 cents, during the last 7 days, for the first quarter 2011. Likewise, for the second quarter of fiscal 2011, the Zacks Consensus Estimate increased 3 cents from 80 cents to 83 cents for the same period.

For fiscal 2011, the Zacks Consensus Estimate upped 6 cents from $3.01 to $3.07, in the last 7 days. Similarly, for fiscal 2012, the Zacks Consensus Estimate jumped 13 cents, from $3.90 to $4.03.

Earning Surprises

With respect to earnings surprises, except for one quarter where DIRECTV was in line with the Zacks Consensus Estimates, the company consistently beat the Zacks Consensus Estimates during the last four quarters. DIRECTV produced a huge earnings surprise of 12 cent or 19.25% in the last quarter.

Although there are no surprises expected for the next two quarters but the upcoming quarter contains 2.56% upside potential (essentially a proxy for future earning surprises) while for fiscal 2011 and fiscal 2012 Zacks Consensus Estimates upside potentials are 0.65% and 0.74%, respectively.

Our Recommendation

DIRECTV remains one of the few pay-TV service providers that are still generating commendable video subscriber growth. A strong fundamental along with huge subscriber growth across all its segments makes it quite popular within its peer group.

However, within the satellite TV industry, DIRECTV is facing increasing competition from its nearest rival DISH Network (NASDAQ:DISH). Furthermore, U.S. telecom giants, AT&T (NYSE:T) and Verizon Wireless (NYSE:VZ) are increasingly rolling out their fiber-based network in order to provide video services.

Additionally, the newly developed Internet video streaming companies like Netflix (NASDAQ:NFLX), Hulu, YouTube have become major threats to the overall pay-TV industry.

We maintain our long-term Neutral recommendation for DIRECTV. Currently, DIRECTV has a Zacks #3 Rank, implying a short-term Hold rating on the stock.