2008 | 2009 | ||||||
Price: | 74.00 | EPS | |||||
Shares Out. (in M): | 0 | P/E | |||||
Market Cap (in $M): | 4,805 | P/FCF | |||||
Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
TEV (in $M): | 0 | TEV/EBIT |
Sign up for free guest access to view investment idea with a 45 days delay.
Dish Network Corp. |
DIRECTV Group, Inc. |
Cablevision Systems Corp. |
Mediacom Communications Corp. |
Time Warner Cable Inc. |
Comcast Corporation |
Charter Communications Inc. |
|
Credit |
Ba3/BB- |
Ba3/BB |
B1/BB |
B3/B- |
Baa2/BBB |
Baa2/BBB+ |
Ca/CC |
EBITDA (LTM) |
$3,109 |
$4,919 |
$2,262 |
$497 |
$6,106 |
$12,884 |
$2,237 |
Interest |
($378) |
($307) |
($821) |
($222) |
($900) |
($2,440) |
($1,883) |
Taxes |
($626) |
($932) |
($137) |
($58) |
($765) |
($1,764) |
($214) |
Capex |
($1,219) |
($2,212) |
($861) |
($262) |
($3,600) |
($5,611) |
($1,284) |
FCF |
$886 |
$1,468 |
$443 |
($45) |
$841 |
$3,069 |
($1,144) |
Cash |
$1,433 |
$2,988 |
$343 |
$33 |
$3,580 |
$2,917 |
$569 |
Total Debt |
$5,981 |
$5,850 |
$11,979 |
$3,308 |
$15,748 |
$33,688 |
$21,103 |
Market Cap |
$4,913 |
$24,094 |
$4,283 |
$274 |
$19,305 |
$45,069 |
$54 |
EV |
$9,462 |
$26,956 |
$15,920 |
$3,549 |
$31,473 |
$75,840 |
$20,588 |
FCF % of Total Debt |
14.8% |
25.1% |
3.7% |
-1.4% |
5.3% |
9.1% |
-5.4% |
Debt/EBITDA |
1.9x |
1.2x |
5.3x |
6.7x |
2.6x |
2.6x |
9.2x |
Net Debt/EBITDA |
1.5x |
0.6x |
5.1x |
6.6x |
2.0x |
2.4x |
9.2x |
EV/EBITDA |
3.0x |
5.5x |
7.0x |
7.1x |
5.2x |
5.9x |
9.2x |
Total Subscribers (MM) |
13.8 |
17.0 |
18.0 |
1.3 |
13.3 |
24 |
5.1 |
EV/Sub |
686 |
1586 |
884 |
2730 |
2366 |
3160 |
4037 |
Net Debt/Sub |
330 |
168 |
646 |
2519 |
915 |
1282 |
4026 |
Levered FCF/Sub |
64 |
86 |
25 |
-35 |
63 |
128 |
-224 |
Debt Payback/Sub (# yrs) |
5.1 |
1.9 |
26.3 |
-72.3 |
14.5 |
10.0 |
-17.9 |
Cash Bond Yield |
13.9% |
9.8% |
12.6% |
18.5% |
8.2% |
8.10% |
100.0% |
Bond |
7 3/4% of 2015 |
7 5/8% of 2016 |
8.5% of 2016 |
8.5% of 2015 |
5.85% of 2017 |
5.85% of 2015 |
11%% of 2015 |
$ Price |
74.0 |
88.5 |
81.0 |
62.0 |
86.0 |
88.5 |
84.0 |
5-yr Credit Default Swap (bps) |
520 |
400 |
750 |
875 |
425 |
315 |
10500 |
The economics of the business are still sound - DISH is trading at an EV/sub of $680, which is lower than the current amount it costs to acquire a new subscriber (around $730). The question then becomes, is adding a new subscriber generating meaningful returns? The chart below shows that even under elevated subscriber acquisition costs (or SAC, about 30% of which runs through the income statement, while the rest is capitalized) and churn rates (churned subscribers must be replaced, and are assumed to be replaced at the current all-in subscriber acquisition cost, which includes all CPE or customer premise equipment + marketing spending). The table below shows that the unlevered pre-tax return per acquired subscriber is still attractive (between 15%-16%).
Monthly ARPU |
$70 |
Yearly ARPU |
$840 |
EBITDA Margin (pre- SAC costs) |
36% |
EBITDA per sub per year |
$306 |
Monthly Churn |
2.0% |
Yearly Churn |
24% |
# of total subs |
13,780,000 |
# of subs churning/yr |
3,241,056 |
SAC (includes capitalized CPE) |
$730 |
Cost to replace Churned Subs |
$2,365,970,880 |
Capex (excl. capitalized CPE) |
$280,000,000 |
Total Spending |
$2,645,970,880 |
Total Spending/Sub |
$192 |
FCF per sub per year |
$114 |
Unlevered Pre-Tax Return on SAC |
15.6% |
Can DISH lose net subs (i.e. what if can’t replace churned subs due to competitive forces)? Since DISH net lost -10k subs in the 3Q (better than the -25k lost in 2Q) one of the key issues is what if they continue to lose subs. The sub losses thus far reflects several factors, all of which should improve over the next 1-2 years:
While it will take a while for DISH’s churn, gross adds, and net add statistics to improve, there should be some headways being made by the 2H of next year. CEO Charlie Ergen (50% economic/80% voting control) believes he is making the right decisions for the long-term health of the company. To paraphrase from my notes of the 3Q call, Ergen stated: “As I got a bit more involved in the day-to-day operations, I realized that some of the investments we were making were short-term and we needed to make some longer term investments. The longer term investments were a more expensive vs budget because budget was based on where management thought we should be spending. I have five rules around here, but one of them is think long-term and when you really got management thinking long-term, they came back with different places they wanted to spend their money, and I think the right places to spend money. And when you spend for the long-term it typically is more expensive than short-term money. It pays dividends for you long-term, and you get a return on investment if you do it right, but it doesn't show up in 2008 for sure. It’s my fault, but we probably had too much of a short-term outlook at the lower levels of our company. And I just wasn't aware of that, to be honest. Everything about what we do is we should be thinking about long-term and where we are 5 or 10 years from now as opposed to where we are next quarter. And you can always have an eye on next quarter but you really got to think about where you're going to be in the years ahead. I have great confidence that we're one – we are one of the few companies that can think long-term”.
Even if I’m wrong, and DISH continues to lose net subs and cash flows decline over the long-term, the company will likely to be able to pay all of its debt over the next 7-8 years.
The sensitivity below shows full paydown of all the Company’s debt assuming EBITDA declines about 6% per year, which means that by 2016, the company will be generating 40% less EBITDA vs. today (40% subscriber losses, offset by pricing increases of 5% per year, reduced capex on fewer subs and reduced SAC due to lower equipment costs)
Millions $ |
2008 E |
2009 E |
2010 E |
2011 E |
2012 E |
2013 E |
2014 E |
2015 E |
2016 E |
% EBITDA Decline |
-6.0% |
-6.0% |
-6.0% |
-6.0% |
-6.0% |
-6.0% |
-6.0% |
-6.0% |
|
EBITDA |
$3,000 |
$2,820 |
$2,651 |
$2,492 |
$2,342 |
$2,202 |
$2,070 |
$1,945 |
$1,829 |
Capital Expenditure |
($1,200) |
($1,200) |
($1,200) |
($1,200) |
($1,100) |
($1,000) |
($1,000) |
($1,000) |
($900) |
Interest Expense |
($340) |
($336) |
($302) |
($247) |
($207) |
($168) |
($126) |
($85) |
($47) |
Taxes |
($647) |
($574) |
($520) |
($478) |
($434) |
($394) |
($357) |
($324) |
($311) |
Free Cash Flow |
$813 |
$711 |
$629 |
$567 |
$601 |
$640 |
$586 |
$536 |
$570 |
FCF Decline YoY % |
|
-12.6% |
-11.4% |
-9.9% |
6.1% |
6.5% |
-8.5% |
-8.5% |
6.3% |
End of Year Cash |
$600 |
$300 |
$300 |
$300 |
$300 |
$300 |
$300 |
$300 |
$300 |
Debt Balance (BOP) |
$5,009 |
$5,009 |
$3,998 |
$3,369 |
$2,802 |
$2,201 |
$1,560 |
$974 |
$438 |
Debt Paydown w/FCF |
($711) |
($629) |
($567) |
($601) |
($640) |
($586) |
($536) |
($570) |
|
Cash for Debt Paydown |
($300) |
||||||||
Debt Balance (EOP) |
$5,009 |
$3,998 |
$3,369 |
$2,802 |
$2,201 |
$1,560 |
$974 |
$438 |
($133) |
Debt/EBITDA |
1.7 |
1.4 |
1.3 |
1.1 |
0.9 |
0.7 |
0.5 |
0.2 |
-0.1 |
Net Debt/EBITDA |
1.5 |
1.3 |
1.2 |
1.0 |
0.8 |
0.6 |
0.3 |
0.1 |
-0.2 |
Cash flows can even decline at a much faster rate for the company to maintain a reasonable leverage ratio of 2.0x . The sensitivity below demonstrates that EBITDA can decline by 12% per year and the company is still generating FCF by 2016 (w/ slightly lower Capex levels vs. scenario 1):
Millions $ |
2008 E |
2009 E |
2010 E |
2011 E |
2012 E |
2013 E |
2014 E |
2015 E |
2016 E |
% EBITDA Decline |
-12.0% |
-12.0% |
-12.0% |
-12.0% |
-12.0% |
-12.0% |
-12.0% |
-12.0% |
|
EBITDA |
$3,000 |
$2,640 |
$2,323 |
$2,044 |
$1,799 |
$1,583 |
$1,393 |
$1,226 |
$1,079 |
Capital Expenditure |
($1,200) |
($1,200) |
($1,200) |
($1,200) |
($1,100) |
($1,000) |
($950) |
($900) |
($800) |
Interest Expense |
($340) |
($336) |
($305) |
($261) |
($237) |
($219) |
($203) |
($192) |
($189) |
Taxes |
($647) |
($502) |
($387) |
($293) |
($205) |
($126) |
($56) |
$7 |
($12) |
Free Cash Flow |
$813 |
$603 |
$431 |
$290 |
$257 |
$238 |
$184 |
$140 |
$79 |
FCF Decline YoY % |
|
-25.9% |
-28.5% |
-32.6% |
-11.3% |
-7.3% |
-22.9% |
-23.8% |
-43.8% |
End of Year Cash |
$600 |
$300 |
$300 |
$300 |
$300 |
$300 |
$300 |
$300 |
$300 |
Debt Balance (BOP) |
$5,009 |
$5,009 |
$4,106 |
$3,676 |
$3,385 |
$3,128 |
$2,890 |
$2,706 |
$2,566 |
Debt Paydown w/FCF |
($603) |
($431) |
($290) |
($257) |
($238) |
($184) |
($140) |
($79) |
|
Cash for Debt Paydown |
($300) |
||||||||
Debt Balance (EOP) |
$5,009 |
$4,106 |
$3,676 |
$3,385 |
$3,128 |
$2,890 |
$2,706 |
$2,566 |
$2,487 |
Debt/EBITDA |
1.7 |
1.6 |
1.6 |
1.7 |
1.7 |
1.8 |
1.9 |
2.1 |
2.3 |
Net Debt/EBITDA |
1.5 |
1.4 |
1.5 |
1.5 |
1.6 |
1.6 |
1.7 |
1.8 |
2.0 |
When one thinks about it, there is some flexibility in DISH’s cost structure. If subscribers flock to cable or telcos (VZ/AT&T), and adding incremental gross subs is an uneconomic proposition, then DISH can dramatically reduce its SAC costs (including marketing, equipment spend for new subscribers) as well as Capex (not as much need for new satellites which cost ~$300MM apiece; my base case model assumes one satellite launch every year for next 4 years and one launch every two years thereafter). Moreover, over time CPE will also decline (set top boxes are deflationary as technology is increasingly commoditized.
You can play around with the numbers quite a bit, but the overall conclusion is that even under stress scenarios, DISH can still generate decent free cash flow. Note that none of the street consensus numbers are anywhere close to my 1st scenario assumptions (consensus has long-term EBITDA increasing) and even some of the most bearish analysts on the sector are showing cash flow growth.
Other Risks worth noting, which have caused the stock to underperform, however, over time these should not be significant factors that would materially alter the credit profile/FCF characteristics of the company:
1. 3Q EBITDA declined about 10%--the first decline in several years. DISH lost 1--10k net subscribers, the result of both higher churn (2.0% vs. 1.9% in yr ago period) and lower gross adds (825k, down 8.7% yoy) ; net adds were modestly better than the -25K loss in 2Q, but still is much worse than the 110k net adds of 3Q07. ARPU and total revenues were better sequentially and yoy, but higher costs were reflected in higher SAC and retention marketing, including expenses related to relocating certain programming/channels, upgrading customers to new MPEG-4 compression technology, reducing piracy, disconnecting non-paying/delinquent subs, expenses related to opening a new call center, and overall operating inefficiencies as the company tries to deal with all these issues simultaneously. As mentioned above, I believe these to be short-term problems that should largely be resolved by the end of 2009.
2. Loss of AT&T marketing agreement. In September, AT&T announced it will not renew its distribution agreement with Dish and will instead offer a bundling arrangement with DirecTV. This will reduce DISH’s gross adds beginning in 2009 (agreement w/AT&T expires in late Jan). The bundling arrangement accounted for about 15% of DISH’s gross adds in 2008. Of course, not all of these gross adds will be lost, as most customers will likely continue receiving DISH, however, the AT&T subs have experienced higher churn vs. DISH’s existing subs (company has not disclosed other than to say they are a “little higher”), so this when combined w/ the effects of piracy (starting to be resolved) and well as the belated HD rollout, in my estimation will likely result in a net loss of subscribers in 2009 and EBITDA to contract slightly or be down in the high-single digits (depending on assumptions). Street estimates have EBITDA increasing slightly in 09.
3. TIVO litigation: TIVO has successfully sued DISH for patent infringement of TIVO’s “time warp” technology in its set top boxes. DISH claims that it installed a new software update that is in effect a suitable workaround complying with the injunction that DISH received earlier this year. TIVO disputes this claim and the matter should be resolved in February of 2009, when a court judge issues what is expected to be a final ruling. The market (when looking at both DISH and TIVO equity) seems to be discounting that DISH will lose the case and will have to pay damages to TIVO, as well as an ongoing royalty. DISH has already paid damages of $128MM, and TIVO claims that DISH should pay additional damages of $92MM. If DISH loses the case, it will likely have to pay the damages TIVO is claiming, plus DISH and TIVO will likely strike an agreement where DISH pays TIVO a royalty fee similar to what DTV and Comcast already pay to TIVO (not disclosed but assumed to be range of 75 cents - $1.25 per sub per month). Assuming a $1.50 - $2.00 per sub royalty is paid by DISH for the 4+MM infringing DVRs, that would mean an annual EBITDA impact of $77 - $103MM. Because DISH has lower pricing vs. DTV and its cable/telco competitors, it will likely be able to recoup most of that cost by passing it through to customers. Should negotiations become contentious or TIVO demands too onerous terms, it might be better for DISH to buy TIVO (current EV is around $480MM) and gain access to superior technology and royalty streams from DTV and other cable operators.
4. 700MHz spectrum. In early 2008, DISH acquired 168 licenses for spectrum in the FCC’s 700MHz spectrum auction, which covers 76% of the US population. DISH is looking to possibly do a mobile video or potentially a wireless data offering. Investors are fearful that DISH will be deploying significant cash into a dubious venture, however it is unlikely that Charlie Ergen would pursue uneconomic ventures. If the current credit crisis continues, as he stated on the 3Q conference call, DISH will conserve cash, run a more conservative balance sheet, and de-emphasize share repurchases. In such an environment, DISH could very well sell that spectrum.
show sort by |
Are you sure you want to close this position DISH Network (Corporate Bonds)?
By closing position, I’m notifying VIC Members that at today’s market price, I no longer am recommending this position.
Are you sure you want to Flag this idea DISH Network (Corporate Bonds) for removal?
Flagging an idea indicates that the idea does not meet the standards of the club and you believe it should be removed from the site. Once a threshold has been reached the idea will be removed.
You currently do not have message posting privilages, there are 1 way you can get the privilage.
Apply for or reactivate your full membership
You can apply for full membership by submitting an investment idea of your own. Or if you are in reactivation status, you need to reactivate your full membership.
What is wrong with message, "".