It may not be quite a full roar of approval from analysts at Moffett Nathanson (MN), but an upgrade from ‘Sell’ to ‘Neutral’ on Charlie Ergen’s Dish Network is welcome news for the Denver-based DTH broadcaster.
The hard facts, however, still make grim reading. Dish’s stock price has crashed 48 per cent this past year (and MN remind clients that the S&P 500, despite all the turmoil of the past year, only fell by 4 per cent). Dish is currently traded at around $26.
Craig Moffett admits that there’s always a risk, as with any stock, but Dish’s prospects now seem finely balanced. “Yes, there is still a great deal of downside risk if Dish Network doesn’t sell its spectrum. But there is now also upside risk if they do.”
MN has marked Dish as a “Sell” stock for a couple of years, and say the recommendation was simple. “At the time, valuations as high as $3 per MHz-POP for Dish’s spectrum were commonplace. In our view, it was (and is) worth a bit less than $1 per MHz-POP. That implied a target price of $38 or so. The shares were trading for as much as $70.”
The analysts admit that factoring in a potential sale of Ergen’s valuable spectrum was perhaps wrong. “Instead, it was that the very methodology of valuing spectrum on a price per MHz-POP basis was only appropriate if the spectrum was going to be sold. Sure, it might be sold. But a sale was only one of many possible outcomes, and all other options were and are much less attractive. In effect, the market’s valuation approach itself was the problem. Investors were basing their target prices exclusively on best-case scenarios.”
MN stays with a target price of $29, and based on the following formula: “We chose a relatively arbitrary 50 per cent probability of a spectrum sale at $1 per MHz-POP (implying a share price of $38) and a 50 per cent probability of all other outcomes with an assumed valuation 50 per cent lower ($19 per share). The weighted average was our $29,” explains Moffett, who admits his calculation is not very scientific. With the shares now in the mid-20s, probabilities do matter. But we still don’t have a way to be any more precise in their estimation. And that seems as good a reason as any to remove our Sell rating and move to a Neutral stance.”