Satellite

Less Upside Means DirecTV Downgrade

6/02/2006 8:00 PM Eastern

Oppenheimer & Co. cable and satellite analyst Tom Eagan lowered his rating on DirecTV Group Inc. from “buy” to “neutral” last week, stating in a report that despite the stock’s impressive run this year, he sees little potential for additional upside in the near term.

Eagan listed four reasons for the downgrade: at current prices, there is less than 10% upside to his $19-per-share price target; positive catalysts for the stock have already been achieved; a reduction in gross subscriber additions, as it focuses on higher quality customers and acquisition; and investment risks looming on the horizon.

Eagan noted that DirecTV stock has ticked up 24% so far this year and that most of the positive catalysts he expected in 2006 have already occurred, including steadily increasing its cash-flow margins (from 11% in the third quarter of 2005 to 14.3% in the first quarter of 2006) and reducing churn.

Eagan pointed to longstanding speculation regarding a possible merger with EchoStar Communications Corp. as a potential acquisition risk. While it is still questionable whether the federal government would approve such a merger (they rejected the idea in 2001), “we believe it raises the risk of a dilutive acquisition, especially since DTV may not be the only suitor,” Eagan wrote, adding that attempts to offer a broadband product could also prove to be risky.

October