DISH: Dead cat bouncing, or incredible bargain?

June 28, 2018

DISH: Dead cat bouncing, or incredible bargain?

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 about 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, and I thought that the quality of our home recordings, and of movie tapes in general, was far better than any comparable VHS tape.

The thing was, not many other people felt the same way – or cared enough to make Betamax more than a passing fad. 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 back then 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 show may be looking at 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 a market capitalization larger than the Walt Disney Company (DIS) and has traditional broadcasting networks scrambling to find ways to evolve and survive.

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. The market has seen the numbers about their eroding customer base and has treated the stock accordingly, driving it into a clear downward trend for the past year that has seen it lose approximately 50% of its value over that period. A clear loser in the scope of broader market performance, the stock has actually rebounded almost 16% since the beginning of June. Contrarian, value-oriented investors might be tempted to bet on a reversal of the stock’s long-term downward trend, but others would be more cautious.

“Dead cat bounce” is a term that investors like to use to describe what happens sometimes when a stock in a long, downward trend finds support and starts to rally higher. Generally speaking, the only way a long-term downward trend can manage a legitimate reversal is if the market sees a very strong fundamental reason to start buying the stock. Often, a stock experiences that downward trend for very good reasons, and in the case of DISH, an eroding customer base is one of those very good reasons. The problem the company has in reversing the trend is that the erosion isn’t to competitors in the same business; it’s coming from a “sea change” in consumer habits and preferences that typically marks the death of one business model in favor of another. The “bounce” comes when technical traders start to buy the stock at a low point, hoping for a quick, short-term gain in the stock’s price; but since there is no fundamental reason for other investors with a longer-term perspective in mind to jump in, that gain is extremely limited in both size and duration.



The argument long-term investors might have for DISH, and that the company is absolutely trying to communicate to the market, is the way they have decided to evolve their 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. 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 sometime in 2020. So is DISH a “dead cat bounce” that only a fool would try to work with, or a real bargain opportunity? 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 $7.7 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings and sales both declined modestly, with earnings decreasing at a slightly greater rate (almost 8%) than sales (6%). In the last quarter EPS actually increased almost 23% while sales declined about 1%.
  • Free Cash Flow: DISH has very healthy free cash flow of more than $2.2 billion over the last twelve months, despite its decline from a little over $2.4 billion in late 2017.
  • Debt to Equity: the company’s debt to equity ratio is 2.07, which is high; levels at 1 or below are preferred. However, 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. High debt to equity ratios are also pretty normal for this industry.
  • 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 $15.69 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.14. 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 2.2, and the historical average for DISH is 6.53. The stock would have to move above $100 to be at par with the its historical average. While I believe that is an over-optimistic target on even a long-term basis, it does suggest that the stock’s 52-week high, which was $66 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, dotted diagonal line traces the stock’s decline and concurrent downward trend for the past year. The stock has been rebounding since the beginning of this month but is now pushing directly up against that downward trend, which should push the stock back down to retest its recent pivot low around $29. A drop back down from that line, to around $31 would be a good sign that the “dead cat bounce” effect is at play. On the other hand, a push above the line to the $35 level, or better, $36 should give the stock some good short-term momentum to push up to the $40 level. That’s a range that short-term traders could find useful for a bullish trade. The stock would have to break above $40 to mark a legitimate reversal of the long-term downward trend.
  • Near-term Keys: Look for the stock to break above $35 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. A move below $31, on the other hand could suggest the stock’s downward trend will reassert itself and push the stock even lower than $29, which could be a good opportunity for a bearish short-term trade by either shorting the stock or working with put options.