Why You Should Own the Leader in Pay TV: DIRECTV (DTV)

While cable companies have been struggling to maintain subscriber numbers in the face of an “unplugging” trend to streaming services, the two major satellite television providers have been successfully increasing subscriptions. However, while Dish Network Corp. (NASDAQ:DISH) continues its foray into building a nationwide 4G network, DIRECTV (NASDAQ:DTV) is gaining hundreds of thousands of subscribers in Latin America — per quarter. The latter released an impressive quarterly earnings report on Thursday, but the stock didn’t react accordingly. Let’s take a look at DIRECTV’s estimate-crushing fourth-quarter earnings and find out why the stock isn’t through the roof.

Staying on course
Not much has changed at DIRECTV over the past year — it is still the No. 1 provider of pay TV in the world. The company has been resolute in sticking to its strategy of customer acquisition in Latin America and higher revenues per user in North America. This simple yet effective strategy has yet again brought the company to beat analyst estimates on both the top and bottom lines. It also resulted in record subscriber growth.

Total revenues for the fourth quarter hit $8.05 billion, up nearly 8% from the year-ago quarter. Analysts expected around $8.02 billion. GAAP net income skyrocketed to $942 million from $718 million the year before. This translates to earnings per share of $1.55 vs. $1.02. The Street expected, on average, $1.15 per share. For all of 2012, free cash flow (one of the main priorities for management) was up to $2.29 billion from $2.02 billion in 2011.

The source of the growth, as mentioned, comes from subscriber additions and higher average revenue per user (ARPU). Let’s take a closer look at these factors.

LatAm
At this point, it should come as no surprise that DIRECTV is absolutely banking off of its tremendous growth in Latin America. The company faces little competition in the region and was able to grow its net subscribers by 658,000, compared with a still-incredible 590,000 in the year-ago quarter. Overall, the Latin American segment grew by 22% in the quarter and closed out fiscal 2012 with 10.33 million subscribers — a 31% premium to 2011’s number.

While the company piles on thousands upon thousands of new users, it is invariably sacrificing some profit potential per user, which is to be expected. ARPU did fall in the quarter from $60.40 per customer in the fourth quarter of 2011 to $55.80. However, this loss wasn’t due to cheap prices or incentives; instead, it was an issue of currency fluctuation. The company had to take a $160 million charge due to the wild volatility of the Venezuelan currency.

Luckily, the raw growth of Latin America offset the currency issues and still contributed a major portion of DIRECTV’s quarterly and annual growth. And don’t forget about the company’s business in North America, which also happens to be thriving.