Where DirecTV Gets Its Value

| About: AT&T Inc. (T)
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DirecTV (NASDAQ:DTV) generates the majority of its stock value from U.S. satellite TV (59%) and U.S. HD/DVR services (18%) by our estimates. The company’s competitors in these segments include satellite pay-TV providers like Dish Network (NASDAQ:DISH) and cable companies like Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC).

Our price estimate for DirecTV stands at $48.63, roughly 5% ahead of market price. Below we take a look at the two main product segments responsible for DirecTV’s stock value.

U.S. Basic Satellite TV: 59% of Value

The majority of DirecTV’s value comes from its U.S. satellite TV operations by our estimates (excluding advanced services like high definition and digital video recording). Profitability here is driven by the large size of DirecTV’s U.S. subscriber base and healthy fees per subscriber.

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Higher Subscriber Base for U.S. Operations Compared to Latin America

DirecTV had about 19 million subscribers in the U.S. by the end of 2010, amounting to a pay-TV market share of just above 18%. This is more than 3x the size of its Latin American subscriber base, which stood near 6 million at the end of 2010. While DirecTV’s Latin American subscriber base is growing at a much faster rate than its U.S. subscriber base, the U.S. subscriber base maintains a pretty substantial lead for now. On top of this, high capital expenditures associated with expanding the company’s footprint in Latin America reduce the comparative value of this region vs. the company’s U.S. operations.

Higher Fee Per Subscriber for Satellite TV Compared to Advanced Services like HD-DVR

We estimate that average fee per subscriber for basic satellite services (excluding advanced services) stood at around $66 for 2010. This is much higher than the fee that DirecTV charges for HD/DVR services, which was just north of $15 for the same year. Since satellite service delivers the actual content while advanced services like HD/DVR are just enhancements, the basic satellite service fees warrant a bit of a premium over the add-ons. Notably, the difference in average fee per subscriber for basic satellite services in U.S. and Latin America is not very large.

HD/DVR Services – 18% Of Value

Lower Penetration Compared to Regular Pay-TV Channel Packages

Besides the fee difference mentioned above, HD/DVR services still have relatively limited penetration - U.S. HD/DVR penetration (among DTV subscribers) stood at about 48% in 2010. This ratio suggests opportunity for revenue creation going forward from increased subscriber adoption of these services. We anticipate that this ratio will increase towards 66% by the end of our forecast period.

Disclosure: No positions