DIRECTV Remains Neutral

DIRECTV ( DTV - Analyst Report ) , the largest satellite TV operator in the U.S., reported excellent third quarter 2011 financial results, where both earnings per share (EPS) and total revenue beat the Zacks Consensus Estimates. The solid result was mainly attributable to double-digit growth in the top line, significant margin expansion and record net customer additions.

DIRECTV continues to add new customers compared to other large pay-TV operators like Comcast Corporation ( CMCSA - Analyst Report ) , Time Warner Cable ( TWC - Analyst Report ) , and Cablevision Systems Corporation ( CVC - Snapshot Report ) , who are sequentially losing basic video customers. Such consistent performance from DIRECTV is mainly attributable to customer screening, target marketing, innovative product developments, avoiding disputes with content manufacturers and most importantly the popularity of its NFL Sunday Ticket promotion, which drove subscriber addition of 327,000 in the U.S. during the quarter.

DIRECTV with 170 HD channels, possesses one of the highest HD channel offerings across U.S., is mainly targeting the high-end customers, who are willing to pay for its costly HD, DVR and interactive services and premium programs. Management remains highly optimistic on adding more customers based on increased adoption of HD DVR devices, popularity of its new Nomad technology that offers anywhere TV service facility.

However, DIRECTV faces stiff competition from large telecom players like AT&T, Inc ( T - Analyst Report ) and Verizon Communications Inc. ( VZ - Analyst Report ) as they continue to launch their fiber-based network in order to provide video services. In the ensuing quarter of 2011, the six large cable and satellite service providers in the U.S. together lost 486,000 video customers in the industry, but during the same quarter, AT&T and Verizon Communications together added 307,000 video customers.

Currently, customers preference of watching their favorite TV shows on cable and satellite TV has shifted to online TV, where they can watch their popular shows and movies at attractive rates. So companies like Netflix Inc. ( NFLX - Analyst Report ) , Hulu.com, YouTube have become a severe threat to pay-TV operators.

Moreover, macroeconomic factors in the U.S. such as high unemployment rate, sluggish residential housing segment growth coupled with higher programming and subscriber acquisition costs will continue to act as impediments for the company going forward.

DIRECTV U.S. achieved the highest customer additions during the quarter mainly driven by the NFL Sunday Ticket promotion. Based on this promotional drive, the company added 210,000 net customers in the last two quarters of 2011. So, it is to be seen how the company fares in terms of subscriber additions without such a campaign.

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.