Neutral on DIRECTV - Analyst Blog

DIRECTV (DTV) has successfully established itself as a premium brand in the U.S. pay-TV market. The company is targeting mainly the high-end customers who are willing to pay for its costly HD, DVR and interactive services and premium programs.

Since most of its subscribers belong to the upper strata of the society, churn rate of DIRECTV is very low. DIRECTV has initiated a massive marketing drive to attract customers to its exclusive programming. This strategy paid off as subscribers are opting more for high-end HD-DVR and whole-room DVR services.

In the third quarter of 2010, DIRECTV added 174,000 net subscribers in the U.S. and 206,000 in Latin America. ARPU (average revenue per user), in the U.S. has increased by 4.3% year over year.

The most surprising fact is that DIRECTV is generating net subscribers addition sequentially, when other large pay-TV operators like cable TV giant Comcast Corp. (CMCSA), Time Warner Cable Inc. (TWC), Cablevision Systems Corp. (CVC), and its closest rival DISH Network Corp. (DISH) are sequentially losing basic video customers.

We believe, this fabulous performance was the combined result of effective customer screening, target marketing, avoiding disputes with content manufacturers and media companies.

DIRECTV recently improved subscriber quality, i.e. it shrank the proportion of subscribers with low credit ratings by restructuring dealer incentives (changed the commission and penalty structure), cutting the proportion of third-party dealer sales and implementing a credit card policy for new subscribers.

 With a higher-quality subscriber base, DIRECTV has implemented programming package price increases, and higher HD and DVR equipment service and lease fees in the U.S., driving increases in ARPU. Advertising revenue has also increased.

Nevertheless, we believe these positives are already reflected in current valuation and therefore maintain our long-term Neutral recommendation for DIRECTV. Currently, it is a short-term Zacks #3 Rank (Hold) stock.

 
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