work sample - directv equity research report

Varun James Vincent | 15 Nov, 2013 1

Company

Rating

Date

DIRECTV

Buy

15 November, 2013

North America

United States

Varun James Vincent

Research Analyst

TMT

Ticker Exchange Reuters Bloomberg

(+1) 425 301-9471

Satellite & Cable DTV NASD DTV.O DTV:US [email protected]

SUMMARY

DIRECTV (DTV) reported strong financial results for 3Q13.

Compared to year-ago qtr, total revenue grew by 6.3% YoY and

net profit by 24% YoY. We expect DTV to sustain low-mid single

digit EBITDA growth from improved Average Revenue Per User

(ARPU) growth, net additions, and lower Subscriber Acquisition

Costs (SAC). Major near-term concerns for the company include

net subscriber loss in the US, decline in growth rate for net

subscriber additions in Latin America (LatAm), increasing

competition in the Pay TV industry, escalating programming

costs, and macro headwinds including rising inflation, slowing

economy and FX. While we remain moderately bearish on the

future of the US Pay TV industry, we believe that DTV LatAm is

set for a healthy long term future. In order to stay competitive,

DTV plans to target and increase its presence in the middle

market segment, while simultaneously trying to establish itself

as the premier Pay TV operator. The company has been

generating solid free cash flow and management’s dedication to

aggressively repurchase shares are helping offset risks. As a

result, it is likely that management will achieve its YE13 goals.

VALUATION

We believe that DTV is currently undervalued and therefore,

initiate coverage with a Buy rating and a $71.11 target price.

Our target price represents ≈ 7.5x our 2014E EBITDA and is

based on discounted cash flow analysis (7.4% WACC from 9.7%

CoE and 5% pre-tax CoD, and 1% terminal growth).

COMPANY OVERVIEW

The California based DIRECTV Group, Inc., incorporated in 1977

with ≈ 30k employees as of 3Q13, is the world's leading provider

of digital television entertainment services. It markets satellite-

based Pay TV services through two geographic segments: DTV

US and DTV LatAm. In addition, it owns and operates regional

sports networks for game-related programming.

Company Price Update Price (11/12/2013) $64.02

Price target $71.11

52-week range $47.71 - 67.85

Price / Price relative -- DTV -- S&P 500

Performance (%) 1m 3m 12m

Absolute 6.6% 8.2% 32.4%

S&P 500 Index 5.9% 8.2% 32.9%

Key Statistics

Beta 1.02

Market Cap ($M) 34,091

Shares O/S (M) 545

30 Day Avg. Vol. (M) 3.1

Dividend ($ / %) $0.00 / 0.0%

S&P 500 Index $1,770.61

Enterprise Value ($M) 57,298

Investment Fundamentals

YE 31 Dec 2012A 2013E 2014E 2015E

Revenues $29,740 $31,614 $33,510 $35,354

Adj. Profit 2,949 2,805 3,040 3,304

FCF 2,285 2,160 2,372 2,448

EPS adj. $4.58 $5.15 $6.16 $7.37

ROA 15.1% 13.6% 14.3% 15.0%

ROE -48.9% -39.5% -42.3% -52.6%

Source: Morningstar, Company data and Estimates

mailto:[email protected]


DTV US: DTV is the largest DTH (direct-to-home) and second largest Pay TV provider in the multi-channel video

programming distribution (MVPD) industry in the US. As of 3Q13, DTV disturbed about 2000 digital video and audio

channels to 20.2m subscribers (subs), while this segment generated 77.3% of the total revenue with average revenue

per subscriber (ARPU) of $102.37.

DTV LatAm: DTV is the leading provider of DTH in LatAm and operates in two business segments: SKY Brasil

(operations in Brazil) and PanAmericana (operations in Argentina, Venezuela, Colombia, Chile, Puerto Rico and

Ecuador). DTV has a 93% owned subsidiary in SKY Brasil and a 41% stake (equity method investment) in SKY Mexico.

As of 3Q13, these segments generated 21.9% of the total revenue with an ARPU of $49.42 from 11.3m subs.

2013 PREVIEW – What to expect in 4Q13?

DTV US: In 4Q13, DTV US may see a rising ARPU due to the new equipment warranty plan and strong pay-per-view

(PPV) revenues. The lower-cost second generation Genie box will further aid in achieving higher net additions and

lower SAC per gross additions. In addition, the 3Q13 net subs additions rose to 139k from 67k in the year-ago qtr as

gross additions increased as a result of competitors’ affiliate renewal disputes during the quarter (DISH/Raycom). Net

subs additions increased by 20% YoY to 124k from 103k.

Exhibit 1: DTV US 2013 Quarterly Subscriber Data

1Q13A 2Q13A 3Q13A 4Q13E

Gross Adds (000's) 893 839 1,109 970

% YoY -5.1% -6.0% 0.2% 4.0%

Net Subs Adds (000's) 21 -84 139 124

% YoY -74.1% -61.5% 107.5% 20.0%

Total Subs (000's) 20,105 20,021 20,160 20,284

% YoY -5.1% -6.0% 0.2% 4.0%

Source: Company reports and estimates

DTV LatAm: LatAm is currently facing economic and currency headwinds. As a result, management expects churn

(rate of disconnections) to remain at current levels (1.93%) for 4Q13. Overall DTH trends in LatAm have weakened in

3Q13: ARPU decreased by 11.7% YoY to $49.42 from $55.97. Net subs additions dropped by 52.1% YoY to 260k from

543k. With this in mind, we estimate LatAm net subs additions in 4Q13E to fall 30% YoY to 461k and in 2013 to fall to

1.5m from 2.44m. This is in line with the lower spectrum of management’s guidance for 1.5 - 1.75m. We forecast

ARPU down 12.5% due to lower quality subscribers. Nevertheless, the relatively low Pay TV penetration in LatAm (≈

30%) and the rising market share for DTV LatAm will help boost long-term growth.

Exhibit 2: DTV LatAm 2013 Quarterly Subscriber Data

1Q13A 2Q13A 3Q13A 4Q13E

Gross Adds (000's) 1,181 1,189 1,023 1,124

% YoY 14.2% 6.3% -5.4% -5.0%

Net Subs Adds (000's) 583 172 260 461

% YoY -1.7% -73.3% -52.1% -30.0%

Total Subs (000's) 10,912 11,077 11,337 11,798

% YoY 14.2% 6.3% -5.4% -5.0%

Source: Company reports and estimates


INVESTMENT RATIONALE

We believe that DTV’s stock is inexpensive and over time the aggressive share repurchase program should push

valuations higher and help offset risks to the company. As a result, we initiate coverage on shares of DTV with a Buy

rating and a $71.11 target price. Our target price represents ≈ 7.5x our 2014E EBITDA and is based on discounted cash

flow analysis. The company will be able to stay competitive if it manages to execute its proposed business strategy

effectively, viz., to target and increase its presence in the middle market segment, while establishing itself as the

premier Pay TV operator by targeting high-end subs. Despite current challenges, DTV US has been generating solid

free cash flows and DTV LatAm continues to provide promising fundamentals for long term growth.

CATALYSTS

Strategic Initiatives to further a potential M&A

Technology that enables inserting ads into individual DVRs; targeting commercial users: hotels and gyms.

Management’s dedication to continue share buyback

Solid free cash flow generation by DTV US as a result of the promising US macro environment

DTV LatAm growth profile and relatively low Pay TV penetration in LatAm (≈ 30%)

RISKS

DTV faces a highly competitive Pay TV market, with the risk of rapidly increasing programming costs, pricing

pressure and increased discounting.

M&A activity among competitors; a merger between AT&T and DISH could cost DTV its largest reselling partners.

DTV’s ability to differentiate products is challenged as Cable continues to aggressively improve its user experience.

Satellites: DTH licenses typically last 10-15 years and the DBS frequencies and available locations capable of

supporting DTV’s business have become increasingly scarce, which could hamper DTV’s ability to obtain future

capacity. DTV’s satellites are subject to significant launch and operational risks that can take up to 3 years to fix; the

loss of one or more satellites, none of which is currently insured, could materially affect the business and earnings.

The US Pay TV industry growth is sensitive to technological advancements and could be materially adversely

affected by the emergence of a more disruptive technology/business plan.

DTV LatAm is subject to various additional risks associated with doing business internationally, which include

political and economic instability, foreign currency exchange rate volatility, and further devaluations.

Increased volatility in the global currency markets present foreign exchange headwinds, particularly in Venezuela,

Brazil, and Argentina.

Other factors that could negatively affect growth prospects are: Changes in macroeconomic and regulatory

environment, increased SAC and subs churn, subs upgrade and retention costs, improper execution of proposed

business strategy, lower than expected ARPU, penetration, and net subs, and a recede in share repurchases.

LONG-TERM OUTLOOK AND RECOMMENDATION

DTV CONSOLIDATED: Share repurchases are a key component to the investment thesis for DTV. As of YE12, DTV had

repurchased almost $26b of its own stock since 2006, retiring almost 60% of its outstanding shares. In Feb 2013,

management authorized an additional $4b in share repurchases and repurchased ≈ $3.2b by the end of 3Q13. Given

management’s ongoing leverage target of 2.5 and our estimated free cash flow, DTV is in a good position to continue

repurchases of $4b per year through 2014 and $2.5b thereafter; while being able to maintain a leverage ratio of

about 1.2x to 2.3x EBITDA, while it aims to purchase ≈ 25% of its YE12 float over 2013 - 2014 and ≈ 60% until 2018.


Exhibit 3: DTV Share Repurchase Activity

2007 2008 2009 2010 2011 2012

Shares Repurchased (M) 86 131 71 136 119 107

Avg. Price Per Share ($) 23.48 24.12 23.79 38.20 45.78 48.24

Amount Repurchased ($M) 2,025 3,174 1,696 5,179 5,455 5,148

% Change In Amount Spent 56.7% -46.6% 205.4% 5.3% -5.6%

Source: Company reports

Multiples largely reflect concerns in LatAm and strategic end game in the US. We forecast DTV’s consolidated EBITDA

growth at a 4.82% 5-yr CAGR (’13-‘18E), roughly in-line with the average mid-single digit growth of its cable/satellite

peers. With DTV trading at ≈ 7.5x EV/’14E EBITDA (below peer range of 7.2-10.0x), valuation appears attractive. EPS

increases to $5.15 from $4.58 (base case) and picks up slowly as the company tries to cope with current challenges.

Since the unsuccessful merger attempt with Hulu, management has ruled out wireless and emphasized that

regulatory hurdles pose barriers for a deal; as a result pursuing accretive acquisitions in the near-term seems unlikely.

DTV US: EBITDA margin increased to 22.6% from 21.7% as revenues increased; capital expenditures on satellites increased by 100% YoY. Net subs additions increased 107% primarily due to lower churn but gross subs additions remained relatively flat due to continued focus on attaining higher quality subs. Total US pay TV subs increased to 20.1m by YE12, while YoY growth slowed to 0.1%. As the industry continues to mature, we estimate that cord cutting will increase in the lower-income / younger market, going forward. As a result, the number of Pay TV subs in the US will decline by ≈ 6m by YE17, representing an estimated compounded annual decline of 1.2%.

Exhibit 5: DTV US Historical Subscriber Data (M)

2007 2008 2009 2010 2011 2012

Total Subs 16.8 17.6 18.6 19.2 19.9 20.1

% YoY 5% 5% 4% 3% 1%

Net Subs Adds 0.88 0.86 0.94 0.66 0.66 0.20

% YoY -2% 9% -29% 0% -70%

Avg. Monthly Churn (%) 1.51% 1.47% 1.53% 1.53% 1.56% 1.53%


$0

$10,000

$20,000

$30,000

2007 2008 2009 2010 2011 2012

Exhibit 4: DTV Consolidated Revenues

DTV US DTV LatAm Sports Networks & Other


0.0

5.0

10.0

15.0

20.0

25.0

2007 2008 2009 2010 2011 2012

Exhibit 6: DTV US Subscriber Data (M)

Total Subs Net Subs Adds

0

5

10

15

20

2007 2008 2009 2010 2011 2012

Exhibit 8: DTV LatAM Subscriber Data

Total Subs (M)

Since 2008, the rate of growth in revenues YoY has been lower than the corresponding rate of growth in broadcast programming costs YoY, while ARPU increased gradually due to increasing total subs and constant average churn. Programming costs increased about 5% YoY in 3Q13 and 9.6% in 2012 compared to 2011. Revenues reported are 7% higher YoY in 3Q13 due to higher ARPU and larger subs base. ARPU increased by 6.2% YoY in 3Q13 to $102.37.

Exhibit 7: DTV US Revenues vs. Programming Costs

2007 2008 2009 2010 2011 2012

Revenues ($M) 15,527 17,310 18,671 20,268 21,872 23,235

% YoY 11.5% 7.9% 8.6% 7.9% 6.2%

Programming Costs ($M) 6,681 7,424 8,027 8,699 9,799 10,743

% YoY 11.1% 8.1% 8.4% 12.6% 9.6%

ARPU ($) 79.05 83.90 85.48 89.71 93.27 96.98

% YoY 6.1% 1.9% 4.9% 4.0% 4.0%


Long-term sustainability of growth in US is unlikely because of the impending cable consolidation outlook; although

DTV’s scheduled Investor Day in December may help as management outlines strategies for TV Everywhere,

programming costs, and NFL Sunday Ticket renewal.

DTV LatAm: EBITDA margin increased to 33.6% from 28.9%;

capital expenditures on satellites increased by 45%

compared to year-ago qtr. Net subs additions decreased

52.1% compared to year-ago qtr primarily due to higher

churn and challenging economic conditions. Average

monthly churn rate increased by 18.8% to 2.3% from 1.9%

earlier. Gross subs additions remained relatively flat due to

continued focus on attaining higher quality subs. Revenues

reported are 5.4% higher YoY due to increase in total subs

base. ARPU decreased by 11.7% to $49.42 compared to

$55.97 earlier primarily due to the devaluation of bolivar

and unfavorable exchange rates in Argentina and Brazil.


Exhibit 9: DTV LatAM Historic Subscriber Data

2007 2008 2009 2010 2011 2012

Total Subs (M) 4.8 5.6 6.5 8.8 11.9 15.5

% YoY 16.7% 16.1% 35.4% 35.2% 30.3%

Net Subs Add (M) 0.59 0.62 0.69 1.22 2.06 2.46

% YoY 6.0% 11.1% 76.3% 69.1% 19.1%

Avg. Monthly Churn 1.38% 1.78% 1.75% 1.77% 1.78% 1.81%

Revenues ($M) $1,719 $2,383 $2,878 $3,597 $5,096 $6,244

% YoY 38.6% 20.8% 25.0% 41.7% 22.5%

ARPU $48.33 $55.07 $57.12 $57.95 $62.64 $57.25

% YoY

13.9% 3.7% 1.5% 8.1% -8.6%

Source: Annual report

In YE12, there were approx. 108m households in DTV’s LatAm markets with ≈ 37.2m of those households subscribing to a Pay TV service. As such, total Pay TV penetration in DTV’s LatAm markets is ≈ 34%. Through YE17, we expect DTV LatAm to add over 7m subs (+11.2% CAGR) with SKY Brasil contributing ≈ 4m net additions (+12.2% CAGR) and PanAm contributing ≈ 3m net additions (+10.2% CAGR).

Venezuelan devaluation - Because of the devaluation of the bolivar in February 2013 from the official exchange rate

of 4.3 to 6.3 bolivars per U.S. dollar, DTV recorded an after-tax charge of $136m. Future devaluations would result in

ongoing impacts to results and difficulty to repatriate funds back to US.

The importance of LatAm to DTV is critical as it offers solid growth prospects as well as higher margins than the US

business. Generating cash and gaining confidence in LatAm growth is important in order to raise valuations. This,

however, is unlikely in the short term due to increased competition, economic slowdowns and rising churn; although,

the 2014 Brazil World Cup could help boost growth if the proposed strategies are executed meticulously. Despite

challenging near-term fundamentals, DTV LatAm is well-positioned to capitalize on the Pay TV market growth in the

long term because of strong fundamentals: (1) thriving economy, (2) young population, (3) significant opportunity in

the middle markets, (4) exclusive content, (5) cost advantages, and (7) tech leadership. More guidance for LatAm in

the long-term is expected during the December Investor Day.

0

5

10

15

20

2007 2008 2009 2010 2011 2012

Mill

ion

s

Exhibit 10: DTV LatAM Subscriber Distribution

Sky Brasil PanAmericana Sky Mexico


SKY BRASIL: According to ANATEL, the Brazilian regulatory agency, August DTH net additions decelerated YoY to

≈114k from ≈ 254k last year with SKY adding only ≈ 27k subs. The regulatory environment is changing in Brazil which

could aid in wireless consolidations. Programming costs in Brazil can be tied to the country’s inflation. The IMF

expects inflation in Brazil to increase to 6% in 2013 from just above 5% in 2012. For the longer term, IMF expects this

inflation to ease and drop to around 4.5% in 2017. The Real has depreciated 12% YoY.

Source: IMF

INDUSTRY TRENDS AND COMPETITIVE LANDSCAPE

DTV CONSOLIDATED: DTV generates the industry’s highest ARPU for its best in class video experience; but as the level

of competition rises, it faces substantial competition in the MVPD industry against Cable TV, Telcos, Wireless

companies, and other land- and satellites-based operators. The industry as a whole has undergone significant change

in recent years and can be characterized primarily by declining growth rates and markets-share shifts among

competitors. Since the 2007 subprime debacle, the US Pay TV industry has been negatively affected by

macroeconomic factors beyond the control of industry operators. The collapse of the subprime market coupled with

depressed employment rates and weakened housing markets stunted the growth of the industry significantly.

Substitutes/Rivals/Potential Entrants: Satellite based Pay TV provides high quality digital picture and sound, including

HS and 3D programming, with the ability to quickly distribute hundreds of channels to millions of customers

nationwide, even with low population density areas, with little incremental infrastructure cost per additional subs.

This is not the same for Cable based Pay TV. Within the Pay TV industry, barriers to entry are high, while the threat of

substitutes is increasingly risky as any technological advancement that could provide viewers a similar experience

with a lower cost could expedite industry decline. The current predominant way to increase subs additions is to offer

bundled video, telephone and broadband services as consumers look for ways to reduce costs. Therefore, connecting

customers’ set-top receivers to broadband service is strategically important as it enhances video experience while

meeting demands to access programming services on mobile devices anytime anywhere.

Demand and Supply Analysis/Profitability: Since the 90’s, television viewing trends have changed with current

dominance of DVR and high-definition along with increased advertising and subs growth. Mobile viewing represents

less than 1% of total TV viewing with the average TV US household having access to 135 channels (double from 2000).

Sports, by far, have the greatest pricing power. The demand for entertainment services has been increasing since

decades and as a result has reached a state of maturity. This limits the profitability of the companies as penetration

levels increase.

0%

1%

2%

3%

4%

5%

6%

7%

2011A 2012A 2013E 2014E 2015E 2016E 2017E 2018E

Exhibit 11: Brazil Inflation Projection


DTV US: Market share has shifted significantly over the past five years. According to National Cable &

Telecommunications association, from the 131.2m US households, ≈ 100m subscribe to MVPD. As of YE12, DTV’s

20.1m subs represented ≈ 20% of MVPD subs; Cable – 57%, Telco – 9%. Remaining market is shared between other

major DTH and video-via-internet providers such as Apple, Hulu, Netflix, Google, Amazon, AT&T, Verizon, and

Comcast.

The number of subscribers being added is growing at a decreasing rate. In 2012, the U.S. pay TV industry added only

91k subscribers (versus 332k+ in 2011), ending the year with ≈ 99.8m subs. The US Pay TV industry grew by only an

estimated 0.6% (CAGR) between YE07 and YE12, adding roughly 3.2m new subs. Subs growth has not exceeded 1%

since 1Q10. In fact 2Q12 represented the tenth consecutive qtr of flattish (0.0 - 0.3%) YoY subs growth.

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2007 2008 2009 2010 2011 2012

Sub

scri

be

rs (

00

0's

) Exhibit 12: US Pay TV Industry Subscriber Breakdown

Cable Satellite Telcos Available Penetration Opportunity

2009 2010 2011 2012

Q1 880 363 860 814

Q2 248 -286 -522 -492

Q3 386 -212 -158 -198

Q4 173 -71 152 -33

Exhibit 13: Net Subscriber Additions



By YE12, DTV had 20.1m subs in the US, a 20.1% share of the US Pay TV market (vs. 20% at YE11). It remains the

nation’s leading DTH provider (ahead of DISH’s 14.1m subs) and second largest Pay TV provider (behind Comcast’s

22m subs). The US Pay TV industry consists of many regional and national providers that deploy various forms of

technology. As of YE12, the top 10 providers, by subs count, accounted for ≈ 86.8% of all Pay TV subs in the US.

DTV LatAm: As of YE12, DTV provided service to 24% of Pay TV households in PanAm, 31% in Brazil and 37% in

Mexico. DTV LatAm tailors its offers and products to provide to various segments by offering postpaid and prepaid

options. DTV’s video and audio is 100% digitally delivered, whereas cable typically broadcasts in analog format, which

renders a lower video/audio quality. Main DTH competitors are Telefonica, EchoStar, and Telmex; all of which have

significant resources and proven ability that could put pressure on DTV’s margins and increase churn.

Comcast 19%

DIRECTV 17%

DISH 12%

Time Warner Cable 11%

Verizon FiOS 4%

AT&T U-verse 4%

Cox 4%

Charter 4%

Cablevision 3%

Brighthouse 2%

Others 7%

No Coverage 13%

Exhibit 14: Pay TV Providers in the US Total US households = 99,787; Pay Penetration = 86.8%

Brazil 49%

Argentina 19%

Venezuela 15% Colombia

7%

Others 4%

Chile 3%

Puerto Rico 2%

Ecuador 1%

Exhibit 15: DTV's Subscriber Distribution in LatAm


SKY Brasil: Brazil is the largest single Latin American market in which pay TV penetrations are still at a record low (≈

30%). ANATEL, the Brazilian regulatory authority, reported that Brazil ended 2012 with almost 16.2m Pay TV subs, up

from 12.7m subs at YE11. The Brazilian Pay TV market has grown by 147% since 1Q09. The vast majority of the

growth in the market has been driven by Satellite. Between 1Q09 and YE12, DTH subscribers grew by 353% while

cable subs grew by only 56%. The Satellite industry has increased its share of the Pay TV market in Brazil from 33.24%

at the end of 1Q09 to 60.82% at YE12. We expect hosting of the 2014 World Cup and 2016 Olympic Games to be

beneficial for the industry but churn will continue to decelerate sequentially from 4Q13; while remaining elevated for

low and middle markets. Of note, management is considering moving its low end subs to a pre-paid model similar to

that in PanAm. Other attributes to SKY Brasil include strong but decelerating subs growth, increasing competition

from several new/better capitalized entrants, and macro-economic challenges. The competitive landscape remains

tough with the regulatory changes and new entrants like Echostar/GVT impacting the wireless business.

Echostar’s recent announcement to partner with Vivendi’s GVT to provide nationwide pay TV services in Brazil is

likely to increase competition in 2014, a critical year for growth given the World Cup. GVT is a well-established player

in Brazil with over 10m broadband subs and a presence in ≈ 140 cities (with plans to expand to 50+ cities in the next

five years). Although GVT’s Pay TV has a meager 560k subs, this joint venture could boost its numbers. The company

also brings a bundled triple play product with HSD speeds of 100 Mbps, the highest in Brazil. In additional, GVT is

launching wireless services and is expected to roll out to 5-6 cities in 2013. Along with a high-power BSS satellite

(Echo XV) positioned at the 45W orbital slot, Echostar has extensive experience in providing operational support and

satellites services to video businesses including uplink services and advanced set-tops. Additional synergies between

GVT and Echostar will be leveraged to propel growth. Thus SKY Brasil will compete head-on with GVT in Brazil. Of

note, DirecTV was initially interested in acquiring GVT but pulled back its bid in 1Q13 due to Vivendi’s high asking

price of ≈ €7b or 7.4x 2013E EBITDA.

Exhibit 16: Ratio and Multiples analysis of competitors is shown below

Name Mkt Cap (USD)

Sales Growth (%)

EBITDA Growth (%)

EBITDA Margin

Capex/Sales (%)

ROIC (%)

ROA (%)

ROE (%)

Average $35,608 5.5 (0.4) 29.5 12.0 11.9 4.7 (13.1)

DIRECTV 34,094 7.6 6.9 25.1 11.3 23.8 14.1 N.A.

COMCAST CORP 118,869 7.7 8.1 32.4 9.1 6.5 4.3 14.1

CABLEVISION SYSTEMS 5,237 (0.1) (24.7) 24.4 16.0 N.A. 3.2 N.A.

DISH NETWORK CORP 20,560 (1.2) (17.5) 20.0 6.7 10.8 3.3 N.A.

TIME WARNER CABLE 33,465 7.0 4.4 36.1 14.5 6.5 4.4 31.3

Source: Bloomberg

Exhibit 17:

Name EV EV/TTM EBITDA P/E P/FCF EV /Subscriber

Average $51,647.1 10.2x 24.7x 28.8x $4,658.9

DIRECTV 50,708.8 6.6x 12.4x 17.2x 2,532.8

COMCAST CORP 161,611.9 7.8x 21.3x 16.7x 7,421.6

CABLEVISION SYSTEMS 14,536.2 9.3x N.A. 8.9x 5,068.4

DISH NETWORK CORP 25,249.3 8.9x 21.2x 27.6x 1,791.7

TIME WARNER CABLE 56,663.1 7.2x 20.1x 15.3x 4,757.2

Source: Bloomberg


EVA Analysis: The Economic Value Added (EVA) has grown at a very steady and rapid rate from 2006.

Exhibit 18: Return on Invested Capital (ROIC) & Economic Value Added (EVA)

2006 2007 2008 2009 2010 2011 2012 2013E 2014E

Total Debt $8,398 $8,750 $11,583 $14,949 $18,103 $21,530 $25,986 $27,419 $29,271

Equity 6,743 6,313 4,956 3,311 (194) (3,107) (5,431) (6,626) (7,586)

Total $15,141 $15,063 $16,539 $18,260 $17,909 $18,423 $20,555 $20,793 $21,685

% Debt 55.5% 58.1% 70.0% 81.9% 101.1% 116.9% 126.4% 131.9% 135.0%

% Equity 44.5% 41.9% 30.0% 18.1% -1.1% -16.9% -26.4% -31.9% -35.0%

Rate of Debt 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6%

Tax rate 35.0% 35.0% 35.0% 38.4% 35.6% 37.4% 36.4% 34.0% 34.0%

Risk-Free Rate 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%

Beta 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 Equity Risk Premium 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%

Cost of Equity 9.7% 9.7% 9.7% 9.7% 9.7% 9.7% 9.7% 9.7% 9.7%

WACC 6.0% 5.8% 5.0% 4.1% 2.9% 1.7% 1.1% 0.9% 0.7%

Common Equity $6,743 $6,313 $4,956 $3,311 ($194) ($3,107) ($5,431) ($6,626) ($7,586)

Total Debt 8,398 8,750 11,583 14,949 18,103 21,530 25,986 27,419 29,271

Invested Capital 15,141 15,063 16,539 18,260 17,909 18,423 20,555 20,793 21,685

EBIT*(1-t) 1,455 1,616 1,752 1,647 2,510 2,896 3,236 3,338 3,561

ROIC 9.6% 10.7% 10.6% 9.0% 14.0% 15.7% 15.7% 16.1% 16.4%

EVA ($m) 552.9 744.4 926.7 903.4 1,991.9 2,576.7 3,000.0 3,146.1 3,405.0

Source: Company data and Estimates

0

1,000

2,000

3,000

4,000

2006 2007 2008 2009 2010 2011 2012 2013E 2014E

EVA

($

m)

Exhibit 19: Economic Value Added

0

5,000

10,000

15,000

20,000

25,000

2006 2007 2008 2009 2010 2011 2012 2013E 2014E

($m

)

Exhibit 20: Invested Capital


Exhibit 21:

2013E 2014E 2015E 2016E 2017E 2013E 2014E 2015E 2016E 2017E 2013E 2014E 2015E 2016E 2017E

Revenues ($m) 31,614 33,510 35,354 37,015 38,755 31,822 34,097 36,313 38,383 40,571 31,019 32,260 33,389 34,290 35,216

Growth % 6.3% 6.0% 5.5% 4.7% 4.7% 7.0% 7.2% 6.5% 5.7% 5.7% 4.3% 4.0% 3.5% 2.7% 2.7%

EBITDA ($m) 8,047 8,622 9,086 9,508 10,180 10,399 11,504 12,623 13,692 14,828 6,193 6,678 7,162 7,565 7,976

Growth % 7.1% 5.4% 4.6% 7.1% 34.7% 10.6% 9.7% 8.5% 8.3% 7.8% 7.2% 5.6% 5.4%

EPS ($) $5.15 $6.16 $7.37 $8.44 $9.74 $7.15 $8.63 $10.38 $11.99 $13.96 $3.47 $4.07 $4.80 $5.39 $6.09

Growth % 19.6% 19.7% 14.6% 15.4% 56.2% 20.6% 20.2% 15.5% 16.4% 17.4% 17.8% 12.2% 13.1%

FCF per share ($) $3.96 $4.80 $5.46 $6.56 $7.35 $5.29 $6.44 $7.38 $8.84 $10.10 $2.82 $3.26 $3.58 $4.44 $4.98

Growth % 21.2% 13.6% 20.3% 11.9% 21.7% 14.6% 19.7% 14.3% 15.9% 9.6% 24.0% 12.4%

Operating assumptions

COGS margin 52.5% 52.0% 52.0% 52.0% 52.0% 49.5% 49.0% 49.0% 49.0% 49.0% 54.5% 54.0% 54.0% 54.0% 54.0%

Operating expenses margin31.5% 31.9% 31.7% 31.7% 31.7% 29.5% 29.9% 29.7% 29.7% 29.7% 33.5% 33.9% 33.7% 33.7% 33.7%

Tax rate 34.0% 34.0% 34.0% 34.0% 34.0% 33.7% 33.7% 33.7% 33.7% 33.7% 35.0% 35.0% 35.0% 35.0% 35.0%

Working capital assumptions

AR as % of sa les 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1%

Inventory as % of COGS 2.5% 2.4% 2.4% 2.4% 2.4% 2.5% 2.4% 2.4% 2.4% 2.4% 2.5% 2.4% 2.4% 2.4% 2.4%

AP as % of COGS 8.0% 8.0% 7.0% 7.0% 7.0% 8.0% 8.0% 7.0% 7.0% 7.0% 8.0% 8.0% 7.0% 7.0% 7.0%

Fixed asset assumptions

Capex as % of revenue 12.0% 11.3% 10.3% 9.6% 9.7% 15.0% 15.0% 15.0% 15.0% 15.0% 10.0% 10.0% 10.0% 10.0% 10.0%

Depr./ Capex ratio 74.5% 81.3% 86.9% 93.2% 99.1% 74.5% 81.3% 86.9% 93.2% 99.1% 74.5% 81.3% 86.9% 93.2% 99.1%

Capital structure assumptions

Dividend payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Minimum cash des i red ($) 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0 1000.0

Debt assumptions

Interest rate (For Senior notes)4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6%

Cash assumptions

Interest rate 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 1.3%

Current Trading

Current Price $64.02 $64.02 $64.02

EV/EBITDA 7.1x 7.5x 6.3x

Scenario Price $71.11 $109.82 $71.11

Impl ied P/E 13.8x 15.3x 20.5x

Impl ied P/fwd FCF 14.8x 20.8x 25.2x

Source: Company Data and Estimates

Best CaseBase Case Weak Case

DTV Model Assumptions for Best, Base and Weak Case Scenarios


Exhibit 22:

(Year end: Dec 31) Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec

($ in millions except EPS) 1Q11A 2Q11A 3Q11A 4Q11A 1Q12A 2Q12A 3Q12A 4Q12A 1Q13A 2Q13A 3Q13A 4Q13E

Revenues $6,319.0 $6,600.0 $6,844.0 $7,463.0 $7,046.0 $7,224.0 $7,416.0 $8,054.0 $7,580.0 $7,700.0 $7,880.0 $8,453.6

Cost of Revenues (3,136.0) (3,255.0) (3,525.0) (4,039.0) (3,567.0) (3,627.0) (3,957.0) (4,428.0) (3,843.0) (3,926.0) (4,122.0) (4,706.2)

Gross Profit $3,183.0 $3,345.0 $3,319.0 $3,424.0 $3,479.0 $3,597.0 $3,459.0 $3,626.0 $3,737.0 $3,774.0 $3,758.0 $3,747.5

11.5% 9.5% 8.4% 7.9% 7.6% 6.6% 6.3% 5.0%

Operating Expenses (2,028.0) (2,115.0) (2,289.0) (2,210.0) (2,171.0) (2,186.0) (2,391.0) (2,328.0) (2,329.0) (2,424.0) (2,533.0) (2,672.3)

Operating Income (EBIT) $1,155.0 $1,230.0 $1,030.0 $1,214.0 $1,308.0 $1,411.0 $1,068.0 $1,298.0 $1,408.0 $1,350.0 $1,225.0 $1,075.2

Interest Expense (172.0) (203.0) (194.0) (194.0) (204.0) (214.0) (204.0) (220.0) (217.0) (219.0) (182.0) (306.3)

Interest Income 7.0 9.0 9.0 9.0 12.0 11.0 17.0 19.0 22.0 19.0 $15.0 (37.9)

Net Non-Operating (Losses) Gains 42.0 70.0 (38.0) 10.0 41.0 (67.0) 39.0 127.0 (128.0) (75.0) $43.0 300.0

Pretax Income $1,032.0 $1,106.0 $807.0 $1,039.0 $1,157.0 $1,141.0 $920.0 $1,224.0 $1,085.0 $1,075.0 $1,101.0 $1,031.0

Income Tax (Expense) (349.0) (397.0) (286.0) (316.0) (416.0) (425.0) (348.0) (276.0) (387.0) (414.0) ($391.0) (267.3)

Tax Rate 33.8% 35.9% 35.4% 30.4% 36.0% 37.2% 37.8% 22.5% 35.7% 38.5% 35.5% 25.9%

Net Income $683.0 $709.0 $521.0 $723.0 $741.0 $716.0 $572.0 $948.0 $698.0 $661.0 $710.0 $763.7

Minority Interests (9.0) (8.0) (5.0) (5.0) (10.0) (5.0) (7.0) (6.0) (8.0) (1.0) (11.0) (8.0)

Net Income to DIRECTV $674.0 $701.0 $516.0 $718.0 $731.0 $711.0 $565.0 $942.0 $690.0 $660.0 $699.0 $755.7

Depreciation & Amort. Expense (611.0) (616.0) (554.0) (568.0) (595.0) (598.0) (618.0) (626.0) (678.0) (731.0) (708.0) (713.7)

EBITDA $1,815.0 $1,925.0 $1,555.0 $1,801.0 $1,956.0 $1,953.0 $1,742.0 $2,070.0 $1,980.0 $2,025.0 $1,991.0 $2,051.0

Wt. Avg. Common Shares

Basic 793.0 763.0 732.0 702.0 678.0 651.0 624.0 601.0 572.0 556.0 541.0 539.0

Diluted 797.0 767.0 737.0 707.0 681.0 655.0 629.0 607.0 577.0 561.0 545.0 545.0

Abnormal Losses (Gains) (14.0) (9.0) 0.0 0.0 0.0 128.0 0.0 (111.0) 166.0 0.0 0.0 0.0

Tax Effect on Abnormal Items 5.0 4.0 0.0 0.0 0.0 (48.0) 0.0 43.0 (30.0) 0.0 0.0 0.0

Normalized Income 665.0 696.0 516.0 718.0 731.0 791.0 565.0 874.0 826.0 660.0 699.0 755.7

Basic EPS Before Abnormal Items $0.84 $0.91 $0.70 $1.02 $1.08 $1.22 $0.91 $1.45 $1.44 $1.19 $1.29 $1.40

Basic EPS $0.85 $0.92 $0.70 $1.02 $1.08 $1.09 $0.91 $1.57 $1.21 $1.19 $1.29 $1.40

Diluted EPS Before Abnormal Items $0.83 $0.91 $0.70 $1.02 $1.07 $1.21 $0.90 $1.44 $1.43 $1.18 $1.28 $1.39

Diluted EPS $0.85 $0.91 $0.70 $1.02 $1.07 $1.09 $0.90 $1.55 $1.20 $1.18 $1.28 $1.39

Revenue Growth 11.5% 9.5% 8.4% 7.9% 7.6% 6.6% 6.3% 5.0%

COGS Margin 49.6% 49.3% 51.5% 54.1% 50.6% 50.2% 53.4% 55.0% 50.7% 51.0% 52.3% 55.7%

Operating Expenses Margin 32.1% 32.0% 33.4% 29.6% 30.8% 30.3% 32.2% 28.9% 30.7% 31.5% 32.1% 31.6%

Tax Rate 33.8% 35.9% 35.4% 30.4% 36.0% 37.2% 37.8% 22.5% 35.7% 38.5% 35.5% 25.9%

Gross Margin 50.4% 50.7% 48.5% 45.9% 49.4% 49.8% 46.6% 45.0% 49.3% 49.0% 47.7% 44.3%

EBITDA Margin 28.7% 29.2% 22.7% 24.1% 27.8% 27.0% 23.5% 25.7% 26.1% 26.3% 25.3% 24.3%

EBIT Margin 18.3% 18.6% 15.0% 16.3% 18.6% 19.5% 14.4% 16.1% 18.6% 17.5% 15.5% 12.7%

Net Profit Margin 10.7% 10.6% 7.5% 9.6% 10.4% 9.8% 7.6% 11.7% 9.1% 8.6% 8.9% 8.9%

Source: Company data and estimates

DTV Income Statement: Quarterly


Exhibit 23:

DTV Income Statement: Annual$mm Actuals Projected

2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E

Revenues $24,102.0 $27,226.0 $29,740.0 $31,613.6 $33,510.4 $35,353.5 $37,015.1 $38,754.8

Cost of Revenues (COGS) (12,105.0) (13,955.0) (15,579.0) (16,597.2) (17,425.4) (18,383.8) (19,247.9) (20,152.5)

Gross Profit $11,997.0 $13,271.0 $14,161.0 $15,016.5 $16,085.0 $16,969.7 $17,767.3 $18,602.3

Operating Expenses (8,101.0) (8,642.0) (9,076.0) (9,958.3) (10,689.8) (11,207.1) (11,733.8) (12,285.3)

Operating Profit (EBIT) $3,896.0 $4,629.0 $5,085.0 $5,058.2 $5,395.2 $5,762.6 $6,033.5 $6,317.0

Interest Income $39.0 $34.0 $59.0 $18.1 $12.5 $12.5 $12.5 $12.5

Interest Expense (557.0) (763.0) (842.0) (924.3) (899.2) (867.2) (817.3) (762.1)

Other (Expense) / Income, Net 136.0 84.0 140.0 140.0 140.0 140.0 140.0 140.0

Pretax profit $3,514.0 $3,984.0 $4,442.0 $4,292.0 $4,648.4 $5,048.0 $5,368.6 $5,707.5

(Taxes) / Tax Benefits (1,202.0) (1,348.0) (1,465.0) (1,459.3) (1,580.5) (1,716.3) (1,825.3) (1,940.5)

Tax Rate 34.2% 33.8% 33.0% 34.0% 34.0% 34.0% 34.0% 34.0%

Net income $2,312.0 $2,636.0 $2,977.0 $2,832.7 $3,068.0 $3,331.7 $3,543.3 $3,766.9

Minority Interests (114.0) (27.0) (28.0) (28.0) (28.0) (28.0) (28.0) (28.0)

Net Income to DIRECTV $2,198.0 $2,609.0 $2,949.0 $2,804.7 $3,040.0 $3,303.7 $3,515.3 $3,738.9

Depreciation & Amort Expense (2,482.0) (2,349.0) (2,437.0) (2,830.7) (3,074.4) (3,171.2) (3,322.4) (3,710.9)

EBITDA $6,553.0 $7,096.0 $7,721.0 $8,047.0 $8,622.1 $9,086.3 $9,508.4 $10,180.4

Diluted Wt. avg shares 886 752 644 545 494 449 417 384

Diluted earnings per share $2.48 $3.47 $4.58 $5.15 $6.16 $7.37 $8.44 $9.74



Exhibit 24:

DTV Balance Sheet: Annual$mm Actuals Projected

2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E

Cash & cash equivalents $1,502.0 $873.0 $1,902.0 $1,000.0 $1,000.0 $1,000.0 $1,000.0 $1,000.0

Accounts receivable 2,001.0 2,474.0 2,696.0 2,872.7 3,045.0 3,212.5 3,363.5 3,521.6

Inventory 247.0 280.0 412.0 408.0 420.1 443.3 458.1 477.6

Other current assets 503.0 614.0 544.0 544.0 544.0 544.0 544.0 544.0

PPE 6,679.0 7,438.0 8,395.0 9,361.8 10,069.8 10,546.1 10,790.0 10,822.0

Other assets 6,977.0 6,744.0 6,606.0 6,606.0 6,606.0 6,606.0 6,606.0 6,606.0

Total assets $17,909.0 $18,423.0 $20,555.0 $20,792.5 $21,684.9 $22,351.9 $22,761.6 $22,971.2

Accounts payable $1,224.0 $1,195.0 $1,208.0 $1,327.8 $1,394.0 $1,286.9 $1,347.4 $1,410.7

Other current liabilities 3,226.0 3,548.0 4,333.0 4,333.0 4,333.0 4,333.0 4,333.0 4,333.0

Long term liabilities 13,653.0 16,787.0 20,445.0 18,400.5 16,560.5 14,904.4 13,414.0 12,072.6

Revolver 0.0 0.0 0.0 3,357.5 6,983.8 8,610.3 9,434.7 9,683.4

Total liabilities $18,103.0 $21,530.0 $25,986.0 $27,418.8 $29,271.3 $29,134.5 $28,529.0 $27,499.6

Common stock / additional paid in capital $5,563.0 $4,799.0 $4,021.0 $4,021.0 $4,021.0 $4,021.0 $4,021.0 $4,021.0

Treasury Stock (4,000.0) (8,000.0) (10,500.0) (13,000.0) (15,500.0)

Convertible preferred stock 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Retained earnings / accumulated deficit (5,730.0) (7,750.0) (9,210.0) (6,405.3) (3,365.3) (61.7) 3,453.6 7,192.6

Other equity-related (27.0) (156.0) (242.0) (242.0) (242.0) (242.0) (242.0) (242.0)

Total equity ($194.0) ($3,107.0) ($5,431.0) ($6,626.3) ($7,586.3) ($6,782.7) ($5,767.4) ($4,528.4)

Balance check 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Source: Company Data and estimates


Exhibit 25:

Cash Flow StatementActuals Projected

2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E

Net income $2,804.7 $3,040.0 $3,303.7 $3,515.3 $3,738.9

Depreciation 2830.7 3074.4 3171.2 3322.4 3710.9

Accounts receivable (176.7) (172.3) (167.5) (151.0) (158.1)

Inventory 4.0 (12.1) (23.1) (14.8) (19.5)

Other current assets 0.0 0.0 0.0 0.0 0.0

Other assets 0.0 0.0 0.0 0.0 0.0

Accounts payable 119.8 66.3 (107.2) 60.5 63.3

Other current liabilities 0.0 0.0 0.0 0.0 0.0

Cash from operations activities $5,582.4 $5,996.2 $6,177.1 $6,732.3 $7,335.6

Capital expenditures (2,416.0) (3,170.0) (3,349.0) (3,797.5) (3,782.4) (3,647.6) (3,566.3) (3,742.8)

Cash from investing activities ($3,797.5) ($3,782.4) ($3,647.6) ($3,566.3) ($3,742.8)

Dividends 0.0 0.0 0.0 0.0 0.0

(Payments to) / Borrowings from Revolver - new debt 3,357.5 3,626.2 1,626.5 824.4 248.7

Debt Repayment (2,044.5) (1,840.1) (1,656.0) (1,490.4) (1,341.4)

Common Stock / APIC 0.0 0.0 0.0 0.0 0.0

Share repurchases (4,000.0) (4,000.0) (2,500.0) (2,500.0) (2,500.0)

Other equity-related 0.0 0.0 0.0 0.0 0.0

Cash from financing activities ($2,687.0) ($2,213.8) ($2,529.5) ($3,166.0) ($3,592.7)

Net change in cash during period ($902.0) ($0.0) ($0.0) ($0.0) $0.0



Exhibit 26:

Supporting SchedulesActuals Projected

2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E

Accounts receivable roll-forwardAccounts receivable, beginning of period (BOP) balance $2,696.0 $2,872.7 $3,045.0 $3,212.5 $3,363.5

+/- additions 176.7 172.3 167.5 151.0 158.1

Accounts receivable, end of period (EOP) balance$2,001.0 $2,474.0 $2,696.0 $2,872.7 $3,045.0 $3,212.5 $3,363.5 $3,521.6

AR as % of sales 8.3% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1%

Inventory roll-forwardInventory, beginning of period (BOP) balance $412.0 $408.0 $420.1 $443.3 $458.1

+/- additions (4.0) 12.1 23.1 14.8 19.5

Inventory, end of period (EOP) balance $247.0 $280.0 $412.0 $408.0 $420.1 $443.3 $458.1 $477.6

Inventory as % of COGS 2.0% 2.0% 2.6% 2.5% 2.4% 2.4% 2.4% 2.4%

Accounts payable roll-forwardAccounts payable , beginning of period (BOP) balance $1,208.0 $1,327.8 $1,394.0 $1,286.9 $1,347.4

+/- additions 119.8 66.3 (107.2) 60.5 63.3

Accounts payable , end of period (EOP) balance$1,224.0 $1,195.0 $1,208.0 $1,327.8 $1,394.0 $1,286.9 $1,347.4 $1,410.7

AP as % of COGS 10.1% 8.6% 7.8% 8.0% 8.0% 7.0% 7.0% 7.0%

PP&E roll-forwardPP&E, beginning of period (BOP) balance $8,395.0 $9,361.8 $10,069.8 $10,546.1 $10,790.0

+ Capital expenditures 3,797.5 3,782.4 3,647.6 3,566.3 3,742.8

-Depreciation (2,830.7) (3,074.4) (3,171.2) (3,322.4) (3,710.9)

PP&E, end of period (EOP) balance $6,679.0 $7,438.0 $8,395.0 $9,361.8 $10,069.8 $10,546.1 $10,790.0 $10,822.0

Capital expenditures as % of revenue 12.0% 11.3% 10.3% 9.6% 9.7%

Depreciation / Capital expenditures ratio 74.5% 81.3% 86.9% 93.2% 99.1%

Retained earnings roll-forwardRetained earnings , beginning of period (BOP) balance ($9,210.0) ($6,405.3) ($3,365.3) ($61.7) $3,453.6

+ Net income 2,804.7 3,040.0 3,303.7 3,515.3 3,738.9

- Dividends 0.0 0.0 0.0 0.0 0.0

Retained earnings, end of period (EOP) balance($5,730.0) ($7,750.0) ($9,210.0) ($6,405.3) ($3,365.3) ($61.7) $3,453.6 $7,192.6

Dividend payout ratio 0.0% 0.0% 0.0% 0.0% 0.0%

Debt roll-forward (long term)Debt , beginning of period (BOP) balance $20,445.0 $18,400.5 $16,560.5 $14,904.4 $13,414.0

Less: Repayment of debt (2,044.5) (1,840.1) (1,656.0) (1,490.4) (1,341.4)

Debt , end of period (EOP) balance $13,653.0 $16,787.0 $20,445.0 $18,400.5 $16,560.5 $14,904.4 $13,414.0 $12,072.6

Debt repayment as a % of BOP debt balance 10% 10% 10% 10% 10%


Exhibit 27:

Treasury share repurchases

Treasury share repurchases ($4,000.0) ($4,000.0) ($2,500.0) ($2,500.0) ($2,500.0)

Revolver roll-forward

Revolver , beginning of period (BOP) balance $0.0 $3,357.5 $6,983.8 $8,610.3 $9,434.7

+/- additions 3,357.5 3,626.2 1,626.5 824.4 248.7

Revolver , end of period (EOP) balance $0.0 $0.0 $3,357.5 $6,983.8 $8,610.3 $9,434.7 $9,683.4

Cash at BOP 1,902.0 1,000.0 1,000.0 1,000.0 1,000.0

Minimum cash desired 1,000.0 1,000.0 1,000.0 1,000.0 1,000.0

Excess cash at BOP 902.0 0.0 0.0 0.0 0.0

Excess cash plus cash generated during period (prior to revolver) (3,357.5) (3,626.2) (1,626.5) (824.4) (248.7)

Interest rate on debt (For senior notes) 4.6% 4.6% 4.6% 4.6% 4.6%

Interest expense (Senior notes) $893.45 $804.10 $723.69 $651.32 $586.19

Interest rate on debt (For revolver facility) 1.84% 1.84% 1.84% 1.84% 1.84%

Interest expense (Revolver) $30.89 $95.14 $143.47 $166.01 $175.89

Total Interest expense $924.3 $899.2 $867.2 $817.3 $762.1

Interest rate on cash 1.3% 1.3% 1.3% 1.3% 1.3%

Interest income $18.14 $12.50 $12.50 $12.50 $12.50


Sensitivity Analysis

$5.15 48.0% 50.0% 52.0% 54.0% 56.0%

9.5% $7.12 $6.32 $5.53 $4.74 $3.94

8.0% $7.00 $6.22 $5.44 $4.66 $3.88

6.5% $6.89 $6.12 $5.35 $4.58 $3.81

5.0% $6.78 $6.02 $5.26 $4.50 $3.74

3.5% $6.67 $5.92 $5.17 $4.42 $3.67

1.0% $6.49 $5.76 $5.02 $4.29 $3.56

$6.16 48.0% 50.0% 52.0% 54.0% 56.0%

9.5% $8.26 $7.33 $6.39 $5.46 $4.53

8.0% $8.13 $7.21 $6.29 $5.37 $4.46

6.5% $8.00 $7.10 $6.19 $5.29 $4.38

5.0% $7.87 $6.98 $6.09 $5.20 $4.30

3.5% $7.75 $6.87 $5.99 $5.11 $4.23

1.0% $7.53 $6.67 $5.82 $4.96 $4.10

$7.37 48.0% 50.0% 52.0% 54.0% 56.0%

9.5% $9.86 $8.77 $7.69 $6.60 $5.52

8.0% $9.71 $8.64 $7.57 $6.50 $5.42

6.5% $9.56 $8.50 $7.45 $6.39 $5.33

5.0% $9.41 $8.37 $7.33 $6.28 $5.24

3.5% $9.26 $8.23 $7.21 $6.18 $5.15

1.0% $9.01 $8.01 $7.00 $6.00 $5.00

2013 COGS margin

2014 COGS margin

2015 COGS margin

2013 Revenue growth range


Diluted EPS based on various revenue growth assumptions (column) and

COGS margin assumptions (row)



Net Debt

Debt - Revolver 20,445.0

Debt equivalent - convertible preferred stock 0.0

Cash (1,902.0)

Net debt 18,543.0

Terminal Value

Perpetuity approach

FCF in last forecast period (t) 4,023.0

FCFt+1 4,063.3

Long term growth rate (g) 1%

Terminal value 63,856.6

Present value of terminal value 44,764.1

Enterprise value 57,298.3

Exit EBITDA multiple approach

Terminal year EBITDA 10,180.4

Terminal value EBITDA multiple 7.3x

Terminal value 74,317.3

Present value of terminal value 52,097.1

Enterprise value 64,631.3

DCF Assumptions

General assumptions

Latest fiscal year end 12/31/2012

Current date 11/12/2013

Current share price $64.02

Terminal value assumptions

Terminal year EBITDA 10,180.4

Terminal value EBITDA multiple 7.3x

Long term growth rate 1.0%

Cost of capital assumptions

Cost of debt (after-tax) 3.0%

Tax rate 34.0%

Debt as % of total capital structure 30.0%

Risk free rate 1.5%

DTV beta 1.02

Market risk premium 8.0%

Equity as % of total capital structure 70.0%

Weighted average cost of capital (WACC) 7.4%

Exhibit 28:


Sensitivity Analysis

Equity value per share (growth rate vs WACC)

$71.11 7% 8% 9% 10%

1% $77.82 $61.04 $48.48 $38.74

2% $96.59 $73.96 $57.82 $45.74

3% $124.74 $92.05 $70.27 $54.75

4% $171.67 $119.17 $87.70 $66.75

Equity value per share (exit multiple vs WACC)

$84.57 7% 8% 9% 10%

6.5x $77.46 $74.09 $70.84 $67.72

7.5x $91.00 $87.18 $83.51 $79.98

8.5x $104.54 $100.28 $96.18 $92.23

9.5x $118.08 $113.37 $108.85 $104.49

Valuation

Perpetuity Exit EBITDA

Enterprise value 57,298.3 64,631.3

Net debt 18,543.0 18,543.0

Equity value 38,755.3 46,088.3

Equity value per share $71.11 $84.57

% premium / (discount) over market share price 11.1% 32.1%

Exhibit 29:

Free Cash Flow Buildup

$mm Projected

2013P 2014P 2015P 2016P 2017P

Fiscal year end 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017

EBIT 5,058.2 5,395.2 5,762.6 6,033.5 6,317.0

tax rate 34.0% 34.0% 34.0% 34.0% 34.0%

EBIAT 3,338.4 3,560.8 3,803.3 3,982.1 4,169.2

Depreciation 2,830.7 3,074.4 3,171.2 3,322.4 3,710.9

Accounts receivable (176.7) (172.3) (167.5) (151.0) (158.1)

Inventory 4.0 (12.1) (23.1) (14.8) (19.5)

Other current assets 0.0 0.0 0.0 0.0 0.0

Other assets 0.0 0.0 0.0 0.0 0.0

Accounts payable 119.8 66.3 (107.2) 60.5 63.3

Other current liabilities 0.0 0.0 0.0 0.0 0.0

Unlevered cash from operations 2,777.7 2,956.3 2,873.5 3,217.0 3,596.6

Capital expenditures (3,797.5) (3,782.4) (3,647.6) (3,566.3) (3,742.8)

Unlevered free cash flows $2,318.6 $2,734.7 $3,029.2 $3,632.8 $4,023.0

Period 1 2 3 4 5

Discount factor 93.1% 86.8% 80.8% 75.3% 70.1%

Present value of free cash flows 2,159.6 2,372.4 2,447.7 2,734.1 2,820.2

work sample - directv equity research report

Economy & Finance