Earning Scorecard: DIRECTV

DIRECTV (DTV), the largest satellite TV operator of the U.S., reported excellent first quarter 2011 financial results, where both earnings per share (EPS) and revenues beat the Zacks Consensus Estimate. The solid result was attributable to double-digit revenue growth, significant margin expansion, and better-than-expected net customer additions.

During the quarter, both the U.S and Latin American segment witnessed significant upside in revenue based on strong subscriber growth and higher average monthly revenue per subscriber (ARPU).

First Quarter Highlights

First quarter 2011 total revenue increased 13% year over year to $6,319 million and was also ahead of the Zacks Consensus Estimate of $6,220 million.

Quarterly GAAP net income was $674 million or 85 cents per share compared with a net income of $558 million or 60 cents per share in the year-ago quarter. First quarter 2011 adjusted (excluding one-time gains) EPS of 82 cents handily beat the Zacks Consensus Estimate of 71 cents.

Quarterly operating profit before depreciation & amortization (OPBDA) was $1,363 million, up 4.4% year over year. Operating profit in the first quarter of 2011 came in at $921 million, up 14% year over year, primarily due to an upside in gross profit arising from higher revenues, partially offset by an increase in subscriber acquisition costs.

Agreements of Analysts

Out of the 23 analysts covering the stock in the last 7 days, only one analyst upwardly revised estimates for the second quarter of 2011, while none revised their estimates downward for the same period. Likewise, for the third quarter of 2011, out of the 22 analysts, one analyst increased estimates, while none revised their estimates downward.

For fiscal 2011, out of the 23 analysts, only one raised estimates, while none of the analysts decreased their estimates. Similarly, for fiscal 2012, only one out of the 22 analysts increased estimates.

We believe the positive sentiment results from the strong fundamentals and better subscriber growth across all its segments.

Currently, the Zacks Consensus EPS Estimate for the second quarter of 2011 is pegged at 85 cents. The projected annual growth rate is 40.94%. Similarly, for the third quarter, the current Zacks Consensus EPS Estimate of 74 cents indicates a gain of 33.72% year over year.

Magnitude of Estimate Revisions

In relation to the upward revision of estimates, the current Zacks Consensus Estimate for the second and third quarter of 2011 inched up by a penny to 85 cents and 74 cents per share, respectively, in the last 7 days. Similarly, for fiscal 2011 and 2012, during the last 7 days, the Zacks Consensus Estimate jumped 1 cent to $3.01 and $4.19, respectively.

Earning Surprises

With respect to earnings surprises, the company either beat or was in line with the Zacks Consensus Estimate over the trailing four quarters. DIRECTV produced an impressive earnings surprise of 11 cent or 15.49% in the last quarter. The current Zacks Consensus Estimates for both the ongoing quarter and the upcoming quarter contain upside potential of 1.18% and 1.35% (essentially a proxy for future earning surprises), respectively, while for fiscal 2011 and 2012, the Zacks Consensus Estimate upside potentials are 1.55% and 1.67%, respectively.

Our Recommendation

DIRECTV remains one of the few pay-TV service providers that are still generating commendable video subscriber growth. A strong fundamental along with huge subscriber growth across all its segments makes it quite popular within its peer group.

However, within the satellite TV industry, DIRECTV is facing increasing competition from its nearest rival DISH Network (DISH). Furthermore, U.S. telecom giants, AT&T (T) and Verizon Wireless (VZ) are increasingly rolling out their fiber-based network in order to provide video services. Additionally, the newly developed Internet video streaming companies like Netflix (NFLX), Hulu, YouTube have become major threats to the overall pay-TV industry.

We, thus, maintain our long-term Neutral recommendation for DIRECTV. Currently, DIRECTV has a Zacks#3 Rank, implying a short-term Hold rating on the stock.

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