2 Cable TV Stocks To Avoid, 1 To Consider

Includes: CMCSA, DISH, T
by: Dividendinvestr

By Renee O'Farrell

The last several decades have been marked by the rise of the entertainment industry -- movies and television in particular. Today, most people can't live without some form of entertainment. However, that doesn't mean the cable television business is an easy one in which to succeed. In addition to competition within the industry, cable television providers also have to compete against companies that provide on-demand video, like Netflix (NASDAQ:NFLX). Aside from providing an obvious alternative to traditional cable service, the more content that's available through a variety of outlets, the less value it has -- especially in traditional formats. Right now, the companies that are proving to be the most hardy competitors are the most diversified. Here are two names in the cable television industry that I recommend investors pass on right now, along with one name that I like.

Avoid DirecTV (DTV)

Digital entertainment provider DirecTV services customers in the U.S. and Latin America under its namesake brand DirecTV and the brand Sky. As of the end of 2011, the company had almost 20 million subscribers in the U.S. and roughly 8 million in Argentina, Chile, Colombia, Ecuador, Venezula, Brazil and the Caribbean. Right now, the stock is trading at $48 a share, which is roughly 9 times its forward expected earnings of $5.33 a share. DirecTV earned $3.47 a share last year and is expected to earn $4.36 a share this year. Analysts say the company's earnings will increase by an average of 17.56% a year over the next five years, vs. expectations for its industry of 15.62% -- but it doesn't offer a dividend to help hedge those estimates.

The company's Latin American segment is responsible for much of it success. DirecTV is aiming to continue that trend and double the number of Latin American subscribers over the next five years. As far as its U.S. segment goes, the company has been able to add subscribers, but not nearly as quickly as it did in previous years. Overall, I am not convinced the company is going to be able to pull it off. Warren Buffett's Berkshire Hathaway may be of a different opinion. The fund upped its stake in the company by 379% during the fourth quarter, bringing its total stake in the company to $870.1 million (check out the rest of Berkshire Hathaway's portfolio).

Avoid Dish Network (NASDAQ:DISH)

DirecTV competitor Dish Network had over 14 million subscribers as of the end of the first quarter of 2012. The company has a lot going for it: It offers subscribers DishOnline.com, which is a subscriber-only online video streaming service, and Blockbuster@Home, which provides subscribers with on-demand content, mail service and in-store exchanges. The company has been reorganizing its management structure, segmenting its distribution channels and trying to revitalize its brand, but those ventures take time and money to pay off. It is trading at almost $31 a share right now. The company earned $2.97 a share last year. Consensus estimates put the company's earnings per share at $2.76 this year and $2.83 per share next year, making its forward P/E ratio somewhere around 11.

Looking a little further into the future, analysts predict this company's earnings will grow by an average of just 1.42% a year for the next five years. Dish could do great things, but I'd say: Why buy in now? The share price will likely go down as its earnings do. I suggest to investors looking to buy into Dish that they do so after the company's earnings start to rebound. Dan Loeb's Third Point is bullish on this company. The fund initiated a $113.92 million position in the company during the fourth quarter -- that's 4.56% of the fund's total portfolio (see more of Third Point's top picks).

Consider Comcast (NASDAQ:CMCSA)

In the cable television game, I like diversified companies like Comcast best. The company has experienced some downturn in the number of subscribers, but this company, which is a favorite of Jean-Marie Eveillard's First Eagle Investment Management (check out the fund's top picks here), is highly diversified. It offers broadband service as well as voice and recently acquired a sizable stake in NBC Universal, the company behind NBC, CNBC, E!, Syfy, Bravo, Telemundo, A&E, USA, MSNBC, Universal Studios and (at least in part) Hulu. Comcast's stake in NBC Universal is large enough to account for roughly one-third of its revenue. Comcast is trading at $29 a share. It earned $1.61 a share last year.

Going forward, analysts expect the company will earn $1.91 a share this year and $2.21 a share next year, making its forward P/E ratio just over 13. This is a little higher than DirecTV or Dish, but Comcast has strong earnings growth estimates -- analysts predict its earnings will increase by roughly 15% a year over the next five years. I think Comcast is the best bet.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.