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Buffett reported a position in DirecTV (NASDAQ:DTV) during Q3 2011 by disclosing that Berkshire Hathaway (NYSE:BRK.A) held nearly 4.25 million shares. Turns out, Buffett was just getting started. During the last quarter of 2011, Buffett increased Berkshire's position in DTV by a massive 378% and now owns approximately 20,348,400 million shares of DTV. Buffett is not the only renowned investor (who I closely follow) to invest in DTV during the last quarter. George Soros, the billionaire investor, increased his fund's stake in DTV by 18% during the same time period. Noticing these purchases, I added DTV to my watchlist for possible future investment. In this article, I will analyze the fundamentals of the stock and perform relative valuation to investigate the reasons as to why Buffett and Soros are bullish on DTV.

Basics

DTV is one of the largest digital entertainment service providers in the world with services in USA, Mexico, Brazil and several other countries in Latin America. It is the largest US satellite TV provider and operates in a very saturated business with a 90% penetration rate. The company had 19.9 million US subscribers and 11.9 million Latin American subscribers as of December 31, 2011.

The company offers its services in the US through its fleet of 12 geosynchronous satellites and has placed orders for two new satellites planned to be launched in 2014. The stock is up 106% during the last 5 years, but is flat over the last year compared to its chief rival Dish Network's (NASDAQ:DISH) 32% gain in stock price. The company has a market capitalization of $31.3 billion and does not currently pay a dividend. However, the company does have a stock buyback program and has repurchased more than $12 billion of DTV stock over the last 3 years.

Growth

The company has increased its revenues at a very consistent rate of 13% over the last 5 years. The EPS increased at a rapid pace during the last year from $2.48 to $3.47. Going forward, analysts expect the firm to grow its earnings at an annual rate of 14% slightly slower than the 16% growth rate of the industry. The table below presents the historical growth rates.

Growth Rates

10 Year

5 Year

1 Year

Revenue

12%

13%

13%

Income

-

13%

19%

EPS

-

25%

51%

Profitability and Returns

Coming to profitability, the company has improved its margins during the past 10,5 and 1 year period. The improving fundamentals are also seen the return on invested capital metric with ROIC up from 13% 5 years ago to the current 19% last year. A similar trend can be seen with return on assets offered by the company. The table that follows presents the profitability and operational metrics (averages).

Profitability & Operations

10 Year

5 Year

1 Year

TTM

Gross Margin

46%

49%

50%

50%

Operating Margin

7%

15%

17%

17%

Net Margin

2%

8%

10%

10%

Return on Invested Capital

7%

15%

19%

19%

Return on Assets

4%

10%

14%

14%

Competition

DTV has several competitors ranging from satellite TV providers to cable providers to telecom companies. The peer group selected for this analysis consisted of DISH, Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC), Liberty Global (NASDAQ:LBTYA), Verizon (NYSE:VZ) and AT&T (NYSE:T). The important operational and financial information for these companies is shown below:

Symbol

TTM P/E

Margin (TTM)

Growth

Gross

Operating

Prev 5 Yr

Future 5 Yr

DISH

9.26

43%

19%

13%

1%

[[C
MCSA]]

19.73

33%

19%

22%

13%

TWC

15.98

54%

21%

8%

14%

LBTYA

-

64%

20%

0%

37.3%

VZ

46.31

59%

17%

-3%

12%

T

46.90

60%

18%

-6%

8%

DTV

13.36

50%

17%

25%

14%

Valuation

Valuation analysis was performed using relative valuation. The multiple used in the analysis was developed using historical analysis of the company's and the peer group's multiples. The table below shows the valuation analysis results.

Valuation

DTV

Next Yr Proj EPS

$5.39

EPS Growth Rate

14%

Future EPS (5 Yr)

$7.90

Expected P/E

14

Price 5 Yrs Out

$110.62

Unlevered Beta

0.95

Debt

13.364

Debt to Cap

43%

Current Tax Rate

30%

Levered Beta

1.23

Risk Free Rate

2%

Risk Premium

8.00%

Size Premium

-0.36%

Cost of Equity

11.5%

Fair Value

$65.95

Current Price

$46.42

% Overvalued

-42%

As shown in the table above, DTV currently trades at a significant discount to fair value. In addition, the company has improving fundamentals and significant growth potential especially in Latin America (the company expects a revenue growth of 20% in Latin America during 2012). It is easy to see as to why Buffett and Soros both love the stock. I would recommend the readers to love it too.

(Kindly use this article for information purposes only. Please consult your investment advisor before making any investment decision)

Source: Why Buffett And Soros Love DirecTV