On Directv Tonight: More Repurchase Reruns?
Directv (DTV) has some serious value admirers. At the end of the first quarter it was one of the 10 largest holdings in the investment portfolio of Berkshire Hathaway (BRK.B). Southeastern Asset Management (embroiled in the Dell tug of war) and the Weitz funds are also investors.
The basic business plan for Directv has been to focus on growing its Latin American subscriber base and upsell to existing U.S. subscribers, while also delivering shareholder value through an aggressive stock repurchase program. That three-legged stool has delivered for the value folks: in a very strong market, Directv has managed to keep pace with the S&P 500’s 23% gain over the past 12 months, yet its 13 PE Ratio is well below the 15x level of the S&P 500.
But the latest earnings release from Directv shows that the stool has developed a wobble. New subscriber growth in Latin America (16.7 million subscribers at the end of June) slowed markedly. Moreover, the average monthly revenue per user in Latin America fell from $57.20 in the second quarter of 2012 to $51 in the just-completed 2nd quarter of 2013. The Venezuelan devaluation and Brazil’s weakened currency were the main culprits. Management says excluding the exchange-rate hits, average monthly revenue per user would have increased 0.8%.
Over in the U.S. segment (20 million subscribers) management had a better time wringing more out of the base: average monthly revenue per user rose 4.5% to $98.70. But that wasn’t enough to keep operating profits on an upward trajectory. The $1.35 billion in the second quarter was down from $1.4 billion in the second quarter of 2012.
While revenue increased 7% in the quarter, year-over-year, operating expenses and capital expenditures rose 9% to $6.35 billion. The $630 million of 2nd quarter net income puts that metric back below its 2012 level:
Directv nonetheless managed to deliver quarterly diluted earnings per share growth of 8% year over year. That was strongly on the back of the company’s continued focus on share repurchases. At the end of June Directv reported 561 million shares outstanding, a 15% reduction from year-end 2012. As this chart shows, share reduction over the past few years has been a major factor in the firm’s ability to manufacture per-share earnings growth.
In fact, CEO Mike White made a point of calling out the share repurchases as part of the strategic plan in announcing second quarter results: "While macro-economic and operational challenges in Latin America impacted our results, particularly in Brazil, contributions from successfully executing on DIRECTV U.S.' long term strategic imperatives combined with our share repurchase program drove solid revenue, earnings per share and free cash flow in the quarter."
Indeed, free cash flow has grown more than 25% over the past five years, but the current $2 billion (for the trailing 12 months) is down from the 2010 peak.
The stock traded down nearly 5% after announcing its second quarter results, though it began to claw back during the day.
At a 13 p/e the stock looks relatively cheap; but the big question going forward is whether the Latin American leg of the stool will regain its strength.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at email@example.com. You can also request a demonstration of YCharts Platinum.
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