Wall Street Downgrades DIRECTV

One Wall Street analyst is predicting a slowdown in DirecTV’s momentum.

Craig Moffett, analyst for Sanford C. Bernstein downgraded DIRECTV to a “market perform.”  Previously, the firm had DIRECTV rated as “outperform.” The downgrade sent DTV shares down 70 cents, nearly 3%, closing at $25.55 a share in heavy volume. At the same time, Moffett said he prefers DISH Network shares. DISH closed up 42 cents, up about 1.5%.

So why the downgrade, and why now? Wall Street recommendations are generally about as reliable as a broken clock, and I believe that is the case here. Moffett says DIRECTV will suffer in the second quarter for three reasons. Let’s review those reasons, and why I believe they are incorrect. As the year progresses, we will check back on Moffett’s analysis and my analysis. Using the respective share prices of DIRECTV and DISH Network as the year progresses will help us gauge the predictions of an amateur blogger vs. a Wall Street analyst.

Moffett’s first point is that DirecTV’s performance lately has been due to their HD leadership, and that will not be as much of a factor in the months ahead. Moffett’s reasoning behind this is that traditionally 70% of HDTV’s are sold during football season, September to December, and service providers follow the same pattern.

This year is different, as Americans are about to be flooded with tax rebate checks. Direct deposits of rebates will hit starting May 1^st, and paper check rebates will continue through mid-July. HDTV’s will be flying off the shelves, as the rebate amount for most couples will be $1,200. Right in the neighborhood of the amount needed to purchase that new Hi-Def television.

According to Moffett, the second factor that will hurt Direct TV is the housing crisis. He predicts a strong impact on gross subscriber additions, as fewer people are moving into new home. Here I see the point, but dispute that it will hurt DirecTV significantly, as it has DISH Network. DirecTV has a more affluent base, and tighter credit restrictions. They have reduced churn to extremely low levels, and their generally higher income subscriber base is just not as susceptible to “bad housing market” issues.

Finally, Moffett’s third factor in downgrading DirecTV is the fact that the former Bell South territory once known as Bell South has stopped selling Direct TV, and is now selling DISH Network, the AT&T satellite TV partner. While no doubt true, this has been known for some time. With the stock market being a forward-looking mechanism, DIRECTV and DISH Network’s share prices have reflected this news for months. While the actual numbers from this area will of course tilt toward DISH Network, DIRECTV still has several advantages.

I see two main advantages for DIRECTV appreciating in price more than DISH Network by year-end.

First, the HD advantage. DIRECTV has executed their HD expansion plan in a nearly flawless manner over the last 9 months. They have more HD channels, and more of the HD channels that people actually want. With the successful launch of DIRECTV 11, and the failure of DISH Network’s satellite AMC-14, the HD race may become a runaway by the end of the year. DIRECTV should actually have excess capacity later this year, and may be waiting for operators to provide them with additional HD content. On the other hand, DISH is stretched as it is, counting on two satellites that haven’t even left Earth.

Second, the Liberty Media factor. John Malone’s company acquired 41% of DIRECTV earlier this year. While Liberty was initially coy about how much more of DIRECTV they would acquire, about a month later they upped their stake to 48%.

Clearly, Malone wants to play in the sandbox with the big boys. Liberty has an interest, and more importantly the means to fully take over DirecTV if it so wishes.