Commentary: Satellite TV stocks might be beaming, but Dish still needs to get on launchpad

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Have you noticed? Shares of the satellite TV giants have provided a rare ray of light this year for investors in the media space, with DirecTV and especially Dish Network defying declining markets. As of Tuesday's close, both remained ahead of their 2008 closing prices, with Dish up 36%.

But Wall Street observers still see Dish lagging its larger rival in key areas.

DirecTV has executed sharply and continued to expand its subscriber base during the past year despite the recession and increasing competition from telecom operators' burgeoning video services. But Dish has struggled, still losing subscribers after doing so for the first time in second-quarter 2008. In fact, its user losses accelerated from 25,000 during that period to 100,000 in the third quarter and 102,000 in the fourth. Things might have been even worse in first-quarter 2009.

Wall Street observers have cited execution problems and Dish's lower-end customer base as top reasons. Among operational issues, they say, are inconsistent marketing and a dwindling dealer base that has strained relations with the company.

Analysts expect more of the same trends this quarterly earnings season, with DirecTV set to report results today, followed by Dish on Monday.

"Performance among the two (satellite) players remains bifurcated," Credit Suisse analyst Spencer Wang said in a recent report. "Our (channel) checks suggest that DirecTV gross and net adds should be strong in the first quarter, fueled by a compelling core product, strong brand equity and marketing, its free HD-DVR offer and its new marketing alliance with AT&T," the telecom giant that previously worked with Dish.

Wang expects that Dish will have lost about 130,000 subscribers in the first quarter, twice as many as his original estimate.

These challenges recently have left Dish's valuation well below DirecTV's, no matter which method of assessing it one uses -- even though it has made up ground this year as some have deemed Dish shares undervalued. Still, many on the Street are waiting for Dish to get a grip on its issues before recommending the stock.

"The valuation gap between DirecTV and Dish, by almost any valuation measure, is at first blush enticing," Sanford C. Bernstein analyst Craig Moffett said in a recent report, pointing out the "yawning gap" between the companies' price-to-earnings, enterprise value-to-EBITDA and steady state cash-flow multiples. "But our analysis of customer lifetime value trends suggests that the gap is fully warranted -- and is therefore not reliably exploitable."

Moffett's analysis found that DirecTV's internal rate of return on customer lifetime value -- the metric measures longer-term results of customer relationships -- has risen steadily in recent quarters as Dish's has declined. He expects DirecTV's growth here to continue, leading him to raise the stock's price target by $5 to $28 while leaving Dish's at $14. He rates both "market perform."

Goldman Sachs analyst Ingrid Chung is among those who see long-term upside for Dish, but recently she pushed back her expectations for when the company might exhibit signs of a true turnaround.

In a report last month, she called cable giant Comcast her "best defensive idea," adding that Dish is her "favorite name for those investors interested in a higher-risk/higher-reward opportunity." As a result, she boosted her six-month price target on shares by $2 to $15, which she then rated a "buy," compared with DirecTV's "neutral" because of its valuation premium.

"The rate of change for operational underperformance will decline in 2009," and most bad news already is priced into Dish shares, Chung said. "Any of a number of catalysts could drive shares further, rewarding those investors with a longer time horizon."

But by the end of April, she cut her Dish rating to "neutral," saying DreamWorks Animation shares had better upside for now, likely in part because of Dish's recent runup.

Although "we continue to believe that Dish is undervalued," she acknowledged that it is "unlikely that management 'turned the ship' in the first quarter."

This lack of improvement also disappointed Collins Stewart analyst Thomas Eagan regarding Dish's fourth-quarter earnings report and call. "There didn't appear to be a single operational metric that suggested a turnaround was imminent," he said, echoing his peers.

As a result, investors and analysts likely will focus less on the first-quarter figures that DirecTV and Dish report in the coming days and more on signals of how business trends are shaping up in the current quarter and beyond.

Dish recently reshuffled its management team in what many took as a sign that chairman and CEO Charles Ergen wants to steady the ship sooner rather than later. Investors will want to hear what the leadership is doing to turn things around so they can take full advantage of Dish's undervalued stock.
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