Satellite TV Stocks: EchoStar's Share Gain Is DirecTV's Loss

Includes: DISH, T
by: Todd Mitchell

Yesterday, EchoStar (NASDAQ:DISH) reported stronger-than-expected 3Q06 results. Today, DirecTV (DTV) reported weaker-than-expected 3Q06 results. A closer look:

Sub Growth:

* EchoStar: Net adds of 295,000 (beat est. of 213.000) up 16% from 255,000 in 3Q05 on 6% increase in gross adds to 958,000. Other sub metrics solid and in line with expectations. Upside due to higher gross adds (increase in market share vis-a-vis DirecTV).
* DirecTV: Net adds of 165,000 (missed our est. of 225,000) down 37% from 263,0000 in 3Q05 on 9% drop in gross adds to 1,006,000. Results suffered from higher-than-expected churn (1.8% versus our 1.65% estimate) and drop in gross adds (lost share to EchoStar).

Financial Results:

* EchoStar: EBITDA $578 million, up 15% from $501 million in 3Q05. Lower than our $638 million estimate, due to higher total SAC on higher-than-expected gross adds. Results were positively impacted by a surprisingly strong 6% jump in ARPU.
* DirecTV: EBIDTA $823 million, up 143% (remember just starting to capitalize SAC this year), but lower than our $895 million estimate, due to multiple points of minor weakness. Consolidated EBITDA of $894 million compares to our estimate of $921 million, AND included one-time $60 million benefit for DLA.

Key Observations:

* EchoStar's gain in the quarter was due to DirecTV's loss (share shift), not a fundamental shift in the competitive environment for pay-TV.
* EchoStar and DirecTV's aggregate gross adds were flat year over year, which shows broader availability of triple-play is not having quite as large a negative impact on DBS as expected.
* Change in the competitive dynamics of the pay-TV business as a result of cable's shift to the triple-play has still not completely worked its way into the market.


We think Comcast (NASDAQ:CMCSA) -- BUY-$43 price target -- still has one more quarter of accelerating growth from its launch of voice and shift to the bundled sales model. We agree with many value investors that DirecTV and EchoStar are looking attractive on a relative forward multiple basis.

However, we think we will need one more quarter to see how cable's shift to the triple-play have effected the competitive dynamics of the pay-TV business before these types of investors have the comfort level to invest in these stock on this basis. As a result, we still rate both stocks a HOLD.