Despite being one of the best bargains in telecom right now, maybe one of the best bargains in the entire stock market, DISH Network (NASDAQ:DISH) is getting little love from either the market itself or most of the authors here on Seeking Alpha, including this one by Brian Nichols.
While DISH has a number of business lines that could be considered valuable, including its traditional pay-TV satellite business and its new Sling TV streaming service, Brian thinks its most valuable asset by far is the wireless spectrum it owns, and I agree.
I disagree, however, with his ultimate conclusion. DISH is not a sell. In fact, it is a screaming buy.
Three Segments, But I Only Need One
After deducting DISH's net $12.15 billion in debt, the market is currently pricing DISH at $22.2 billion in market capitalization. At the risk of stating the obvious, whether DISH's real value is over or under that number will determine whether it should be bought or sold. And just one DISH segment alone is worth well over that number.
That is of course the most valuable one - the spectrum holdings. DISH owned roughly 56 MHz of spectrum before the recent AWS-3 auction: 40 MHz AWS-4, 10 MHz PCS, and 6 MHz low-band, sub-1 GHz. Since then it has acquired even more spectrum, but for now we will assume that it acquired that spectrum at full price and that it does absolutely nothing to raise the value of DISH's equity.
The recent spectrum auction broke all records for spectrum license revenue, and spectrum is now being priced at well in excess of $2 per MHz-POP. Assuming a conservative $2.50 per MHz-POP, 56 MHz in a country of over 320 million people yields about $45 billion. Even after DISH's debt, that represents a roughly 50% upside to the current share price. And then there are the other two business segments, and then the new spectrum they've acquired, and then the real price of the spectrum is probably higher than $2.50 per.
DISH bears don't dispute this, but rather seek more to put an asterisk on it. Repeating something I have read countless times over the last 12 months or so, the bear argument is that DISH faces a looming deadline to deploy its spectrum that it can only meet with the help of an existing wireless operator. Since the spectrum will be repossessed by the FCC, and the license therefore made worthless to DISH, if the deadline is missed, this supposedly gives wireless operators all the leverage and leaves DISH to take whatever crumbs for the spectrum. Bears also note that Sprint (NYSE:S) and Verizon (NYSE:VZ) recently declined to purchase spectrum when given the opportunity, and AT&T (NYSE:T) can never hope to do a deal with DISH since it just bought DirecTV. Brian goes so far as to say that leaves T-Mobile (NASDAQ:TMUS) as the only suitor with no other bidders, and all DISH can do is hope Legere and co. "play nice."
The bears have it wrong. Well, except for the part about the federal government never allowing AT&T to buy both DirecTV and DISH. That is almost certainly correct. But Sprint's lack of interest in DISH's spectrum is nothing new and not surprising. The problem with this analysis is that it only examines low-band and mid-band spectrum holdings of carriers, where AT&T and Verizon dominate and Sprint and T-Mobile lag badly. In fact, the only spectrum chart in the latest article is a low-band chart. But as I've explained, high-band spectrum is increasingly the name of the game in wireless, given its far superior capacity to move large amounts of wireless data cost effectively. And Sprint owns most of the cellular spectrum above 2.3 GHz in this country. It's more than they know what to do with, so DISH was probably never all that tempting for them.
I'm less than persuaded by Verizon's claim that they are all set with regard to spectrum. It sounds more to me like trying to talk the price down right before they go shopping for it. But never mind that now. Let's assume that indeed DISH is doomed to get a poor offer for its spectrum if it sells it now. By far the biggest hole in the bears analysis is that DISH doesn't have to sell now. Bulls like myself have been saying that for months, but bears continue to insist that we are wrong. So at least we now know what we are arguing about. If DISH has to sell now, it is indeed in trouble. If it can afford to wait, rising wireless data demand should make sure it gets paid handsomely a few years down the road. So, does it have to sell now, or doesn't it?
Fresh Off The (SEC) Presses
To settle this once and for all, I went digging through DISH Network's 10-Q that it filed in May of last year. So that there is no risk of filtering or slanting on my part, I have reproduced the entire, detailed risk disclosure from DISH Network below:
"By March 2017, we must provide terrestrial signal coverage and offer terrestrial service to at least 40% of the aggregate population represented by all of the areas covered by the licenses (the "AWS-4 Interim Build-Out Requirement"). By March 2020, we were required to provide terrestrial signal coverage and offer terrestrial service to at least 70% of the population in each area covered by an individual license (the "AWS-4 Final Build-Out Requirement"). On December 20, 2013, the FCC issued a further order that, among other things, extended the AWS-4 Final Build-Out Requirement by one year to March 2021 (the "Modified AWS-4 Final Build-Out Requirement"). If we fail to meet the AWS-4 Interim Build-Out Requirement, the Modified AWS-4 Final Build-Out Requirement may be accelerated by one year, from March 2021 to March 2020. If we fail to meet the Modified AWS-4 Final Build-Out Requirement, our terrestrial authorization for each license area in which we fail to meet the requirement may terminate."
As you can see, the terms are very clear. While DISH does indeed face loss of licenses for failing to meet the Final buildout deadline, the only penalty for missing the Interim deadline is the acceleration by one year of the second deadline. So assuming they miss that deadline, which I agree seems likely at this point, they have until March 2020 to deploy the spectrum to 70% of the covered population. And since that deadline had already been extended one year, that is actually not a day sooner than the deadline the spectrum came with when DISH first bought it. So there is no spectrum fire sale in DISH's future, at least not in 2016. Or 2017. Or 2018. Whichever of the Big Three caves first will have to offer a lot more than crumbs to get DISH's spectrum.
DISH does not have to sell now. Because it does not have to sell now, it cannot be forced into a sale, but rather can afford to wait until it gets a full value offer. Meanwhile, rising data demand may very well drive the price even higher. With the spectrum alone being 50% more valuable at current prices than the cost of DISH stock, and with whatever upside the other two business lines and potential future spectrum appreciation offers, I see DISH as a strong buy.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.