Do you know anyone who doesn’t have something negative to say about the cable or satellite company that provides the video entertainment feed into their home? For most consumers, subscription video entertainment in our homes is somewhat of an ironic situation because most of us are unhappy with the service we receive and the prices we pay; but we would never consider, even for a moment, living without it. We love the content but hate the provider and, on a regular basis, many who have the option to will switch back and forth between cable and satellite providers. Well, if I don’t have to like the company in order to like and buy their products, then I shouldn’t have to like them to make a profit from them either.
Three Names Almost Every American Knows
Dish Network Corp (NASDAQ:DISH), DIRECTV (NASDAQ:DTV) and Comcast Corporation (NASDAQ:CMCSA) are three of the nation’s major providers of subscription entertainment services into our homes and there are probably very few households in the country where those names are not well known. Two appear to provide an opportunity for investors to recover some of the money being sent to these businesses each month by owning a piece of them; one does not.
A Difficult Position for One
Dish Network Corp (NASDAQ:DISH) is the smallest of the three businesses being discussed and is having difficulty maintaining their already diminished foothold in the market. Even though customer retention is a challenge for all three of these businesses, the majority of subscriber growth is taking place within Comcast Corporation (NASDAQ:CMCSA) and DIRECTV (NASDAQ:DTV), and Dish Network is falling behind. Over the last five years Dish Network has only managed to grow its sales at an annualized rate of 7.9%, well below the growth rate of its competitors.
As this business is currently valued at a forward P/E ratio of 15.28 with a forward 5-year projected earnings growth rate of only 2.6%, it seems to be exorbitantly priced in relationship to its future prospects. While income investors might be tempted by the attractive 5.28% dividend yield, they would be well served to weigh the 121% payout ratio as well as the minimal amount of shareholder equity held within the business.
A Better Prospect for Another
With a market capitalization almost twice that of Dish Network, the market clearly sees the superior potential of DIRECTV as compared to its competitor in satellite delivered home video entertainment. When reviewing the current valuations and forward growth prospects, it is not difficult to see why.
DIRECTV is currently priced with a multiple of only 9.61 times next year’s projected earnings but has a 5-year projected earnings growth rate of 12.3, producing a PEG of 0.78. If the stock merely maintains its current P/E valuation of 11.59, that would impute a gain of 20.6% for the stock over the next 12 months.
A note of caution is required for investors in DIRECTV however, as it currently carries a negative value for shareholder equity. This is somewhat mitigated by the price to cash flow multiple of only 6 and interest coverage of 7.3. The company does not currently pay a dividend but does present an interesting prospect for capital gains over the short and long term time-frames. Those prospects would become even more interesting should Dish Network fall into more difficult circumstances than they currently face.
Saving the Best Value for Last
I must confess to being a bit surprised at the final result of my analysis of this sector; I expected DIRECTV to be the best choice as it is a stock I have owned in the past. However, the main reason due diligence is important in the investment process is to allow an investor to replace opinions with facts, and this analysis has changed my view by replacing an opinion with facts.
With a forward P/E ratio of 15.32 and a 5-year projected growth rate for its earnings of 13.7, Comcast Corporation (NASDAQ:CMCSA) is not an inexpensive stock; but, it is a fairly priced stock. Unlike the other two businesses discussed here, it has a high, but manageable, debt to equity ratio of 0.82. The cash generation of its business operations covers the interest on the debt 9.2 times, so it appears to be under control and not to present a threat to the viability of the business.
Comcast Corporation (NASDAQ:CMCSA) stock pays a dividend that produces a yield of 1.86% based upon the current price and requires a very reasonable payout ratio of only 28%. If fair value is calculated using the dividend yield plus the 5-year projected earnings growth rate, a share price valuation of 15.86 times the current year’s projected earnings is established. This valuation is almost perfectly aligned with the current share price.
One Last Foolish Consideration
AT&T Inc. (NYSE:T) has decided to enter this market with a service called U-verse. While it is not yet available in all markets, it is very competitive in relationship to cable and satellite. It is also a very good product. So good, in fact, that I have it in my own home! AT&T Inc. (NYSE:T)’s presence with this excellent product offering will certainly increase competition in the existing market and could well provide some pop to the bottom line for AT&T going forward.
Final Thoughts
Subscription in-home video entertainment is not going away, and Fools now have the opportunity to rush in for a safe investment in the industry by purchasing shares of Comcast Corporation (NASDAQ:CMCSA) at today’s level. Those wanting to invest with a bit more diversity and reduced risk may wish to consider splitting their investment between Comcast Corporation (NASDAQ:CMCSA) and DIRECTV and add a pinch of AT&T while avoiding the substantial risk of placing capital into Dish Network.
The article Profit From Your Home Video Content Provider originally appeared on Fool.com and is written by Ken McGaha.
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