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May 25, 2010
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We upgrade our recommendation for NET Servicos de Comunicacao S.A. (NETC) to Neutral on the basis of current valuation. The stock price has fallen more than 35% in the last one year and is trading at the low-end of its 52-week price range. At this stage we do not find further downside potential.
NET Servicos declared mixed financial results for the first quarter 2010 as revenues beat the Zacks Consensus Estimate but net earnings dips below it. Nevertheless, the company generated commendable Pay TV subscriber growth despite of stiff competition from more aggressive wireless and satellite service providers in the Brazilian broadband market. At the end of the first quarter 2010, Pay TV subscriber base was 3,776,000, up 13% year-over-year. Out of this, Digital Video subscriber base reached 1,025,000, up 11% year-over-year and now constitute 27% of total Pay TV subscribers.
The company’s product portfolio includes various innovative products such as Net Digital HD Max, NetFone.com, and Net Virtua which are expected to drive subscriber-based growth, going forward. In the upcoming quarters, we expect operating margin to increase due to introduction of these profitable products. However, we also believe that these positive factors are already reflected in the current valuation leaving little room for any above market gain.
Read the full analyst report on "NETC"
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