One of the challenges all businesses face is their ability to remain relevant over time. Market economies are incredibly competitive, and that means that no matter what industry a business exists in, there is a constant need to adapt and change with the times. A good current example of what I mean exists in world of retail, where Amazon (AMZN) is forcing businesses in every segment to shift their focus and operating models to keep up with their aggressive, innovative push into every space they can reach. That competitive process is changing the way consumers shop and interact with retail businesses – and the ones that can’t keep up, like Sears Holdings (SHLDQ) and JC Penney Co (JCP) are being left behind. The titans of yesteryear often become the dinosaurs of yesterday, rendered obsolete, irrelevant and instinct.
The same idea is usually seen in even more dramatic fashion in technology and communications; 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, more recently the Walt Disney Company (DIS) launching 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 for years n 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. In July of this year, DISH agreed to acquired about nine million Sprint prepaid cell phone customers along with additional spectrum assets totaling about $5.4 billion. The deal is part of the pending merger between Sprint and T-Mobile, and will enable the company to operate on T-Mobile’s network under a wholesale agreement during a seven-year transition period. That move will make DISH the fourth “major” U.S. wireless provider, and should accelerate its entry into the wireless market as a 5G broadband provider even as they work on completing the build out of their own 5G network. Additionally, 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 has helped the market start to look at DISH as more than just another dying broadcast TV service this year, and is probably the biggest catalyst for the stock’s 45% 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 $17.9 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined -19.5, while sales decline -6.68%. In the last quarter EPS increased 10% while sales declined about -1.34%.
Free Cash Flow: DISH has very healthy free cash flow of about $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 10.9%.
Debt to Equity: the company’s debt to equity ratio is 1.28, 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 $1.6 billion in cash and liquid assets against $13 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, including the recent deal with Sprint.
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 $20.62 per share. At the stock’s current price, that translates to a Price/Book Ratio of 1.76. 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 $80 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 multi-year 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 from December 2017 to December 2018. It also informs the Fibonacci retracement lines on the right side of the chart. DISH rebounded strongly through the first half of 2019, to a peak around $44 before dropping back sharply at the end of July. From that point, the stock has moved about 20% higher, with current resistance a little below $37 as well as the 50% Fibonacci retracement line, which is a little below $38. A break above $38 should be a good indication the stock’s bullish momentum is picking up, with room to run to about $41.50 to as high as about $43.50, near the stock’s 52-week high point. Current support is back around the 38.2% retracement line, which is currently sitting right around $34.50 per share. A drop below that level could see the stock test its early August lows around $31 per share.
Near-term Keys: Look for the stock to break above $38 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 $41 to $43.50. A move below $34.50, 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, and its valuation numbers are compelling; 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. That means that 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 are yet to be seen, with useful numbers not likely to be seen until late 2020.