Hughes Stock Picture Blurs Amid DirecTV Concerns.

Just three months ago, El Segundo-based Hughes Electronics Corp. was riding high.

The General Motors Corp. subsidiary had announced its decision to sell its satellite manufacturing business -- which had been a drag on earnings -- to Boeing Co., essentially completing Hughes' transformation from an aerospace to a telecommunications giant.

And the federal government had just approved rules allowing Hughes' satellite television service to carry local channels, greatly enhancing its competitive position against cable operators.

But in the months since, Hughes has hit some major bumps in the road. While the sale of its satellite division has been tied up by opposition from the European Union, the company's stock also got caught up in the April technology sell-off on Wall Street.

And, most recently, the growth in new subscribers to its DirecTV satellite television service, which was spectacular in March and April, did not meet Wall Street expectations for the month of May.

"The pace of growth in new subscribers is declining, and that is a cause for concern," said Mark Crossman, vice president of JP Morgan Securities.

As a result, Hughes' stock, which reached 52-week high of $141 a share in March, had slid to $86.25 a share as of late last week, its lowest point since Thanksgiving.

"There is concern over how much their digital satellite system will grow," said David Kestenbaum, an analyst with ING Barings "The growth was spectacular early this year, but when you do so well, it's hard to sustain."

In past years, such a dip in growth might not have meant so much for Hughes. But since its decision in January to sell its satellite manufacturing division to Boeing for $3.75 billion in cash, Hughes now considers itself a telecommunications company, with DirecTV being its main asset. (Despite the opposition from the European Union, which regards Boeing as a competitor to its Arianne satellite manufacturing service, most analysts expect the sale to ultimately go through.)

Depending on DirecTV

In terms of future growth, the realignment of Hughes seems wise, analysts said.

"The satellite division, while it offered steady growth, was still relatively modest when compared to the spectacular growth that Hughes was expecting on the telecom side," said Paul Nisbet, aerospace analyst with JSA Research Inc.

What's more, Nisbet said, the pending sale will provide a desperately needed cash infusion. That's because Hughes has incurred huge losses in each of the last four quarters since rolling out its expanded DirecTV service.

Last year, Hughes posted revenues of $5.56 billion, up 60 percent from 1998. But acquisitions and network build-out pushed operating costs to $5.98 billion, resulting in an operating loss of $428 million. That in turn translated into an overall net loss in 1999 of $291 million, compared with a $251 million net profit in 1998. (Because Hughes is a tracking stock set up by General Motors, it does not report conventional earnings-per-share figures.)

The news wasn't any better for the first quarter ended March 31. Revenues were $2.1 billion, up 30 percent from the same period last year. But the company reported a net loss of $77 million, compared with a net profit of $78 million for the first quarter of 1999.

Wall Street had looked for DirecTV subscriber growth to explode and offset these losses after the Federal Communications Commission ruled in March that broadcast companies must negotiate in good faith over retransmission of their programs on satellite and cable television networks. The FCC decision ratified an act of Congress last year that allowed satellite television companies for the first time to carry local programming.

"This removed the final barrier for satellite television viewers," said DirecTV spokesman Robert Mercer.

Volatile stock

Hughes stock rose sharply after the FCC decision, aided by rumors that Liberty Media Corp. was considering making a hostile offer to buy DirecTV. When the rumors proved unfounded in early April, Hughes' stock fell; the slide accelerated with the implosion of technology stocks.

But the stock recovered in May, following an April spike in the number of new subscribers to DirecTV. Company officials and analysts offered several explanations for the sudden jump in subscribers:

* They were attracted by satellite TV service providers' ability to offer local channels for the first time;

* A series of promotions, including free satellite dishes and installation;

* Fallout from the nasty dispute between cable giant Time Warner Inc. and the ABC television network that culminated in March with ABC cutting off its signal to Time Warner households.

But Hughes stock fortunes turned again. The DirecTV promotions expired in late April and the Time Warner-ABC dispute was quickly resolved, which, when combined with a typical late spring lull in satellite television subscriptions, caused analysts to take a second look at Hughes stock.

On June 7, Wall Street research firm Wit SoundView downgraded its rating on Hughes from a "buy" to a "hold," which sent the stock down again. And sure enough, when the May DirecTV subscriber report came out in mid-June, it showed only about 130,000 new subscribers, short of the 140,000 that many on Wall Street had expected.

"This caused a lowering of expectations to perhaps a more realistic level," said ING Barings' Kestenbaum, who characterized the May report as a bump in the road rather than a sign of a major failing. "Look, they are still on track to add over 1.5 million subscribers this year. It's now a question of whether they are growing like gangbusters or like gangbusters on steroids."

DirecTV spokesman Mercer said that the June subscriber figures, when released, should show "another record month of growth," noting that local channels are now being offered in 24 major metropolitan markets across the U.S. and will be offered in a total of 35 major markets by the end of September.