Aggressive marketing and pricing promotions helped lead Dish Network (DISH) to a stronger than expected fiscal fourth quarter. The second largest satellite TV provider reported Monday that net income fell to $179 million in the quarter from $217 million a year ago. However, EPS of 40 cents per share easily topped analysts’ estimates of 32 cents, and revenue rose 1.4% to $2.96 billion which slightly edged out Wall Street’s expectations. Perhaps most importantly though was the net subscriber additions of 249,000, which was 50,000 more than expected and demonstrated Dish is connecting with cash-strapped consumers.
The latest “Why Pay More” ad campaign out of Dish Network takes direct aim at satellite competitor DirecTV (DTV) claiming that their plan can save consumers $24 per month. However, DirecTV is suing over the ads claiming that the plans that were compared are not equal offerings. The result of the suit is pending, and DirecTV lost the recent ruling on an injunction pulling the ads from TV. Either way, the ads have been effective as Dish has lured consumers in with less costly plans, and then benefited as many customers upgrade to more pricey high definition plans. Following three straight quarters of subscriber growth Dish Network now has 14.1 million subscribers which means it is still small relative to DirecTV and other cable TV services, but they are gaining with attractive pricing.
Dish grabbed a larger market share in the fiercely competitive and mature television service provider space. The subscriber growth and the earnings beat have combined to send Dish Network shares more than 6% higher on heavy trading. As you can see from our historical ratings chart, we have been bullish on DISH for some time and we are confident to reiterate our Undervalued rating following the results. Based on the way the market has historically valued DISH, there is still significant room for appreciation. For example, price-to-cash earnings currently stands at 5.6x, which is well below the historically normal range of 8.1x to 14.2x. Furthermore, price-to-sales have historically ranged from 1.07x to 1.92x, but the current level is just .81x. The company continued to produce attractive free cash flow of $1.16 billion in the year topping last year’s $1.06 billion. Trading at just over 11x next year’s earnings, this stock is still attractive even after today’s rally.
Clearly, Dish Network is succeeding in its current strategy and grabbing an ever larger market share through aggressively pricing their services. They have benefited from consumers being more cost conscious (but still wanting HD television), which we think is a behavior that will be around quite some time. If the market begins to value Dish Network’s fundamentals in a way that is more consistent with the historical valuations, this stock could trade for $29 or better.