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We downgrade our recommendation on Grupo Televisa SA (TV - Analyst Report) to Underperform following its first quarter of 2013 financial results, which fell below the Zacks Consensus Estimate. Televisa currently has a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Although Televisa received a formal approval to enter the Mexican wireless market, Mexican regulator CoFeCo (CFC) imposed several restrictive conditions on the Televisa-Iusacell merger. We believe that the recent telecommunications industry reform bill of the Mexican government may adversely affect Televisa as the company currently controls nearly 70% of the country’s broadcast TV market. Furthermore, TV Azteca, a sister concern of Grupo Iusacell, commands nearly 25% of the Mexican TV market. TV Azteca and Grupo Iusacell are the holding companies of Grupo Salinas.

Thus, Televisa and Azteca form a perfect duopolistic market structure in Mexico. The regulatory body may ask Televisa to disinvest some of its broadcasting assets, which in turn will reduce Televisa’s market share and create an opportunity for Carlos Slim to enter the Mexican TV market.  

Intensifying competition in its core pay-TV market is forcing Televisa to spend more to develop a new client base. Addition of new subscribers is generally associated with higher expenditure since the company needs to install equipment such as satellite dishes and set-top boxes in the customers’ premises. This resulted in a surge in depreciation and amortization charges for Televisa in the reported quarter.

Other Stocks to Consider

While we prefer to avoid Televisa until we see signs of improvement in the company's performance, other stocks in this industry worth a look are Entravision Communications Corp. (EVC - Snapshot Report), Multiband Corp. and ValueVision Media Inc. (VVTV - Snapshot Report). All these stocks currently have a Zacks Rank #2 (Buy).

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