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Friday, July 28, 2006

EchoSar's Wildest Dreams

Stocks: (DISH)(DTV)

The management and shareholders of EchoStar must think that the bankers at the local saving and loan left the vault open and put a sign on the door that says "Free Money". With local cable companies offering the "triple play" of VOIP, television, and broadband and the telcos about to offer IPTV over fiber to the home, Echostar hit a 52-week high at $35. Its low for the period is $24.44 which it hit in November of last year.

According to Morningstar, it takes EchoStar about two years to get back the acquistion costs of a new customer. The cost to convert hardware and systems, plus content costs, will grow with the demand for HDTV and other costs. There is, of course, always the problem that satellite TV does not work during a heavy rainstorm. Not a bad point to make if someone is selling cable or telco fiber products door-to-door.

Recent growth at EchoStar has been decent, but hardly spectacular. In the December 05 quarter, revenue was $2.18 billion. In the March 06 quarter, revenue hit $2.29 billion, a 5% increase. Operating income went from $252 million in the Decmber period to $274 million in the quarter ending in March.

The real engine behind the run-up in Echostar's stock is merger rumors. Pretty thin. It is also speculation to assume that the merger would value Echostar much higher than its current price. EchoStar trades at 1.74 times sales while DirecTV is at 1.62 times. Then, there is the thorny issue of antitrust and the anthropoids at the FCC.

Investing on merger chatter can be risky business. Has EchoStar's value really gone up 40% in a little over six months?

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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