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By Erik Kobayashi-Solomon | 01-08-2010 04:12 PM

DirecTV Reaching a Peak

Why a bearish option strategy on the pricey shares could pay off.

Erik Kobayashi-Solomon: I'm Erik Kobayashi-Solomon, one of the editors of Morningstar's OptionInvestor, and today it's my great pleasure to welcome Mike Hodel, who is an associate director here, covering telecom companies. Mike, thanks for coming.

Mike Hodel: Thanks for having me here.

Kobayashi-Solomon: A couple days ago, I wrote an article about DirecTV, a company that you cover. You had convinced me, and I think that you have a really good point, that it seems like they're running out of room economically, that their stock price seems to be a little bit high.

So I wrote an option strategy trying to take advantage of that. Can you explain a little bit your thinking about DirecTV, and why you think the stock is looking a little toppy right now?

Hodel: Sure. I guess at the outset, I'd point out that DirecTV has executed extremely well over the past couple of years. They've done a great job of marketing their service, building the brand, continuing to provide good service and grow their customer base, and grow cash flow as well.

But what we really see from this point forward, though, is that competition in the pay television industry continues to increase. You have phone companies, Verizon and AT&T in particular, that are steadily building out their network capability so they can offer television service to a larger percentage of their customers.

We also see maturity in the pay television business, so the number of new customers out there is declining as well.

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