Dish Network (DISH) is the third largest pay-TV provider in the United States, with over 13.9 million customers. Dish's main competition is fellow satellite TV provider DIRECTV (DTV), as well as cable providers Comcast (CMCSA) and Time Warner Cable (TWC).
DISH data by YCharts
After reaching a high of nearly $50 per share in late 2007, the stock plummeted to $10 per share at the depths of the recession and has since recovered to about $27 per share today. Here is the financial performance for the last five years:
| (In Million $) | 2007 | 2008 | 2009 | 2010 | 2011 |
|---|---|---|---|---|---|
| Revenue | $11,090 | $11,617 | $11,664 | $12,640 | $14,048 |
| Operating Cash Flow | $2,616 | $2,188 | $2,194 | $2,139 | $2,573 |
| Capital Expenditure | $-1,445 | $-1,842 | $-1,038 | $-1,114 | $-906 |
| Free Cash Flow | $1,172 | $346 | $1,157 | $1,026 | $1,668 |
Revenue stayed flat from 2007-2009 at around $11.5 billion. The last two years has seen revenue growth, with $14 billion in 2011 and $1.6 billion in free cash flow.
Owner Earnings
Owner Earnings is a better measure for valuation purposes than free cash flow. Warren Buffett defines Owner Earnings as follows:
These represent (1) reported earnings plus (2) depreciation, depletion, amortization, and certain other non-cash charges... less (3) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume... Our owner-earnings equation does not yield the deceptively precise figures provided by GAAP, since (3) must be a guess - and one sometimes very difficult to make. Despite this problem, we consider the owner earnings figure, not the GAAP figure, to be the relevant item for valuation purposes.
I'll calculate Owner earnings by taking the Net Income and adding back various non-cash items, such as depreciation, and then subtracting the 5-year average Capital Expenditures. I'll also add interest payments adjusted for taxes since interest is tax deductible.
| (In Million $) | 2007 | 2008 | 2009 | 2010 | 2011 |
|---|---|---|---|---|---|
| Net income | $756 | $902 | $635 | $984 | $1,515 |
| Depreciation & amortization | $1,329 | $1,000 | $940 | $983 | $922 |
| Stock based compensation | $0 | $15 | $12 | $15 | $31 |
| Other non-cash items | $82 | $-83 | $50 | $-141 | $46 |
| Interest Payments | $405 | $369 | $388 | $454 | $557 |
| Avg Capital Expenditure | $-1,268 | $-1,268 | $-1,268 | $-1,268 | $-1,268 |
| Owner Earnings | $1,144 | $781 | $614 | $866 | $1,598 |
Owner earnings smooth out capital expenditures and provide a clearer picture of the profitability of the company. Let's use the Owner Earnings figures to determine Dish Network's Cash Return on Invested Capital, or CROIC. This is the cash return generated by the company on invested capital, and is simply the Owner Earnings divided by the total invested capital. This is a better measure than ROIC because ROIC relies on earnings, which is a poor measure of profitability.
| (In Million $) | 2007 | 2008 | 2009 | 2010 | 2011 |
|---|---|---|---|---|---|
| Owner Earnings | $1,144 | $781 | $614 | $866 | $1,598 |
| Invested Capital | $10,086 | $6,460 | $8,295 | $9,632 | $11,470 |
| CROIC | 11.35% | 12.09% | 7.4% | 8.99% | 13.94% |
Dish's CROIC took a dive in 2009 but has since recovered to higher than pre-recession levels, nearly 14% in 2011. Let's take a look at the most recent balance sheet.
| Cash and Cash Equivalents | $2,693 |
|---|---|
| Investments | $255 |
| Debt | $7,509 |
| Pension Obligations | $0 |
| Minority Interest | $1 |
| Net Cash (Debt) | $-4,561 |
| Diluted Float | 447 |
| Cash/Share | $-10.20 |
Dish Network has about $10 per share in net debt, with interest payments around $550 million per year. This is a third of free cash flow and is a concern going forward.
Valuation
I use a discounted cash flow analysis to estimate the fair value of a company. I will use a discount rate of both 12% and 15% and use these value to define a fair value range. I will assume an annual growth rate of owner earnings of 3%, reflecting the difficulty of adding to the customer base in a mature and difficult industry. Using the above parameters, I arrive at a fair value range of $20.45 - $30.67.
Conclusion
Dish Network operates in a difficult, mature industry with large competitors. It has a significant amount of debt and a large amount of cash flow goes to interest. Assuming anemic growth going forward, the current stock price of $27.09 falls within my fair value range. The stock is a mixed bag, but one upside is that its small size relative to competitors may allow it to grow subscribers at their expense. If Dish can grow at a faster rate, it offers a good value.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
