First report card for solo EchoStar

Earnings news will measure progress after split with Dish

EchoStar Holdings will report quarterly earnings for the first time as a stand-alone company today. But judging from the limited analyst coverage, there might not be much interest in what the company has to say, even though the stock has done well.

EchoStar Holdings is one of two companies — the less sexy one, apparently — that used to make up EchoStar Communications. That company split Jan. 2; the other half is named Dish Network.

EchoStar consists of the tech-focused set-top box and satellite business, while Dish is the nation's second-biggest satellite TV service with about 14 million subscribers. DirecTV is tops with nearly 17 million.

While Dish might be the easily identified brand and business model, its shares are down 5% since the split. EchoStar shares, however, are up 14% since the split despite the fact that five times as many analysts cover Dish than EchoStar.

Lehman Bros. analyst Vijay Jayant was the first to tout the stock, saying in early January that shares of both companies were undervalued after the split.

Shortly thereafter, Stifel Nicolaus analyst Kit Spring initiated coverage of EchoStar with a "buy" recommendation and $39 target, though the stock blew through that one-year target in just five weeks, so he downgraded EchoStar shares to "hold" last week and they have sunk to $37.26 as of Monday.

The spinout left EchoStar with about $1.2 billion in cash, or about $13 per share, and Spring figures the company will generate $100 million in free cash flow this year.

About 86% of EchoStar's revenue comes from set-top boxes, with 14% coming from its fixed satellite service. Worrisome is the fact that it only has two customers to speak of: Dish, which accounts for 86% of its sales, and Canadian TV operator Bell ExpressVu.

Some presume that it will be difficult for EchoStar to line up cable and satellite TV clients because of its close association with Dish. After all, they used to be one company, they're both headquartered in Englewood, Colo., and they share many of the same executives. Most notable among them is Charles Ergen, CEO of both firms.

But Spring has argued that Ergen is an asset, given his track record of having started EchoStar Communications in 1980 — at the time called EchoSphere — with just $60,000 and turning it into a personal fortune of $9 billion.

Spring also thinks that EchoStar makes some of the best high-definition DVRs in the industry, as good or better than TiVo, and HD DVRs internationally might be an especially lucrative market for EchoStar because there are no conflict-of-interest issues.

He wonders whether EchoStar might harm the Dish business by selling superior set-top boxes to Dish competitors in the U.S.

"It could make the cable experience better, reducing the likelihood of cable customers switching to Dish," he said.

Already, with only two customers, he figures that EchoStar has 18.2% of the $8.5 billion domestic market for set-top boxes and 3.7% of the $7 billion international market.

"It doesn't take many new customers to produce significant revenue growth and margin expansion," Spring said.

He also sees an opportunity for EchoStar to profit from the planned transition to all-digital television in the U.S. in February 2009.

In addition, he likes the potential of EchoStar's Slingbox, which he compares to TiVo in that it "has patented technology that may be difficult for competitors to replicate without paying a license fee." TiVo successfully sued EchoStar Communications for infringing some of TiVo's DVR patents.

Not everyone who has studied EchoStar was initially as bullish on it as Spring. Motley Fool senior analyst Anders Bylund argues that it is too early to make a rational judgment, so he'll be listening carefully to what management has to say during its earnings call.

While some on Wall Street have been speculating that the reason for the split is so that Dish could be acquired by AT&T or some other interested buyer, Bylund still predicts that Dish will merge with DirecTV.

"And if AT&T were to buy any of those companies, I think it would prefer EchoStar," he said.
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