Advanced Television

Plenty of upside at DirecTV

December 16, 2013

By Chris Forrester

A report to clients issued by investment bankers Morgan Stanley has delivered an “Overweight” rating, and a significant upgrade on the bank’s current price expectations of $70 a share. The new advice says that a $90 share price “[is becoming] more realistic and supports our Overweight rating”.

The basis of Morgan Stanley’s argument is that DirecTV’s management guidance is for investors to expect $8 a share in free cash flow per share (up 15 per cent), and higher Earnings Per Share in 2016 (up 8 per cent), which are both ahead of Morgan Stanley’s own model expectations. DirecTV’s shares closed Friday 14 at $66.63.

DirecTV itself is guiding to expect stronger top-line revenue growth, lower subscription acquisition costs, and lower capital investment intensity.

DirecTV also anticipates its ad-sales revenues to grow quickly over the next 3-4 years helped by its new and significantly expanded ‘addressable advertising’ efforts.  Speaking at the company’s investor day, Paul Guyardo, EVP/chief revenue and marketing officer for DirecTV, estimates that business will grow 30-40 percent over the next three to four years.The expectation is that DirecTV ad revenues will increase to $750 million by 2016, from $550 million at the end of this year.

Given the dynamics of the US pay-TV market – mature and highly competitive – DTV’s relatively bullish US revenue forecast is likely the most significant difference between the bank’s former expectations and the market’s general consensus.  However, DirecTV’s Latin American market is also helping with better subscriber growth only threatened by currency exchange rate headwinds.

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