Sat providers gird for down economy

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NEW YORK -- The two big U.S. satellite TV providers each earned an upgrade this week, with a perceived difference in their ability to weather an expected economic downturn earning DirecTV Group a boost to "buy" status.

"Market dynamics and financial leverage favor DirecTV," Kaufman Bros.' Todd Mitchell wrote in his report. "We expect DirecTV to generate solid sub growth and financial gains with the strongest (high-definition TV) offering and the least exposure to an economic downturn." He also suggested that the stock is oversold and upgraded it from "hold" to "buy."

Another key argument that Mitchell mentioned in favor of DirecTV is that it "will hit an inflection point sometime in mid-2008 when it will begin to generate a significant step-up in free cash flow."

Discussing a possible economic slowdown, the analyst highlighted the company's high percentage of high-quality customers as DirecTV spent the past two years pruning lower-credit quality subs.

"We believe DirecTV's relatively affluent sub base and tight credit policies should insulate it from a spike in churn," argued Mitchell, who has a $28 price target on DirecTV.

Meanwhile, Bear Stearns analyst Spencer Wang upgraded competitor EchoStar Communications to "peer perform" from "underperform."

Among the factors cited is the fact the company's shares have fallen 39% from their 52-week high. "We believe this reflects in part reduced speculation of an acquisition by AT&T," Wang argued. In his view, deal chatter has subsided as anti-collusion rules in the current FCC 700 MHz spectrum auction prevent communication between the two parties.

"This is consistent with our view that a transaction is not imminent and that the run-up in EchoStar shares on this speculation was largely unwarranted," he said.

Another driver of Wang's upgrade are reduced Wall Street earnings estimates after disappointing third-quarter results. "With the pullback in the stock, we view valuation as more appealing," he explained.

Why, though, did the Bear Stearns analyst not upgrade EchoStar shares to a straight "outperform," which is his firm's equivalent of a "buy"? The answer is -- in part -- the economy.

Besides bigger upside potential in cable stocks, such as Comcast Corp. and Time Warner Cable, he referenced a potential recession or at least economic sluggishness. "EchoStar's lower-income sub base may be more susceptible to economic weakness," he said.
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