is the largest satellite pay-TV provider in the U.S. Its main competitors in the pay-TV business include
Time Warner Cable
Although DirecTV's Latin American division is experiencing fast subscriber growth, it constitutes only 8% of the company's stock price, according to our estimate, making it the least important division. The Latin America business contributes relatively little to DirecTV's share value because of its high indirect costs, including capital expenditures and sales, general and administrative expenses.
We see a potential 13% upside to the $38.53 Trefis price estimate for DirecTV's stock if the company can reduce its Latin America expenses to match U.S. levels.
Growth Equals Cost
Unlike the U.S., Latin America is not a saturated pay-TV market. DirecTV is aggressively pursuing new subscribers and market share in Latin America, which explains the company's higher indirect spending in this market.
DirecTV is spending significantly on marketing and advertising to create brand awareness among Latin American consumers. This helps explain the division's high SG&A expenses, which we measure as a percentage of gross profits.
You can drag the trendline in the chart to create your own SG&A forecast for DirecTV's Latin America business and see how it impacts the company's estimated share value.
DirecTV's capital spending in Latin America consists mainly of satellite and set top box expenses. We expect capital spending to remain high in the initial phase of expansion.
In this chart, you can drag the trendline to create your own forecast for DirecTV's capital spending as a percentage of gross profits for Latin America.
Costs Down, Stock Up
We currently expect very slight declines in DirecTV's SG&A and capital spending in Latin America during the Trefis forecast period. Sharper spending declines could significantly boost the company's share value.
In the U.S. market, we expect SG&A as a percentage of gross profits to stabilize around the 45% level by the end of our forecast period vs. 53% in Latin America. We estimate a potential stock price upside of 5% if DirecTV can quickly achieve its Latin America growth targets and then cut SG&A spending to U.S. levels.
Similarly, we expect U.S. capital spending as a percentage of gross profits to stay between 17% and 20% levels during our forecast period. We expect capital spending in Latin America to decline from 38% today to 30% by 2016. However, we see a potential upside of nearly 8% for DirecTV's stock if capital spending in Latin America declines to 20% by 2016.
Combining these two scenarios, we conclude that DirecTV's stock could see a total upside of 13% in the event that the company's indirect expenses in Latin America decline to U.S. levels during the Trefis forecast period.
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