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DirecTV: A Sensible Way to Get Access to the Latin American Consumer

July 28, 2011 | About:
The rise of the emerging market consumer is the single most important macro trend of the next decade. The new middle and upper classes in China, India, Brazil and other budding behemoths will be one of the only real sources of growth in a global economy that is still suffering from excess capacity and debt deflation in the United States and Europe. Investors can certainly profit from this trend by buying shares of emerging market stocks trading at attractive valuations. There are plenty that trade as ADRs in the United States and Canada that can be held in a basic discount brokerage account.

This approach is not without its risks, unfortunately. Hedge fund super-manager John Paulson recently took a beating on his investment in the Chinese timber company Sino-Forest Corp (Toronto: TRE) when news began to circulate that the company was overstating its timber holdings. Within a matter of weeks, the stock had fallen by 90%.

John Paulson is one of the most successful fund managers in the business. To this day, his short of subprime mortgage derivatives is the most profitable trade in history. Yet even Paulson was blindsided and took horrendous losses because of the lack of transparency surrounding this former emerging-market darling.

It is fair to ask: If this can happen to John Paulson, one of the brightest and best-connected investors in the world, what chance does a retail investor have?

Given the risks of emerging market stocks, The Sizemore Investment Letter prefers to get access to the growth of these countries through indirect means. We like to buy shares of American and European companies with a large and growing exposure to emerging markets trading at reasonable prices. Call it “Emerging Markets Lite,” if you will.

One good candidate is DirecTV (DTV), the largest provider of paid satellite television. The paid TV market in the United States is already largely saturated. Market penetration is estimated to be at over 90%, and the company faces stiff competition from wired cable providers that offer substantially the same service. Yet DirecTV’s revenues continue to grow due in large part to its exposure to the fast growing markets of Latin America, where it already has 8.9 million subscribers (vs. 19.2 million in the United States).

Operations from south of the border already generate 15% of total earnings and are expected to be 30-50% of total earnings within a few short years. Latin American earnings soared by 74% in the last year alone.

Bad infrastructure in many of these companies also gives DirecTV a competitive advantage. Being a satellite provider, DirecTV can avoid the hefty investment of laying wires that local cable companies must undertake. Furthermore, DirecTV is often times the only high-definition option available — a strong selling point to South American soccer fans wanting to see every bead of sweat on their favorite player’s forehead.

Yet despite all of the potential for growth, DirecTV remains very modestly priced. It currently trades at a forward P/E ratio of only 12. I find this too good to turn down for a company with DirecTV’s growth potential.

DirecTV does carry more debt than I would normally like to see, much of this due to its merger with Liberty Media Entertainment in late 2009. This has caused DirecTV to have a slightly negative book value, which might put off some investors. Still, the company’s healthy cash flows should enable it to pay down its debts to manageable levels in very little time.

DirecTV is an attractively priced way to get access to the explosive growth in living standards in Latin America from the relative safety of the U.S. markets. Consider making room in your portfolio.

Charles Lewis Sizemore, CFA is the chief investment officer of Sizemore Capital Management LLC and the editor of the Sizemore Investment Letter. Sign up for his free e-letter at www.sizemoreletter.com.

About the author:

Charles Sizemore
Charles Lewis Sizemore is the Editor of the Sizemore Investment Letter premium newsletter and Chief Investment Officer of Sizemore Capital Management.

Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.

Visit Charles Sizemore's Website


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