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Profit From The Death Of Cable With This Market Leader

Michael Vodicka

Innovation is a wonderful thing. Without it, products would never get better. Services would never improve.

That's exactly what Henry Ford was talking about in one of his most famous quotes: "If I had asked people what they wanted, they would have said faster horses."

Apple (AAPL) is a great example of this dynamic. Before the iPod came along, music lovers were still carrying around racks of CDs that were cumbersome and susceptible to scratches. The iPod not only gave Apple a market-changing product -- and sent its shares rocketing higher -- it also enriched the listening experience with a more user-friendly device.

But now, more than 10 years after Apple changed the landscape of consumer electronics, that same cycle of innovation is repeating itself in a different segment of the market.

Traditional cable companies are going the way of the dodo bird.

Under a barrage of competition from new-media companies such as Netflix (NFLX) and Hulu, consumers are increasingly spurning the traditional cable model in favor of less expensive alternatives that offer more interactivity and customized content. That's why Comcast (CVV) lost more than 2 million subscribers from 2009 to the end of 2012, suffering from notoriously poor customer service, high prices and limited content.

But while many innovative media companies will benefit from this ongoing migration from traditional cable, there is one that stands out. The company is already cashing in on the trend, lifting its share price to a market-beating 36% gain in just the past year. Take a look:

DirecTV (DTV) is a leading provider of satellite television, video and broadband services in North and Latin America. With a market cap of $38 billion, DirecTV is hardly a startup, but there are a number of reasons this company still has so much upside.

DirecTV is aggressively pursuing the fast-growing streaming content market. The company recently released a video-streaming service called TV Everywhere, which also includes multi-stream capabilities gaining popularity on mobile devices. Mobile and streaming are red-hot markets, and DirecTV is moving aggressively to be a major player.

Latin America is also a big part of DirecTV's growth strategy. Unlike the highly saturated North American market, Latin American penetration rates for TV subscription services are much lower. DirecTV has launched a massive marketing campaign in Latin America to capitalize on its growing middle class. It's also offering a range of programming packages to cater to high- and lower-end consumers alike. In addition, DirecTV is working to build next-generation wireless broadband offerings and on-demand video services to the region.

DirecTV is focused on building a world-class infrastructure to support and deliver more content. The company is teaming with ViaSat and Hughes Network Systems to develop a nationwide satellite-broadband network capable of Internet speeds of more than 10 megabits per second. This advanced network is intended to support DirecTV's growing on-demand video streaming service while enabling it to deliver broadband services to rural areas. This creates another barrier to entry for potential competitors, one principle my colleague Elliott Gue mentions as being absolutely key in his Top 10 Stocks premium newsletter.

Analysts are bullish on DirecTV, calling for earnings growth of 7% this year and 21% in 2014. They also forecast annual earnings growth of 13% over the next five years, outpacing the industry estimate of 11%.

Risks to Consider: Although the on-demand video and streaming space is growing quickly, it is also extremely competitive, with a number of major players. DirecTV is well-positioned to capitalize on the bullish trend, but increased competition could threaten margin growth.

Action to Take --> Traditional cable companies continue to struggle and lose market share as demand for online and streaming content grows. That is creating a big opportunity for DirecTV, which is already a major player in multiple segments of the content market. But even though there are plenty of reasons to be bullish on DirecTV, shares still look undervalued, trading with a forward P/E (price-to-earnings) ratio of 13, a sharp discount to the 10-year average of 16.5. If DirecTV regains its average valuation in the past 10 years, shares could jump an additional 27%.

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