Satellite TV Companies Look Undervalued, But Risks Loom

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Includes: AAPL, CHTR, CMCSA, DISH, NFLX, T, VZ
by: Benjamin Goldman

Looking from a multiples standpoint, satellite television companies DirecTV (DTV) and Dish Network (DISH) both appear to be undervalued. DirecTV is expected do have per annum earnings growth of over 18 percent over the next five years, but has a P/E ratio of 13.3. Dish Network's P/E ratio is currently less than 10, but has experienced per annum P/E ratio growth of over 14 percent over the last three years. In this article, I explain why these two companies are not good buys despite looking undervalued and give suggestions on how to better invest in the television industry.

The main reason why I'm bearish on satellite television companies is their method of delivery. Over the past few years, internet speed has gotten much better, but satellite technology has stayed pretty much the same. Disturbances in service are one of the largest reasons to switch television providers and have been satellite television's biggest flaw for some time now. As I've mentioned before, the internet revolution in television is already here and will be a household standard within the next ten years. I believe wired providers like Verizon (VZ) and Time Warner (TWC) are much safer from the internet revolution than satellite providers because they normally bundle their services which includes internet access.

DirecTV's biggest selling point is NFL Sunday Ticket, which gives football fans access to watch every NFL game. This is a huge advantage over competitors, especially with football's massive rise in popularity over the last ten years. The contract expires after the 2014-2015 season and I expect the service to be available to many more providers. Dish Network has recently introduced the Hopper, a DVR with 2 TB of memory and the ability to automatically skip commercials, which has drawn several law suits since its introduction. I believe this may attract subscribers for now, but this will be an industry standard very soon and may even become obsolete if program recording can move to the cloud.

I believe both DirecTV and Dish Network shares will stagnate over the next two years and believe that not holding (but also not shorting) them is a good idea as there will be plenty of better investments in the same industry. Right now I recommend going long on Comcast Corporation (CMCSA) as they are an industry leader and have been performing very well as of late. I am also very bullish on Netflix (NFLX), but it is still a risky pick since their management is known to make bad decisions and their plan to start original programming is unproven. Many people speculate that Apple (AAPL) will release a revolutionary television product, but details are still cloudy. If they do produce a TV product, which is likely at this point, it is sure to be very successful and my boost the company's stock price even higher. It looks like the best play now is to stay away from satellite and hover towards industry leaders and companies that have the potential to revolutionize the television industry value chain.

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