DISH Network (DISH) is the #2 household satellite television provider in the
United States with nearly 14 million subscribers, trailing only DirecTV (DTV)
who services over 17 million customers. Satellite television services are now
virtually the only business that DISH engages in. The firm spun off it's set-top
box business, as well as some satellite assets, into EchoStar (SATS) at the
beginning of last year.
DISH Network's strategy is to be the low-cost leader in satellite television
service. The company accomplishes this by focusing on costs and the
identification and acquisition of subscribers who will both stick with the
company's services and not utilize customer service assets at the drop of a hat.
While this has caused DISH to lag behind DirecTV in subscriber growth, the firm
has delivered solid returns on capital averaging 41% (on an Magic Formula, no
intangible asset basis) and 18% (traditional ROIC) over the past 5 years.
Management's focus on generating cash flow has also been successful, as DISH has
run a solid 11.3% free cash flow margin since 2004, despite the very capital
intensive nature of the business. Since the divestiture of EchoStar, return on
capital has improved markedly.
At MagicDiligence, we look at potential investments from 3 directions, with
an eye towards business risk as well, to identify Top Buy picks on the Magic
Formula screen. Unfortunately for DISH Network, the company does not score
very high in 2 of the 3 points of growth, financial health, and competitive
position. Add in some questionable moves by management and there are plenty of
reasons why DISH looks like a second-rate MFI stock.
Growth is going to be difficult going forward. While the past few years have
delivered good revenue growth (about 10% per year), subscriber growth has
slipped into negative territory and churn (people dropping the service) has
increased. The competition for pay TV is heating up. In addition to direct rival
DirecTV, DISH competes against the big cable companies like Comcast (CMCSA) and
Cablevision (CVC) for subscribers. Satellite is at a natural disadvantage
against cable. For one, cable can more easily provide local channels, a big deal
to many people. Also, the cable companies can add on additional services, such
as broadband Internet and digital telephone, that satellite providers cannot.
Recently, the telecom giants AT&T (T) and Verizon (VZ) have entered the
ring, offering video services over their networks.
