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Bobby Raines's Analyst Insights

InvestorsObserver
Options Analyst Writer
Bobby Raines
Author Bio


February 24, 2014 - Let DirectTV Beam Some Profit to Your Wallet

Growth is what everyone is looking for in the stock market. Chasing growth can be a dangerous game though. Ask anyone who was invested in the tech sector in 2000, or in housing or financial stocks in 2008 about what happens when you jump headlong into whatever the fastest growing sector in the market is.

A better strategy is to find companies that have been posting steady growth for years and are also in industries that don't seem to be overheating.

One such company that reported earnings recently is DirectTV (DTV). The satellite-television company has been around for a long time, and despite the recent trend toward cord-cutting that has hurt cable television providers, has been growing steadily. The company has a five-year annual growth rate of 19.26% and a three-year growth rate of 42.60%.

DirectTV has a number of things working in its favor in the face of cord cutting. Perhaps the biggest is that it is the sole provider that carries the NFL Sunday Ticket. As people have the ability to access television programming on all sorts of devices at whatever time is convenient for them, live sports remains one of the few things available almost exclusively through a traditional television provider. The NFL is by far the most popular sport in the country, and DirectTV is the only company with a license to sell Sunday Ticket, which allows viewers to watch any game they want instead of just the games being broadcast in their local market.

Another thing keeping DirectTV somewhat isolated from the cord-cutting trend is that it has a relatively large number of subscribers in rural areas. Cord-cutting is a viable option in cities where some over-the-air broadcast signals may be available and broad band internet is available to everyone. Large swathes of the U.S. are still relatively isolated and don't have the internet speeds to handle multiple video streams at the same time.

I credit those two factors, and the company's strong business in Latin America with its ability to keep adding subscribers even as the big cable companies are losing them. 

In the most-recent quarter, the company added 93,000 customers in the U.S., and 231,000 in Latin America. Analysts had expected 21,000 new U.S. customers and 332,000 in Latin America. That was good for a 6.7 percent increase in sales, to $8.59 billion, which topped estimates for $8.48 billion. That translated to a bottom-line earnings figure of $1.53 per share, compared to estimates for $1.28.

The company also announced an aggressive $3.5 billion share repurchase plan, which should allow the company to buy back a little more than 9% of its outstanding shares at the company's current roughly $38 billion market cap.

Chart courtesy of stockcharts.com

The company's solid history of earnings growth, and the support to the stock that that hefty buyback will provide make a bull-put credit spread seem like an attractive play here. The June 67.50/70 bull-put spread yields a credit of 53 cents per share. That's a 26.9% return, or 83.93% on an annualized basis (for comparison purposes only). This position will return a full profit so long as the stock is above $70 at June expiration. That gives this trade about 7 percent downside protection.

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