DISH is a long-term bet – but not on television

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Consumer trends can be a fascinating thing to watch, despite the fact that sometimes they are fickle. That’s because sometimes those trends can give you important clues about the viability of certain products or ways of approaching business. It’s easy to get caught up in the excitement of a new, groundbreaking technology, for example, but if the buying public doesn’t buy it, it doesn’t matter how great the tech is; it isn’t going to stick around for very long.

In the 1980’s, my parents bought a video tape player for the family. We were excited because we could finally watch movies in our home without having to wait for network TV to broadcast them for us. The player was a Betamax player, and my dad went to great lengths to explain to us why Betamax players were superior to the VHS players we had been hassling him about. And it’s true, it was a terrific piece of machinery; the quality of our home recordings, and of movie tapes in general, was clearly better than any comparable VHS tape.

The thing was, not many other people felt the same way. By the beginning of the 1990’s, Betamax was a thing of the past. We still had our player, and the tapes with our home recordings, but guess what we had sitting right on top of it? You bet – a VHS player, and all of the movies we bought to keep at home were VHS tapes. If you invested in Betamax development, you probably lost a lot of money.

The same idea can be applied to very mature businesses as well; the advent of one kind of new technology often means that a previously lucrative and growing technology becomes obsolete. That is especially true if the new technology is widely adapted and erodes the consumer base the older technology relied on. Cable and satellite broadcasting is one of those mature technologies that consumer trends increasingly indicate is coming up on the end of its usefulness in the not-so-distant future. More and more customers of all ages are “cutting the cord” with traditional television viewing in favor of on-demand, web-based streaming services. It’s a trend that has built Netflix (NFLX) into a media powerhouse, with Amazon not far behind and even the Walt Disney Company (DIS) preparing to launch its own streaming service to compete directly.

Dish Network Corporation (DISH) is among a number companies in the Media industry that finds itself at a crossroads, with a still large, but dwindling subscriber base that requires attention and a high level of service and quality, but a desire to redirect its business to evolve with the needs of a changing business landscape. Through the end of 2018, the stock was one of the biggest losers in the market, declining from a July 2017 high at around $62 to a December low around $22.50. From that point, however, the market has turned significantly more bullish, pushing the stock to its current level at around $35.16. The fact the company really has no international exposure to speak of also appears to have worked in its favor, as trade tensions this month haven’t impacted the stock’s price in a meaningful way, except perhaps to level off the rally; the stock has been consolidating for most of the past month around its current level.

It might seem easy to dismiss DISH as just another technological dinosaur whose time has passed, but I think that misses the mark. The truth is that the company has been investing very heavily in evolving beyond the declining value of its core business. Since 2008, the company has spent more than $11 billion buying wireless spectrum frequencies in order to build their own 5G wireless network. Their founder and CEO relinquished his role as chief executive at the end of 2017 to focus on developing that part of the business. I think this is one of the things that the market has recognized about DISH this year, and is probably the biggest catalyst for the stock’s 40% increase year to date. The challenge is that the company is generating zero revenue from the licenses they hold, and they won’t begin to see any return on their already large and ongoing investment until they complete the buildout of their network sometimes in 2020. Reports do indicate that they are on schedule to meet a government-imposed deadline on that buildout, but even so, betting that the company will be successful is a very long-term proposition. So is DISH a a legitimate bargain opportunity that you should pay attention to? Here’s a few numbers to consider that might help you make your own decision.

Fundamental and Value Profile

DISH Network Corporation is a holding company. The Company operates through two segments: Pay-TV and Broadband, and Wireless. It offers pay-TV services under the DISH brand and the Sling brand (collectively Pay-TV services). The DISH branded pay-TV service consists of Federal Communications Commission (FCC) licenses authorizing it to use direct broadcast satellite and Fixed Satellite Service spectrum, its owned and leased satellites, receiver systems, third-party broadcast operations, customer service facilities, a leased fiber optic network, in-home service and call center operations, and certain other assets utilized in its operations. The Sling branded pay-TV services consist of live, linear streaming over-the-top Internet-based domestic, international and Latino video programing services. The Company markets broadband services under the dishNET brand. The Company makes investments in the research and development, wireless testing and wireless network infrastructure. DISH has a current market cap of $8.1 billion.

Earnings and Sales Growth: Over the last twelve months, earnings and sales both declined modestly, with sales decreasing at a slightly greater rate (-7%) than sales (almost -8%). In the last quarter EPS increased 1.5% while sales declined about -3.5%.

Free Cash Flow: DISH has very healthy free cash flow of more than $2 billion over the last twelve months, despite its decline from a little over $2.4 billion in late 2017. That translates to a useful Free Cash Flow Yield of 12.8%.

Debt to Equity: the company’s debt to equity ratio is 1.6, which is high; levels at 1 or below are preferred. However, high debt to equity ratios are also pretty normal for this industry. The company’s balance sheet indicates operating profits are more than adequate to service the debt they have, with adequate liquidity from their cash flow to provide additional stability and flexibility. In the last quarter, DISH reported $2.39 billion in cash and liquid assets against $14.3 billion in long-term debt. The high debt level is attributable primarily to the aggressive investments the company has been making to acquire high-frequency wireless spectrum.

Dividend: DISH does NOT pay a dividend, which is normal for stocks in the Media industry.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for DISH is $19.12 per share. At the stock’s current price, that translates to a Price/Book Ratio of 1.83. Ratios closer to 1 are usually preferred from a value-oriented standpoint, however higher multiples aren’t that unusual, especially in certain industries. The average for the Media industry is 2.5, and the historical average for DISH is 3.9. The stock would have to move above $74 to be at par with the its historical average. While I believe that may be over-optimistic target on even a long-term basis, it does suggest that the stock’s 52-week high, which was above $60 in July of last year, is useful and within striking distance over time.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The red, diagonal line traces the stock’s decline and concurrent downward trend for the past year. It also informs the Fibonacci retracement lines on the right side of the chart. Because of the length and depth of the stock’s long-term downward trend until the end of last year, the stock is still almost $5 away from the 38.2% Fibonacci retracement line, which is near to $40 per share. The stock’s upward trend since that point has held up pretty nicely, with immediate support close by, at around $33 per share. The stock’s consolidation since late April, with immediate resistance right around $35.50 could mark useful signal points for the trend’s next likely direction. A break above $35.50, to about $36, would mark a confirmation of the upward trend, with room to run to the $40 in short order, and perhaps beyond from that point. A drop below $33, however would likely signal a reversal of the intermediate upward trend, with downside in the $29 to $30 area likely to be the next significant support level.

Near-term Keys: Look for the stock to break above $35.50 per share. A move above this level could be a good opportunity to enter a bullish trade, either by buying the stock or working with call options with a near-term target between $39 and $40. A move below $33, on the other hand could suggest the stock’s downward trend will reassert itself, which could be a good opportunity for a bearish short-term trade by either shorting the stock or working with put options. What about the value proposition? The fundamentals are better than you might expect, but the fact remains that for now the company is depending on its mature, yet declining satellite broadcasting customer base for the largest portion of its revenues. The stock is cheap relative to historical valuations; but if you want to bet on the company’s 5G future, you should plan to strap yourself in for a bumpy ride, since real results aren’t going to be seen for a year or more.

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