DIRECTV on Upward Trajectory
DIRECTV Group, Inc. (DTV) has vigorously grown its free cash flow and earnings over the last two years. It is now cutting churn-related costs, and raising the quality of its subscriber base by tightening credit standards. We believe the company is poised to sustain its strong revenue and earnings growth.
The company is on track to roll out up to 150 high-definition (HD) channels in 2008 and 200 channels in 2009, which should continue raising average revenue per user and help stem decelerating subscriber growth as DTV overtakes EchoStar Communications Corp's (DISH) HD lead with twice as many HD channel offerings, while the cable companies are several years away from catching up, in our view.
We think the HD roll out with the Regional Bell Operating Companies as partners, will defend DTV s market share against cable's ability to offer video, voice and data (triple play), which together with recently tightened credit standards have been impeding subscriber growth.
At 13.3x our 12-month forward EPS estimates, DTV shares trade at a discount to our estimate of its 5-year EPS growth rate and, in our opinion, will outperform the market. Our six-month target price is $29.
Regeneron Outlook Optimistic
Regeneron Pharmaceuticals Inc. (REGN) lead candidates are VEGF-Trap for the treatment of cancers, eye diseases, and IL-1 Trap for CAPS, a rare genetic disorder, and gout. The company recently received the approval from the Food and Drug Administration on Arcalyst for CAPS. It also has a number of pre-clinical drug candidates for other disorders.
The company made impressive progress in recent months in terms of clinical developments and business developments. We maintain our Buy rating on the shares.
We are optimistic about the company's Trap Technology. The Bayer collaboration on VEGF-Trap-Eye validates this technology and its value for eye diseases. The VEGF-Trap-Cancer programs with Sanofi-Aventis (SNY) are progressing very well. We are impressed by the new deal with Sanofi-Aventis to develop antibody drugs. We are also pleased to see the license deals with AstraZeneca (AZN) and Astellas to monetize and validate the company's VelocImmune technology.
We think recent decline of share price are mainly due to two factors: the broad market meltdown and investor reactions to recent phase II ovarian cancer data. For the latter, we think the market overreacted to the data. Even if Aflibercept fails in this cancer category as a single agent, we don't think it will impact the potential of this drug candidate.
Our $28 price target is derived from our 2011 estimated EPS of $1.27, multiplied
by biotech industry average P/E ratio of 38, discounted at 20% for three years.
