Is It Time To Put The TV Into Sleep Mode?

DIRECTV DTV reported earnings that beat Wall Street estimates this morning, but accompanied by a massive sell-off in equities and weaker than expected internals, shares are plunging, more than 6% today. The El Segundo, Calif.-based company reported second earnings of 91 cents per share on $6.6 billion in revenues. Wall Street had been expecting earnings of 85 cents per share on $6.54 billion in revenues, but U.S. growth was far weaker than expected, which is helping to add to losses today. Subscriber numbers, average revenue per user (ARPU), and EBITDA all came in lighter than expected. The company added just 26,000 customers in the second quarter of 2011. This is sharply lower than what it added in 2011, when it added 100,000 users. The cancellations rate also rose to a monthly average of 1.59% from 1.51%. “Consolidated revenue accelerated to 13% exceeding both last year and first quarter growth rates as DIRECTV Latin America's continued record subscriber additions coupled with strong ARPU growth propelled a 46% increase in DTVLA revenues while DIRECTV U.S. delivered another solid quarter of industry leading revenue growth of 7%,” said Mike White, President and CEO of DIRECTV. “Importantly, the significant subscriber performance in Latin America did not come at the expense of profitability as DTVLA's OPBDA grew 60% fueling our consolidated OPBDA growth to 13%.” White added, “While a challenging economic and competitive landscape continues to impact DIRECTV U.S., the substantial and growing contributions from DTVLA combined with our share repurchase program drove strong EPS growth of 52% in the quarter.” As such, shares hit a low print of $43.23 on the day before bouncing back, to approximately $46 per share, as of the time of this writing. With subscriber growth slowing in the U.S., economic growth slow slowing here as well, it is no surprise that cancellation rates are rising. People are panicking over what is going on out there and a company like DirectTV is going to feel the crunch. Despite trading at just 11 times 2012 forward earnings, shares could continue to get cheaper until the dip finally gets bought. Many thought it may have happened yesterday. That obviously is not the case at this point. People are not willing to outright cancel their TV subscriptions altogether, but any pick up in cancellation rates for DIRECTV will be punished unmercifully in this market. It might not be time for investors to turn off the TV, but perhaps change the channel for a while. Go see what else is on. Just don't make it a Blockbuster night anytime soon. ACTION ITEMS:

Bullish:
Traders who believe that economic conditions will get better might want to consider the following trades:

• Consider DIRECTV on its ability to do something with Blockbuster. A Netflix NFLX competitor could do wonders for DIRECTV, and potentially add billions to the company's market cap if it can execute on its plans.

Bearish:
Traders who believe that the economy is going down for a long while may consider alternate positions:

• Short everything. DIRECTV will likely see higher cancellation rates if things do not improve quickly.
  
  

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