Pegasus Communications hit hard by downgrade

2 min read

Pegasus Communications shares tumbled 6 1/4, or 15 percent, to 35 1/16 Wednesday after Wit SoundView cut the stock from a "buy" recommendation to a "hold" on valuation and growth concerns.

Pegasus (Nasdaq: PGTV), which distributes DirecTV satellite service in rural markets, met analysts' estimates in its latest quarter, posting a loss of $43.2 million, or $2.59 a share, on sales of $110 million.

However, company executives said customer growth would likely lag behind leaders such as Hughes Electronics (NYSE: GMH) and EchoStar Communications (Nasdaq: DISH). It expects to add 300,000 new customers this year, or roughly a 27 percent increase.

"(Pegasus) has issues surrounding the company that make it hard to increase their outlook," said Wit SoundView's Tim O'Neil. "They have three pending lawsuits with the National Rural Telecommunications Cooperative that are causing a lot of consternation at the customer level in terms of distributing the product to rural markets."

The National Rural Telecommunications Cooperative (NRTC) includes more than 900 rural utilities and affiliated organizations serving 48 states.

Because of these distribution issues, Pegasus and other DirectTV distributors are being forced to look to urban markets for customer growth. That, of course, puts them in direct competition with digital cable providers such as AT&T (NYSE: T) and AOL-Time Warner (NYSE: AOL).

"If DirecTV wants to be successful with interactive services, it needs access to these huge rural customers," O'Neil said.

First Call consensus expects Pegasus to lose $1.24 a share in its second quarter and $4.60 a share in the fiscal year.

The stock split 2-for-1 in May after soaring to a 52-week high of 77 1/2 in March.

Ten of the 11 analysts following the stock rate it either a "buy" or "strong buy."