Latin America Should Provide Growth Opportunities

Let's take a look at DirecTV (DTV, Financial), a $43.95 billion market cap company that is engaged in providing digital television entertainment in the U.S. and Latin America. Let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment.

Growth regions

In Latin American markets, there is a steady penetration in the pay-TV market, where it plans to continue to be the most cost effective provider while focusing on driving customers to download and stream OnDemand video.

Further, as we can suspect, competition is higher and higher, especially in countries like Brazil, where the presence of rivals limits the ability to grow at higher returns.

Another risky region is Venezuela, which represents almost 15% of the Latin American unit's revenue and a quarter of its EBITDA.

Despite these, we feel confident that Latin American regions should provide with good results in the future, due to the increase in the consumption of television services.

Analyst recommendation

The firm is currently Zacks Rank # 3 – Hold, which indicates that the stock, over the next one to three months, will perform at an annualized rate of 10.45%.

Relative valuation

In terms of valuation, the stock sells at a trailing P/E of 16.1x, trading at a discount compared to an average of 22.8x for the industry. To use another metric, its price-to-sales ratio of 1.4x is below the industry average of 1.73x.

Net income and earnings

The net income has decreased by 12.6% when compared to the same quarter one year ago, from $699 million to $611 million.

Earnings per share (EPS) decreased slightly in the most recent quarter compared to the same quarter a year ago (from $1.21 to $1.28). During the past fiscal year, the company increased its bottom line. It earned $5.19 versus $4.61 in the prior year. This year, Wall Street expects an improvement in earnings ($5.94 versus $5.19).

In the next graph we can see that it has demonstrated an interesting positive trend in the last eight years, and we include the stock price because EPS often lead the stock price movement.

Margins

The gross profit margin is considered high at about 47%, and it has increased from the same quarter the previous year. The net margin is at 8.47% and is ranked higher than 85% of the 977Â companies in the Pay TV industry.

Return on assets

Finally, we can consider the return on assets (ROA), which is an indicator of how profitable a company is relative to its total assets. This ratio gives an idea of how efficient management is at using its assets to generate earnings. The higher it is, the better, because the company is earning more money on less investment. So let´s compare the current ratio with the peer group in the next table:

The company has a current ratio of 12.70% which is higher than the one registered by Charter Communications Inc. (CHTR, Financial), Digital Globe Inc. (DGI, Financial), EchoStar Corp (SATS, Financial), Gilat Satellite Networks, Ltd. (GILT, Financial) and Intelsat SA (I, Financial).

It is important to analyze the trend over time, and as we can see in the next table, the firm has increased the ratio over the last 10 years.

Final comment

I would recommend investors consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in the last quarter of 2014. Gurus like David Abrams (Trades, Portfolio) and John Hussman (Trades, Portfolio) bought the stock, while Jim Simons (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) have also invested in it.

Disclosure: Omar Venerio holds no position in any stocks mentioned.