Commentary: Downturn exposes cracks in Dish

Satellite firm faces sub declines, end of marketing deal

In an economic downturn, shoppers tend to flock to big discounters like Wal-Mart. And for a long time, Dish Network has positioned itself as the Wal-Mart of satellite TV operators, with product appealing to the cost-conscious consumer who still wants options.

So, shouldn't things be fine and dandy for Charlie Ergen's company?

Well, perhaps in theory. Yet Dish just reported back-to-back quarters of subscriber declines, the first such drops since the launch of the U.S. satellite TV industry.

It turns out Dish's lower-end customer base feels economic pressure faster and churns off. It's also hard to win over users from other service providers. That and some bad news in a long-running legal showdown with DVR pioneer TiVo has decimated Dish shares during the past six months, and the company hit a 52-week low of $10.21 intra-day Tuesday.

Which begs the question: Is the worst behind Dish shareholders?

Those hoping for a happy ending might have to wait, and it's not the kind of Twizzlers-sweetened wait found at your local movie theater. "Waiting for a turnaround at Dish Network has the flavor of waiting for Godot," Sanford C. Bernstein analyst Craig Moffett says in what must be a sobering assessment for investors — even those who are Samuel Beckett fans.

Ergen is tenacious, so shareholders know he's working hard to address the issues his firm faces. However, little points to a quick resolution of Dish's business challenges. Or, as Moffett puts it, "Hope springs eternal, but there are few tangible signs in Dish's third-quarter results that signal a turn is near." He rates the stock a "market perform," with his $19 price target pointing to aspirations for an eventual rebound.

One of the subscriber challenges adding to a weak economy is Dish's co-marketing agreement with AT&T coming to an end in January, with competitor DirecTV set to become the telecom giant's new partner.

As a result, Collins Stewart analyst Thomas Eagan recently lowered his 2009 subscriber estimate for Dish from an increase of 17,000 to a loss of 99,000. "This is due in large part to higher-expected churn from the base of Dish subs marketed with AT&T," which has yielded about 1 million subscribers, he says.

During the latest quarter, Dish also spent more on acquiring subscribers, which has affected its bottom line.

"We continue to think that there are underpinnings in place for improvement to subscriber metrics; however, this improvement will have to be off of a lower bottom than we had previously expected, and it will require higher spend by Dish in order to achieve it," says Bryan Kraft, an analyst at Banc of America Securities. "While valuation is very attractive, given Dish's operational challenges, it could take a year for the stock to work."

He prefers DirecTV shares over Dish but takes a longer-term view by rating Dish a "buy," with a price target of $21.

Other analysts also are keeping their fingers crossed for a turnaround as 2009 unfolds.

Credit Suisse's Spencer Wang, who calls Dish a work in progress, believes that "a turnaround in the company's operations in 2009 is possible." He cites an improved HD product and investments in customer service, among other factors. Still, he maintains a "neutral" rating and an $18 target on the stock.

"We remain cautious on the Dish shares as proof of improving operations remains to be seen, and an adverse TiVo ruling in the near term could further pressure fundamentals," Wang says.

Moffett fears the end of the AT&T deal might only add to Dish's pain and make for more bad news in 2009. "One shudders to think that next year, without AT&T, things could even be worse," he says.

So, revisit Dish shares next year. Your Wal-Mart shares have served you better in 2008; those are down only a few bucks during the past six months and are up year-to-date.
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