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Dish Network (NASDAQ: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 (NASDAQ:DTV), as well as cable providers Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC).

(click to enlarge)DISH Chart

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 $)20072008200920102011
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 $)20072008200920102011
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 $)20072008200920102011
Owner Earnings$1,144$781$614$866$1,598
Invested Capital$10,086$6,460$8,295$9,632$11,470
CROIC11.35%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 Float447
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.

Source: Dish Network May Offer Good Value