Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

New Device Could Revolutionize Media Business

Thursday, May 17th, 2012
By for Profit Confidential

oil pricesA new investment strategy by DISH Network Corporation (NASDAQ/DISH) could positively impact its corporate earnings over the short term, but also change the media business radically in the long term. A new set-top digital-video recorder (DVR) allows customers the ability to delete ads completely from the recordings of TV shows. This unique innovation is an interesting strategy by DISH Network to incorporate this DVR, built by EchoStar Corporation (NASDAQ/SATS).

The unit will be charged at a higher rate than traditional DVRs, positively impacting DISH Network’s corporate earnings. The question: will consumers jump at the chance to delete advertisements? In my opinion, absolutely. The biggest complaint by consumers when watching TV is about the ads. But this investment strategy may upset the advertising companies. Ad spending is a big portion of corporate earnings for distribution corporations like DISH. This move to implement this investment strategy might boost corporate earnings in the short term, but raise issues over the long-term viability of broadcasting corporations. If this device becomes prevalent amongst consumers, the amount of money spent by the networks is obviously going to decline significantly, negatively impacting the corporate earnings of firms like DISH.

The introduction of DVRs has had strong penetration in the U.S., comprised of 43% of households, according to Nielsen. Industry estimates that at least 50% of ads currently get skipped by DVR customers. While this is the case, corporate earnings have continued to rise, because the networks have increased spending on embedding products within the actual TV shows. “Product placement” is the new buzzword in Hollywood. An investment strategy to make consumers happy might burn DISH in the long run.

Media companies are going to have to spend more time and energy embedding products directly and subversively into the actual TV shows to avoid this problem, as technology increasingly makes it easier for consumers to avoid being marketed to. Corporate earnings based on this investment strategy will most likely benefit DISH in the short run, but raise questions over the long-term regarding corporate earnings.

technical analysis

Chart courtesy of www.StockCharts.com

The stock is been relatively stable, trading at a price-earnings ratio of just under 11. Frankly, this firm needs something to generate a boost in corporate earnings, as I don’t see a big move either way in the stock coming anytime soon. The stock is hitting a key level going back to last summer. If there’s a break below the $30.00 level, we could see a pullback to the 200-day moving average. If we see a break above the downward sloping trendline, the stock will try to re-test the $34.00 area.

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technical analysis

Chart courtesy of www.StockCharts.com

EchoStar has an interesting chart. After making a massive move from December to the February high, the stock was clearly overbought—as seen by the RSI. The stock then retraced to its 50% level before bouncing up through the 38.2% Fibonacci retracement level. All signs are pointing to an accumulation occurring since the sell-off. A break below the 50% level would negate this thesis.

This is new technology is unique and perhaps buyers of EchoStar stock are anticipating higher corporate earnings than previously estimated. This is just conjecture, as there is no way of predicting the future. I do like the investment strategy of catering to the wishes of consumers. What will happen to corporate earnings over the next few years is much more difficult to predict.

 

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Sasha Cekerevac - Investment Advisor, Fund AnalyzerSasha Cekerevac, BA Economics with Finance specialization, is a Senior Editor at Lombardi Financial. He worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. He has comprehensive knowledge of institutional money flow; how the big funds analyze and execute their trades in the market. With a thorough understanding of both fundamental and technical subjects, Sasha offers a roadmap into how the markets really function and what to look for as an investor. His newsletters provide an experienced perspective on what the big funds are planning and how you can profit from it. He is the editor of several of Lombardi’s popular financial newsletters, including Payload Stocks and Pump & Dump Alert. Add Sasha Cekerevac to your Google+ circles