Don't Count the Consumer Out
08/30/2010 1:00 pm EST
To be fair, the economic reports haven't been exactly upbeat. In the United States, savings rates were recently reported to be the highest they have been since June 2009, consumer confidence slipped from 54.3 to 50.4, and the Michigan consumer sentiment index for July dropped from 76.0 to 66.5.
[So,] you might get the idea that investing in consumer stocks would be a risky move, but when you dig deeper, you get a very different picture.
Take the consumer confidence report, for example. A reading of 50.4 is not something to panic about. Over the last two years, the highest reading was 61.4, [while] the lowest was 25.3 (from February 2009). While we'd all like the number to be higher, we are not in a crisis in consumer confidence.
DIRECTV (Nasdaq: DTV) is the largest direct-broadcast satellite service in the United States and is far ahead of ahead of [number-two] DISH Network.
And DIRECTV is the gold standard in satellite service. Cable providers have all continued to lose customers in the latest quarters as they have been unable to upgrade their services enough to compete with DIRECTV's massive offerings. DIRECTV continues to add more customers (100,000 in the second quarter in the US alone), and now is putting more nails in cable's coffin by teaming up with phone companies, primarily Verizon (NYSE: VZ), which is now bundling DIRECTV's video services with its own voice and Internet packages.
In addition to its more than 18.8 million US customers, the company serves more than six million subscribers in Latin America under the DIRECTV and Sky brands, where it is striving to double its total subscribers by 2016.
In the second quarter, DIRECTV's sales rose 12.5% to $5.85 billion. During the same period, earnings increased 33% overall to $543 million, or [42 cents] per share, compared with $407 million, or [40 cents] per share. But on a per share basis, its earnings gained 5% [because] there are more shares outstanding after former chairman John Malone swapped his Class B shares for Class A shares. Without the Malone stock swap, DIRECTV's second-quarter per-share earnings would have risen 50% to [60 cents a share].
For the third quarter, [analysts expect] 9% annual sales growth and 51.4% earnings growth. In the second quarter alone, the company added 415,000 subscribers, so Latin America will be an important source of growth for the next several years, where its services include high-definition and video-on-demand programming.[Analysts have] revised their consensus earnings estimate 7.9% higher in the past three months. Typically, strong analyst earnings revisions precede future earnings surprises. Buy DIRECTV below $41. (It closed above $38 Friday—Editor.)