Here is an archive of all the posts on Northlake's client blog. These posts concern actual trades and positions in Northlake client accounts. The MediaTalk blog contains comments on other media stocks, including buy and sell ideas. However, the best ideas are those that are executed in client accounts.
Please fell free to link to anything of interest but only clients and friends have access to the entire post. If you are interested in learning more about Northlake Capital Management or gaining access to our blogs, please contact Steve Birenberg at steve@northlakecapital.com.
July 02, 2011 - Mid Cap and Value Still Reign:For the seventh consecutive month there were no changes to the signals from Northlake's Market Cap and Style models. Mid Cap and Value continue to be favored. As a result, client positions in the S&P 400 Mid Cap (MDY) and the Russell 1000 Value (IWD) will be maintained for another month.
The lack of change to the signals for this long is unusual but no unprecedented. The Market Cap model typically changes signals every four to six months and the Style model normally changes every five to seven months.
There was little movement in the underlying indicators of the Market Cap model, which remains right in the model of the range that favors Mid Cap. However, the Style model saw two indicators shift in favor of growth. Any further shifts in specific indicators in July could change the signal from value to growth for August.
The two indicators that shifted toward growth this month were insider activity and trend. The insider indicator measures net buying by insiders of stocks in growth and value industries. Over the past few months it has shifted decisively toward growth. The trend indicators measure recent relative performance of value and growth indices and are picking up the relative strength in growth stocks over the past few months. In reality, it has been weakness in value stocks that is driving the shift. Bank, industrial, and industrial stocks fared poorly in the market correction when investors lost confidence in the economic recovery and worried again about bank balance sheets in light of renewed problems in Greece.
In June, the model signals were inaccurate. Small and Mid Cap stocks led the market lower so MDY trailed the return of the benchmark S&P 500. However, year to date, the Market Cap model has added significant value with MDY gaining almost 8% versus 5% for the S&P 500.
The Style model's value signal produced a return slightly worse than both the S&P 500 and small cap Russell 2000 in June. For the year, the Style model is now slightly worse than the market and the Russell 1000 Growth. Neither gap is large, however. This lagging performance for value stocks is what the trend indicator discussed above has picked up.
Disclosure: MDY and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve Birenberg is sole proprietor of Northlake, an SEC registered investment advisor.
July 02, 2011 - Mid Cap and Value Still Reign:
For the seventh consecutive month there were no changes to the signals from Northlake's Market Cap and Style models. Mid Cap and Value continue to be favored. As a result, client positions in the S&P 400 Mid Cap (MDY) and the Russell 1000 Value (IWD) will be maintained for another month.
The lack of change to the signals for this long is unusual but no unprecedented. The Market Cap model typically changes signals every four to six months and the Style model normally changes every five to seven months.
There was little movement in the underlying indicators of the Market Cap model, which remains right in the model of the range that favors Mid Cap. However, the Style model saw two indicators shift in favor of growth. Any further shifts in specific indicators in July could change the signal from value to growth for August.
The two indicators that shifted toward growth this month were insider activity and trend. The insider indicator measures net buying by insiders of stocks in growth and value industries. Over the past few months it has shifted decisively toward growth. The trend indicators measure recent relative performance of value and growth indices and are picking up the relative strength in growth stocks over the past few months. In reality, it has been weakness in value stocks that is driving the shift. Bank, industrial, and industrial stocks fared poorly in the market correction when investors lost confidence in the economic recovery and worried again about bank balance sheets in light of renewed problems in Greece.
In June, the model signals were inaccurate. Small and Mid Cap stocks led the market lower so MDY trailed the return of the benchmark S&P 500. However, year to date, the Market Cap model has added significant value with MDY gaining almost 8% versus 5% for the S&P 500.
The Style model's value signal produced a return slightly worse than both the S&P 500 and small cap Russell 2000 in June. For the year, the Style model is now slightly worse than the market and the Russell 1000 Growth. Neither gap is large, however. This lagging performance for value stocks is what the trend indicator discussed above has picked up.
Disclosure: MDY and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve Birenberg is sole proprietor of Northlake, an SEC registered investment advisor.
July 02, 2011 - Mid Cap and Value Still Reign:
For the seventh consecutive month there were no changes to the signals from Northlake's Market Cap and Style models. Mid Cap and Value continue to be favored. As a result, client positions in the S&P 400 Mid Cap (MDY) and the Russell 1000 Value (IWD) will be maintained for another month.
The lack of change to the signals for this long is unusual but no unprecedented. The Market Cap model typically changes signals every four to six months and the Style model normally changes every five to seven months.
There was little movement in the underlying indicators of the Market Cap model, which remains right in the model of the range that favors Mid Cap. However, the Style model saw two indicators shift in favor of growth. Any further shifts in specific indicators in July could change the signal from value to growth for August.
The two indicators that shifted toward growth this month were insider activity and trend. The insider indicator measures net buying by insiders of stocks in growth and value industries. Over the past few months it has shifted decisively toward growth. The trend indicators measure recent relative performance of value and growth indices and are picking up the relative strength in growth stocks over the past few months. In reality, it has been weakness in value stocks that is driving the shift. Bank, industrial, and industrial stocks fared poorly in the market correction when investors lost confidence in the economic recovery and worried again about bank balance sheets in light of renewed problems in Greece.
In June, the model signals were inaccurate. Small and Mid Cap stocks led the market lower so MDY trailed the return of the benchmark S&P 500. However, year to date, the Market Cap model has added significant value with MDY gaining almost 8% versus 5% for the S&P 500.
The Style model's value signal produced a return slightly worse than both the S&P 500 and small cap Russell 2000 in June. For the year, the Style model is now slightly worse than the market and the Russell 1000 Growth. Neither gap is large, however. This lagging performance for value stocks is what the trend indicator discussed above has picked up.
Disclosure: MDY and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve Birenberg is sole proprietor of Northlake, an SEC registered investment advisor.
July 19, 2010 - Early 2Q Earnings: Stocks Being Sold But Hopeful Signs for Media:
Earnings season is off to a rough start as far as stock prices go. Some stocks gap higher on good numbers but can’t hold the gains (Intel). Some stocks have mixed results and get smacked (GOOG and the big banks). Some stocks miss and get smoked (MAT) and others beat and get sold (HAS).
The broad message from the early reports is that business in 2Q was just fine relative to expectations and guidance so far indicates that fears of a slowing economy have yet to show up in demand beyond weak revenues for banks. Communications datapoints are quite limited and will kick into gear late this week when AT&T reports on Thursday and Verizon reports on Friday. The news so far in media looks good with advertising revenues in 2Q and guidance commentary constructive.
Despite a big sell-off in its stock, Google (GOOG) actually beat on revenues. The issues worrying the street are slowing growth and the heavy investment GOOG is making to sustain growth. Margins are under a little pressure but what really seems to worry investors is that Google's decision to invest suggests a much more competitive and mature search market. For media companies in general, the beat on Google's revenues is a positive. Advertisers are clearly spending on search (up over 20% globally and stronger in the US). Google does not provide guidance but the Q&A on the call did not reveal any worry about near-term demand trends.
Good news on advertising also came from NBC Universal, which reported as part of General Electric's report on Friday. Revenues rose 5%, operating profit gained 13%, and trend in advertising were at the high end of expectations. Cable nets were up high single digits and local TV stations reported ad gains in the mid to the upper 20% range. Given NBCU's broad reach, these ad growth rates speak well to what is to come from other cable and broadcast network companies.
Gannett also provided some good news even though the stock sold off 10% on the report. Gannett reported a 20% increase in 2Q TV station ad revenues and provided a forecast for even stronger growth in 3Q, up in the mid 20% range. Furthermore, according to the Wall Street Journal, Gannett indicated that ad rates are firming and "haven't seen" any pullback in advertising due to recent worries about the economy and financial market volatility.
This week won’t bring much more clarity or information on the advertising outlook. Yahoo reports Tuesday after the close and Street commentary and action in the stock price indicates the results could be decent. The only other media company of note to report is Netflix. The commentary could provide some read-through to DVD trends at the major movie and TV studios and maybe some insight into the re-basing of windows.
The big action for media earnings is the first week in August. I think there is reason to be optimistic about 2Q results and guidance commentary but until we get some better data on the US economy I think it will be hard to make money in the stocks. Expect the stocks to remain volatile, leading the market on up days and lagging on down days. Until we get firm data on the outlook in the second half of 2010 and 2011, the stocks remain hostage to investor sentiment toward the economy.
Disclosure: Google is widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts. Google and Hasbro are net long positions in the Entermedia Funds. Steve Birenberg is co-portfolio manager of the Entermedia Funds, partial owner of Entermedia's investment management company, and has personal monies invested in the Entermedia Funds.
July 19, 2010 - Early 2Q Earnings: Stocks Being Sold But Hopeful Signs for Media:
Earnings season is off to a rough start as far as stock prices go. Some stocks gap higher on good numbers but can’t hold the gains (Intel). Some stocks have mixed results and get smacked (GOOG and the big banks). Some stocks miss and get smoked (MAT) and others beat and get sold (HAS).
The broad message from the early reports is that business in 2Q was just fine relative to expectations and guidance so far indicates that fears of a slowing economy have yet to show up in demand beyond weak revenues for banks. Communications datapoints are quite limited and will kick into gear late this week when AT&T reports on Thursday and Verizon reports on Friday. The news so far in media looks good with advertising revenues in 2Q and guidance commentary constructive.
Despite a big sell-off in its stock, Google (GOOG) actually beat on revenues. The issues worrying the street are slowing growth and the heavy investment GOOG is making to sustain growth. Margins are under a little pressure but what really seems to worry investors is that Google's decision to invest suggests a much more competitive and mature search market. For media companies in general, the beat on Google's revenues is a positive. Advertisers are clearly spending on search (up over 20% globally and stronger in the US). Google does not provide guidance but the Q&A on the call did not reveal any worry about near-term demand trends.
Good news on advertising also came from NBC Universal, which reported as part of General Electric's report on Friday. Revenues rose 5%, operating profit gained 13%, and trend in advertising were at the high end of expectations. Cable nets were up high single digits and local TV stations reported ad gains in the mid to the upper 20% range. Given NBCU's broad reach, these ad growth rates speak well to what is to come from other cable and broadcast network companies.
Gannett also provided some good news even though the stock sold off 10% on the report. Gannett reported a 20% increase in 2Q TV station ad revenues and provided a forecast for even stronger growth in 3Q, up in the mid 20% range. Furthermore, according to the Wall Street Journal, Gannett indicated that ad rates are firming and "haven't seen" any pullback in advertising due to recent worries about the economy and financial market volatility.
This week won’t bring much more clarity or information on the advertising outlook. Yahoo reports Tuesday after the close and Street commentary and action in the stock price indicates the results could be decent. The only other media company of note to report is Netflix. The commentary could provide some read-through to DVD trends at the major movie and TV studios and maybe some insight into the re-basing of windows.
The big action for media earnings is the first week in August. I think there is reason to be optimistic about 2Q results and guidance commentary but until we get some better data on the US economy I think it will be hard to make money in the stocks. Expect the stocks to remain volatile, leading the market on up days and lagging on down days. Until we get firm data on the outlook in the second half of 2010 and 2011, the stocks remain hostage to investor sentiment toward the economy.
Disclosure: Google is widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts. Google and Hasbro are net long positions in the Entermedia Funds. Steve Birenberg is co-portfolio manager of the Entermedia Funds, partial owner of Entermedia's investment management company, and has personal monies invested in the Entermedia Funds.
August 15, 2008 - Normalcy Accompanies Growth and American Apparel Bounces Back:
One of Northlake's biggest portfolio headaches is a lot better today. Pain relief came in the form of very solid quarter from American Apparel (APP). 2Q results were inline to a bit better than the few analyst estimates. Revenues of $133 million exceeded the estimate of $126 million. EPS of 10 cents matched estimates despite much higher expenses to beef up corporate support and dramatically increase manufacturing personnel in support of rapid overall and same store sales growth. Guidance was confidently affirmed. Given the history of controversy surrounding the CEO and accounting and reporting issues, the 2Q results should come as a great relief to investors and leave shorts scrambling.
Leaving aside the controversies, APP is executing quite well in its growth initiatives. Revenues rose 39% with retail only sales up 51%. Gross margins expanded by 300 basis points. Operating income grew 29% despite the aforementioned expense ramp. Net income rose 42% thanks to lower interest rates and some debt reduction. Same stores sales for 2Q were up 23% and are on track to exceed full year guidance of 15% even with a 40% comp coming up in 4Q.
Given this growth profile the shares are cheap at less than 20 times 2008 estimates and just 12 times 2009 estimates. Growth in 2009 will be driven by aggressive new store growth, high single digit to low double digit comps and leverage of operating expenses that are finally reaching the point at which a public company should operate. On the call, management indicated that over the next few years operating margins could expand by 600-800 basis points.
Were it not for the controversy surrounding CEO Dov Charney....
August 02, 2008 - Why Is CETV Struggling When I Think It Will Double:
Central European Media Enterprises (CETV) remains my favorite media stock for all time horizons. Despite my enthusiasm the shares have performed poorly this year. Although, within the media stock universe, the 20% drop since June is not unusual. Neither is the 36% decline from the 52 week high.
However, there is one big difference. CETV is beating consensus handily and estimates are rising while virtually ever other company in media is missing consensus and estimates are falling. As a result, CETV shares have gotten to ridiculously cheap levels given the outstanding historical and projected growth profile – 8 times 2008 Estimated EBITDA. EPS are too volatile because the company's euro denominated debt causes foreign exchange fluctuations to distort results but on normalized numbers the stock trades at 16 times 2008 and 13 times 2009. CETV's EBITDA and P-E valuation is similar to other TV based media assets such as CBS, Disney, News Corporation, Viacom, and Scripps Interactive.
You might be thinking valuation is in line with the group so why do you say it is cheap. The answer is growth and an almost perfect track record of beating estimates. In its just reported 2Q08, CETV saw revenue rise 41% and segment EBITDA grow 53%. Year to date, revenues are up 45% and EBITDA is up 64%. In 2007, revenues and EBITDA grew 39% and 46%, respectively. Barring a major slowdown in Central and Eastern European economic activity, no signs of which have yet appeared, growth in 2009 should be at least 15-20% in local currencies. Sure, CETV's reported results have benefited from the weak dollar but local currency growth has been in the range of 15-25% across the entire company for the past several years....
Growth emanates from rapidly growing economies in the region which is driving per capita income and spending leading advertisers to aggressively grow their budgets. CETV's stations are ratings leaders pretty much across the board and operating management is widely acknowledged to be best in the business. Besides growing interest from advertisers, CETV has aggressively raised ad prices to begin to close the monumental gap that exists between rates in Western vs. Central and Eastern Europe.
There are two bear arguments that have been circulating. First is the macro argument: Central and Eastern European economies will rapidly decelerate due to rising inflation and slowing global growth. If this happens, CETV's 2009 outlook is not nearly as good as I or the consensus believes. Revenue projections are too high and best in class operating margins will come under pressure.
I can accept this argument and I understand why a short would take a position on it, a long would sell, or a potential long would pass. However, as I mentioned so far CEE economies are holding up just fine. Inflation pressures are a problem but for CETV they also make the ad prices increases easier to implement. I also believe that CEE economies are much less reliant on natural resource based growth than other emerging markets. The growth in the region is a function of low cost labor and manufacturing leading to very rapid growth in foreign direct investment. Maybe I am naïve but I don’t see this trend abating due a cyclical downturn given that the FDI is designed to lower cost structures for companies that are currently seeing lower growth in their mature home markets and open new opportunities in aster growing markets.
The second bear argument revolves around valuation. If you read analysts reports, they will tell you the stock is trading at 10 times EBITDA. Only one of the six reports I read reviewing 2Q results bothered to point out that two of the six countries CETV operates in are at breakeven.
Croatia just had its first ever EBITDA positive quarter following a period of investment that moved the station from #3 to ratings leader. Revenues have grown north of 60% per quarter since 4Q06. EBITDA is on its way toward $30 million in 2010. CETV just paid $172 million for 80% of the money losing #3 station in Bulgaria. I am extremely confident that if Croatia were sold today the price would be at least $250-300 million.
CETV has been in Ukraine for many years. Since 2004, revenue growth has been 30-40% with uneven EBITDA due in part to CETV's lack of control over day-to-day management of its station. The company just completed acquisition of the control stake in the station. Ownership is now 90% and will move to 100% at the end of this year. The two step buyout places a value of $800 million on Ukraine. Two recent events make this look conservative. First, CETV just issued detailed five year guidance for Ukraine projecting 2012 revenue and EBITDA of $500 million and $200 million, respectively. Second, Modern Times Group, one of CETV's primary competitors, purchased the #2 station in Bulgaria for almost $1 billion. Bulgaria's population is about 1/7th the size of Ukraine's.
I believe that at least $1.2 billion in hidden value exists at CETV in its Croatian and Ukrainian operations. Analysts and investors are ignoring the fact that these businesses are operating at breakeven providing zero value in any EBITDA, DCF,. or EPS based valuation.
Back out $1.2 billion and the EBITDA multiple is 8 times. Given the growth profile and history of consistently meeting or beating expectations, the shares surely deserve a premium to other TV based media assets. Even if you are worried about CEE economies, you have to admit that parity valuation with mature assets that are lucky to grow in the mid to upper single digits discounts the risk.
And if you are worried about emerging markets you are probably paying up for defensive stocks like Procter and Gamble. Did it ever cross your mind that one of the reasons that P&G is defensive is because of rapid growth in emerging markets? Now consider the fact that P&G is one CETV's major advertising customers.
I stand by my belief that CETV shares should be trading near $130 on 2008 prospects. If the company hits my 2009 estimates, I see the shares doubling. It will take a better market environment, improved sentiment toward emerging markets, and less risk aversion from investors to get the stock moving. But given this kind of upside, cheap valuation, great management, and an almost perfect track record at the operating level, the risk-reward trade off is the most compelling in the media universe.
August 02, 2008 - Why Is CETV Struggling When I Think It Will Double:
Central European Media Enterprises (CETV) remains my favorite media stock for all time horizons. Despite my enthusiasm the shares have performed poorly this year. Although, within the media stock universe, the 20% drop since June is not unusual. Neither is the 36% decline from the 52 week high.
However, there is one big difference. CETV is beating consensus handily and estimates are rising while virtually ever other company in media is missing consensus and estimates are falling. As a result, CETV shares have gotten to ridiculously cheap levels given the outstanding historical and projected growth profile – 8 times 2008 Estimated EBITDA. EPS are too volatile because the company's euro denominated debt causes foreign exchange fluctuations to distort results but on normalized numbers the stock trades at 16 times 2008 and 13 times 2009. CETV's EBITDA and P-E valuation is similar to other TV based media assets such as CBS, Disney, News Corporation, Viacom, and Scripps Interactive.
You might be thinking valuation is in line with the group so why do you say it is cheap. The answer is growth and an almost perfect track record of beating estimates. In its just reported 2Q08, CETV saw revenue rise 41% and segment EBITDA grow 53%. Year to date, revenues are up 45% and EBITDA is up 64%. In 2007, revenues and EBITDA grew 39% and 46%, respectively. Barring a major slowdown in Central and Eastern European economic activity, no signs of which have yet appeared, growth in 2009 should be at least 15-20% in local currencies. Sure, CETV's reported results have benefited from the weak dollar but local currency growth has been in the range of 15-25% across the entire company for the past several years....
Growth emanates from rapidly growing economies in the region which is driving per capita income and spending leading advertisers to aggressively grow their budgets. CETV's stations are ratings leaders pretty much across the board and operating management is widely acknowledged to be best in the business. Besides growing interest from advertisers, CETV has aggressively raised ad prices to begin to close the monumental gap that exists between rates in Western vs. Central and Eastern Europe.
There are two bear arguments that have been circulating. First is the macro argument: Central and Eastern European economies will rapidly decelerate due to rising inflation and slowing global growth. If this happens, CETV's 2009 outlook is not nearly as good as I or the consensus believes. Revenue projections are too high and best in class operating margins will come under pressure.
I can accept this argument and I understand why a short would take a position on it, a long would sell, or a potential long would pass. However, as I mentioned so far CEE economies are holding up just fine. Inflation pressures are a problem but for CETV they also make the ad prices increases easier to implement. I also believe that CEE economies are much less reliant on natural resource based growth than other emerging markets. The growth in the region is a function of low cost labor and manufacturing leading to very rapid growth in foreign direct investment. Maybe I am naïve but I don’t see this trend abating due a cyclical downturn given that the FDI is designed to lower cost structures for companies that are currently seeing lower growth in their mature home markets and open new opportunities in aster growing markets.
The second bear argument revolves around valuation. If you read analysts reports, they will tell you the stock is trading at 10 times EBITDA. Only one of the six reports I read reviewing 2Q results bothered to point out that two of the six countries CETV operates in are at breakeven.
Croatia just had its first ever EBITDA positive quarter following a period of investment that moved the station from #3 to ratings leader. Revenues have grown north of 60% per quarter since 4Q06. EBITDA is on its way toward $30 million in 2010. CETV just paid $172 million for 80% of the money losing #3 station in Bulgaria. I am extremely confident that if Croatia were sold today the price would be at least $250-300 million.
CETV has been in Ukraine for many years. Since 2004, revenue growth has been 30-40% with uneven EBITDA due in part to CETV's lack of control over day-to-day management of its station. The company just completed acquisition of the control stake in the station. Ownership is now 90% and will move to 100% at the end of this year. The two step buyout places a value of $800 million on Ukraine. Two recent events make this look conservative. First, CETV just issued detailed five year guidance for Ukraine projecting 2012 revenue and EBITDA of $500 million and $200 million, respectively. Second, Modern Times Group, one of CETV's primary competitors, purchased the #2 station in Bulgaria for almost $1 billion. Bulgaria's population is about 1/7th the size of Ukraine's.
I believe that at least $1.2 billion in hidden value exists at CETV in its Croatian and Ukrainian operations. Analysts and investors are ignoring the fact that these businesses are operating at breakeven providing zero value in any EBITDA, DCF,. or EPS based valuation.
Back out $1.2 billion and the EBITDA multiple is 8 times. Given the growth profile and history of consistently meeting or beating expectations, the shares surely deserve a premium to other TV based media assets. Even if you are worried about CEE economies, you have to admit that parity valuation with mature assets that are lucky to grow in the mid to upper single digits discounts the risk.
And if you are worried about emerging markets you are probably paying up for defensive stocks like Procter and Gamble. Did it ever cross your mind that one of the reasons that P&G is defensive is because of rapid growth in emerging markets? Now consider the fact that P&G is one CETV's major advertising customers.
I stand by my belief that CETV shares should be trading near $130 on 2008 prospects. If the company hits my 2009 estimates, I see the shares doubling. It will take a better market environment, improved sentiment toward emerging markets, and less risk aversion from investors to get the stock moving. But given this kind of upside, cheap valuation, great management, and an almost perfect track record at the operating level, the risk-reward trade off is the most compelling in the media universe.
August 02, 2008 - August 2008 Model Signals:
Once again there were no changes to Northlake's monthly Market Cap and Style models. The Market Cap signal remains mid cap and the Style signal remains growth. As a result, Northlake continues to own the S&P 400 (MDY) and the Russell 1000 Growth (IWF) for assets devoted to this strategy.
The Market Cap model remains a split decision with half the indicators favoring small caps and half favoring large caps. The resulting signal is mid cap. The indicators did move significantly in favor of small caps for August. In fact the unsmoothed signal month reading is just barely in small cap territory. The two month average remains in mid cap but leaning toward small cap. The only indicators to shift this month were the technical trend measures.
The Style model remains firmly in growth territory as it has been for over one year. The growth signal has weakened form earlier this year due to the steepening of the yield curve and the valuation measure which is reflecting the massive underperformance of value during the last twelve months.
Last month the mid cap and growth signals were inaccurate....
March 19, 2008 - Big Media Fundamentals Holding Up For Now:
Catching up some email, I found a couple of interesting pieces on the major media companies from Merrill Lynch analyst and my friend, Jessica Reif Cohen. Back in early March, Jessica noted that as a group the media companies she follows reported 4Q07 earnings ahead of her estimates. Her universe had revenue growth of 15% and EBITDA growth of 12%, ahead of her estimate for 10% and 6%. Jessica's estimates weren't far off consensus. Among major companies, Disney and News Corporation easily beat estimates as did Dreamworks Animation. Viacom reported at the high end and Time Warner reported inline. CBS results showed no growth but were close to consensus as well.
In this initial report, Jessica noted that she thought 1Q08 results would be similarly strong but she was worried that this was a "head fake" as media company results tend to lag the economy by a few quarters, especially when the economy has slowed significantly.
I own DIS and NWS on behalf of Northlake clients and even as the I reported favorably on the 4Q results and higher guidance from both companies I was worried that results could slow quickly if not unexpectedly. The fact that DIS and NWS have reported a string of positive surprises but seen their absolute and relative valuations sink to historic lows strongly suggests the market has a similar worry.
With this in mind, I have been on the lookout for any evidence that fundamentals were slowing for the major media companies. Mostly, that means that TV advertising slows. DIS has the added issue of slower sending on vacation travel....
March 18, 2008 - Good News From American Apparel But Stock Remains Under Pressure:
I was quite pleased with the 4Q07 results, 2008 guidance, and conference call from American Apparel (APP), which reported after the close last night. The consensus I was using consisted of just one analyst so it wasn't really meaningful. Just three analysts asked questions on the call but they were enthusiastic, asked a lot of questions, and seemed very pleased by the answers they were getting. The only meaningful negative in the quarter was the announcement that the company has material weakness in accounting per Sarbanes Oxley. I think this is a routine matter for a newly public company via blank check IPO but some may not like it.
For 4Q07, APP reported revenues of $111.2 million, up 48%. This figure was a little higher than I was expecting driven by the retail business (the company operated 182 stores at year end), where same stores sales rose a stunning 40% in the quarter. Adjusted EBITDA came in at $13.3 million, up 56%. This was slightly short of the $60 million figure I hoped reflecting heavy investment by the company in its transition to public reporting standards and by its commitment to set the stage for America Apparel to be a major global brand with 100s of new stores over the next five years. The company reported a small net loss for the quarter after backing out a tax benefit. I was expecting a small net profit and the difference was due to the higher expenses I just mentioned and greater than expected net interest expense. Overall, I fund these numbers to be excellent for a growth retailer like APP and the analysts on the call all congratulated the company on the results.
APP provided detailed guidance for 2008, pointing to revenues of $470-485 million and EBITDA of $70-64 million, both up 24%, and EPS of 32-36 cents, vs. the adjusted 2007 result of 19 cents. At first I was a bit disappointed that EBITDA and EPS guidance was not higher but on the call it became pretty call that guidance is conservative. First, guidance is based on comps of 15% versus the 2007 figure of 29%. Tougher comps will lead to a slowing but January and February are up 40% and 45%, respectively! Also conservative is the projection for $15 million net interest expense given a total debt level of $117 million and current cash of over $80 million. Finally, at 74 million, the share count is about 4 million ahead of my spreadsheet. I strongly believe APP will easily beat guidance on the revenue, EBITDA, and EPS line in 2008....
March 12, 2008 - CETV Presents At Bear Stearns Conference:
Central European Media Enterprises (CETV) shares have steadied since the sharp fall last week following announcement and pricing of their convertible deal. The timing on the convert was terrible coming in the midst of the market's meltdown. I think the fact that it included a complicated capped call transaction made folks shutter as complicated is a bad word in securities these days. The capped call requires use of about 13% of the deal size to purchase calls which will eliminate dilution between the conversion price of $105 and $151. According to management, essentially they converted a 3.5% up 25% convert into a 7.2%, up 80% convert. I trust these guys deeply so I'll accept that this was best way to raise money for buying out their partners in Ukraine and reloading for future deals including a rumored entry into Turkey.
After the close on Tuesday, CETV CEO Michael Garin presented at a Bear Stearns conference. I listened to the webcast and came away with these observations which are incremental to what I feel is a deep knowledge of this company:
(1) Garin said CETV would double through organic growth in “4 or 5 years.” Might be minor but the official guidance on this measure issued just two weeks ago is five years.
(2) Garin noted that CETV knows 80% of their revenue by the end of March and though it has not happened in the company's history if there were a shortfall they had nine months to adjust their cost structure.
(3) Regarding the convert, Garin noted the goal was to have two years of “activity” on their balance sheet. He said this required them to do a $400 million deal. The bankers came up with the idea to raise it to $475 million so they would have the funds for the capped call.
(4) Just prior to Q&A Garin addressed a bearish Merrill report on the company which centered on concerns about Romania’s economy. He said that based on the fact that they have received no resistance to price increases on advertising this year (most of the year has been sold since January 1st) they don’t see a problem for CETV. He also said based on their on the ground observations and actual trends they monitor in retail sales, Merrill is wrong. Later in Q&A someone asked about Romania and to a room full of laughter, Garin said again that Merrill is wrong. I would add that CETV's COO is their long-time Romanian partner who is one of the most revered businessman and richest people in Romania. I am very confident that CETV has a better read on Romania than anyone at Merrill Lynch.
(5) Maybe most meaningful, Garin said that if they owned and managed Ukraine last year they would have made $50 million EBITDA instead of the $27 million reported. 2008 will be an investment/restructuring year in Ukraine so I don’t look for much more than 5% EBITDA growth but this comment does give you a sense of the upside in 2009 and beyond.
(6) In response to a question on free cash flow, Garin said they have about $100 million in FCF before capital spending. Capex in 2008 will be about $130 million so no FCF this year but maintenance capex is $65 million and that is where he thought they would be in 2009 when they would be FCF positive after capex again.
Put it all together and CETV remains the both growth stock in traditional media, fully financed, and deeply undervalued.
March 11, 2008 - Weekend Box Office and Weather Channel Updates:
The weekend box office fell by 33% against what is probably the toughest comparison it will face until May. The box office has now declined for 5 straight weekends but remains up almost 7% year to date. Comps may remain negative for a few more weeks but the rate of decline should moderate significantly. Analyst estimates for 1Q08 box office are in a range from a mid-single digit decline to a small gain. As a result, the slump should not cause estimates to fall and earnings misses. And to reiterate, a single month or even a whole year of bad comps does not mean that the box office is facing secular decline. Ticket sales are stable for the last ten years and we are coming off a two year run of higher box office including the all-time record year in 2007. I am glad I sold Regal Entertainment off its good 4Q and guidance increase but I won’t hesitate to buy it back if the current box office slump leads to another round of "the box office dying" stories. The next big film that could improve the outlook is Horton Hears A Who which debuts this coming weekend.
Separately, last week the Wall Street Journal and SNL Kagan provided an update on the sale of The Weather Channel and the Weather.com website. Apparently initial bids were due last week and might be coming in under the hoped for sale price of $5 billion. Among the bidders mentioned were NBC, CBS, Comcast, and Liberty Media. I'd guess that the Liberty Media interest is probably referencing a bid from Discovery Communications. There is logical reason for each of these bidders to be interested. NBC already operates a weather business that could quickly gain scale. CBS is looking to diversify and like other owners of major market TV stations, they are already providing weather services. Comcast is also looking to beef up its content both online and on TV. Comcast.net is a very heavily trafficked portal and weather is an obvious draw for a company that already reaches 24 million homes with TVs. Discovery is the leading content player focused on non-fiction content. I am not sure how this is going to play out but a $4-5 billion transaction is a big deal for the buyer and will set a standard for valuing cable networks at a time when the business is in the news due to the Scripps breakup, the Discovery recapitalization, and Viacom's attempted turnaround. Complicating the ability to draw conclusions about cable networks is the fact that Kagan and others believe that weather.com may be as valuable as The Weather Channel. Look for the winning bidder to see their stock price pressured.
March 10, 2008 - Studios and Theatres Finalize Plans for Digital Upgrade:
Reuters is reporting that theatre chains representing 40% of North American screens and the major movie studios have finally agreed to a financing plan to upgrade 14,000 movie screens to digital and 3-D capable technology. The upgrade will cost about $1.1 billion or $70,000 to $75,000 per screen. Studios, theatres, and other content providers would pay fees to use the newly installed equipment with the fees being passed through to bondholders that would be financing the transaction. Obviously, the current credit markets might make completing the deal difficult but the stability inherent in the theatre business should make this a low risk transaction. Digital and 3-D upgrades are a win-win for theatre and studio owners. Studios will save on storage and distribution by downloading films to theatres. Theatres will get better quality digital images, have the capability to receive non-movie content that might fill seats during slower times, and most importantly sell 3-D tickets at a premium. The success of the Hannah Montana 3-D film earlier this year at $15 per ticket has studios and theatres drooling. Dreamworks Animation is committed to issuing all of its movies starting next year in 3-D. Ultimately, the impact is going to be marginal in an absolute dollar sense but it will be enough to improve the operating growth profile of studios and theatres. I'll take incremental growth any place I can get in mature industries.
March 08, 2008 - Final Wrap-Up of 2007 Box Office:
The Motion Picture Association of America (MPAA) released its package of theatrical market statistics for 2007 last week. Most of the data I have already recounted in my many updates about the box office. However, there is some interesting data, especially as it relates to the major movie studios which are owned by Disney, News Corporation, Sony, Viacom, and Time Warner. The data referencing MPAA members only covers studios owned by these five companies but industry box office data includes all studios and all movie releases.
The MPAA data confirms previous reports that the 2007 domestic box office rose by 5.4% to $9.63 billion. This builds on the 2006 gain of 3.5% which broke a three year slump that saw 2003, 2004, and 2005 box office change by -1.2%, 0.5%, and -4.2%, respectively. Also, as I previously noted, ticket sales were up just 0.3% in 2007 so the domestic box office gain was driven by a 5% increase in ticket prices. The ticket price increase accelerated from 2002 thru 2006 when price increases ranged from 2.2% to 3.8%. In the three prior years, from 1999 thru 2001, ticket prices increased rapidly in the range of 4.9% to 8.3%.
Despite rising ticket prices, total admissions in 2006 and 2007 are almost exactly equal to 1997 and 1998. Admissions are down about 10% from the 2002 peak but ten years of unchanged ticket sales with the last two years up by about 2% cumulatively seriously challenges the myth that the box office is dying. This is a critical conclusion as far as analyzing the prospects for theatre and studio owner stocks.
Last year was also very good abroad as the international box office reached an all-time high of $17.1 billion, up 5%, representing 64% of the worldwide box office of $26.7 billion. International box office has doubled since 2001 with growth every year except 2005. Total worldwide box office has risen in five of the last six years and was 60% higher in 2007 than in 2001. Hollywood studios produce their films for a worldwide audience making the growth in international box office over the past decade another dagger in the myth that the movie business is dying.
Completing the 2007 recap, MPAA produced some other statistics confirming data I have previously supplied. The data shows that 2007's record box office was driven by blockbuster films. 2007 had 4 $300 million films vs. just 1 in 2006 and 28 films reached the $100 million blockbuster status vs. 19 in 2006. Growth in the domestic box office in 2007 was driven by the record breaking summer. MPAA notes that the top ten summer movies in 2007 grossed 23% more than the top ten in 2006. The next ten were up an astounding 39% but the third ten fell by 25%.
2007 was a blockbuster driven year which is why 2008 faces difficult comparisons which started last weekend and will extend pretty much continuously through summer. This was the main reason why I sold my multi-year long position in Regal Entertainment. I plan to stay on the sidelines until Regal makes a new 52 week low or we learn that this summer's slate will show better comps than currently expected.
MPAA confirmed one other point I have written about: in 2007, R-rated films did well generating 15% of the total domestic box office, up from 10% in 2005 and 2006. 15% is not an unprecedented level, as it was matched or exceeded in 2003 and 2004, but it does show that records are made when there is depth of interesting movies across all movie going demographics.
The most interesting new data in the MPAA report concerns the cost of making movies and the impact of new media on the movie business.
The graph on the left shows that for major releases by the five MPAA members the cost of producing and marketing a movie grew by 8% last year to $107 million. The major studios are also starting to dominate the independent business. Each major has started its own independent studio, which are competing with the independents traditionally associated with films festivals like Sundance. The graph on the right shows that the costs associated with these films has skyrocketed and is not too far behind the traditional big budget, widely released film. How the studios are coming to dominate the "independent" business is a topic for another column.
Facing rising production and marketing costs, the studios are increasingly turning to outside financing. Unfortunately, this MPAA data excludes the portion of costs that are paid by outside film financing ventures. David Poland, founder of Movie City News and author of the The Hot Button and , estimates that outside financing would push the actual cost up 30%. The idea behind outside financing is for the studio to slice revenue and costs on a film into lots of pieces to increase predictability on their own piece and give outside investors the ability to match their own risk tolerance to the appropriate investment vehicle (insert your joke about the credit crisis here!).
For the studios, it is these costs which really determine the profitability and growth potential of the movie business....
March 04, 2008 - CETV Issuing Convertible Bonds:
CETV announced a $425 million convertible offering after the close yesterday with a $50 million green shoe. Proceeds will be used to acquire another 30% of its operations in Ukraine, bringing control and 90% ownership. Given its strong balance sheet, CETV didn't need to raise this money to fund the $210 million Ukraine purchase so it is probably fair to assume that they are getting close on another acquisition. Over the weekend, there was an article in the Financial Times indicating that they were in position to partner with new local owner of Turkey's leading commercial TV station group. In addition on its last conference call, management made it pretty clear that they would be purchasing additional operations in Ukraine. Both of these deals could be dilutive to current valuation assuming that the acquired assets are in start-up phase or under earning. However, Ukraine and Turkey are huge markets in terms of population that are enjoying rapid GDP growth and advertising growth in the range of 20-40%. In other words, CETV would be buying the next leg in its growth profile beyond the current leg that has been driven by the Czech Republic, Romania, Slovakia, Slovenia, and initial forays into Ukraine.
More assets in Ukraine, a new market in Turkey, and the pending turn to profitability in Croatia (70% revenue growth but an operating loss in 2007), would provide enough upside to sustain 20-30% growth for another five to seven years. In the meantime, Romania remains a 20% growth market, CETV 's second largest operation, the Czech Republic, has another year of 15% local currency growth, and Slovakia has 15% local currency revenue growth but huge upside in margins. CETV EBITDA is up 85% since 2004. Well financed acquisitions in high growth markets offer a great chance to extend the run. That makes the sharp drop on the convert deal an opportunity for new long positions in CETV.
March 03, 2008 - March 2008 Model Signals:
There were no changes for March to Northlake's Market Cap and Style models that I use for ETF allocation. The signals remain mid cap and growth. The mid cap signal remains a weak one that could shift back to large cap next month. The growth signal is moderately strong and got a little stronger last month. It is strong enough that it seems unlikely to shift to value next month. Entering March I thought a shift to value was possible. Given the current model signals, I continue to own the S&P 400 Mid Cap (MDY) and the Russell 1000 Growth (IWF) in client and personal accounts. As always, special thanks to Ned Davis Research who developed the original models and continues to maintain them.
There was little movement in the underlying indicators in either model. The only shift in the Market Cap model was the Advisory Service Sentiment indicator moving from small caps to neutral. The model is picking up the most recent drop in sentiment but also now shows that bearish sentiment is high enough to trigger a move back in favor of small caps next month. The concept behind this indicator is that small caps are favored when bearish sentiment reaches an extreme and then reverses. The extreme is in place. The reverse is not. Coming off an extreme bearish sentiment bottom, you want to own small stocks for the benefit of the beta effect.
There was a similar lack of movement in the underlying indicators in the Style model. The only indicator to shift was Insider Activity which moved to growth from a neutral reading.
Overall, the indicators reflect a slowing economy that favors large caps and growth, an interest rate environment that increasingly favors small caps, and stock market internals that favor large caps and growth. The weak dollar also favors large caps and growth. The mid cap reading is a result of mixed readings on market cap....
February 29, 2008 - Good Quarter, Good Outlook For Central European Media Enterprises:
Central European Media Enterprises (CETV) reported excellent 4Q07 results easily beating estimates on revenues, EBITDA, and EPS. Revenues and EBITDA grew 40% and 33%, respectively, with all six countries where the company owns TV stations or networks beating my estimate for revenue and five of the six countries beating my estimate for EBITDA. To gain some sense of the magnitude of the beat, my revenue estimate was $286 million and the company reported $301 million. For EBITDA, I was looking for $111 million and the company reported $129 million.
For the year, revenue and EBITDA grew 39% and 46%, respectively. For 2008, I am looking for 20% revenue growth and slightly expanding margins to drive 26% EBITDA growth. Free cash flow is beginning to be meaningful and could reach close to $100 million in 2008. In its conference call presentation, management said that it would to double revenues over the next five years with margin expansion leading to even faster EBITDA growth. Given the recent track record of consistent 20% plus annual growth and the rapidly growing ad markets throughout Central and Eastern Europe this is very reasonable expectation.
The shares trade at less than 11 times my 2008 EBITDA estimate ascribing no value to the company's rapidly growing but not yet profitable operations in Croatia and the #2 or #3 position of its internet properties in most of the countries in which it operates. Doubling revenue in five years with margin expansion indicates that revenues will grow about 14% per year with EBITDA slightly above that rate. Given current forecasts for 2008 advertising growth in Central and Eastern Europe, higher growth seems likely at least in 2008.
With US media companies struggling to grow at 5-10% trading for 7-8 times EBITDA, I find the shares of CETV to be way too cheap. Assuming 18% growth in 2009, a 12 multiple on forward estimates would get the shares to $130. All it will take to get the shares moving again is a decent market that allows investors to start having confidence in the future and fewer worries about the stocks perceived as risky. I think it is a good bet that CETV shares and management team will continue to deliver for at least the next two years....
February 28, 2008 - NII Holdings: Finally In The Clear?:
NII Holdings (NIHD) reported better than expected 4Q07 financial results yesterday but the shares sold off sharply anyhow. I can see three potential issues. First, EBITDA guidance is a bit low even after adding back the $30 million in unexpected expenses related to upgrading the company's network in Peru to 3Q. Revenue guidance is in line so there is some evidence of margin pressure. Second, the Peru 3G build out is again raising fears of a big spike in capex for the rebuild in Mexico and Brazil. Third, 1Q08 net adds will be down sequentially. They were up sequentially in 2007 and flat in 2005. This serves to undermine the fragile confidence that guidance is good and the Mexico situation is stable.
By way of background, NIHD shares have been cut in half since last summer when competitive activity in the company's largest market, Mexico, picked up. Sub growth in Mexico slowed, ARPU trends deteriorated, margin expansion stopped, and talk of the need for massive network upgrade moved front and center. Analysts lowered subscriber and financial estimates in response.
I think the shares are way oversold and that as time passes, maybe one or two quarters, the shares will move up considerably. Ultimately, 4Q07 sub and financial results beat the lowered estimates. These results show that management can handle the more competitive environment in Mexico and still “EXCEED” numbers. This makes me believe that the 2008 EBITDA guidance is likely low, especially given momentum in Brazil, which no represents 30% of subscribers and 25% of EBITDA....
February 27, 2008 - Selling Regal Entertainment:
I posted the following on Real Money before the open on February 27th explaining my decision to sell client holdings of Regal Entertainment. By way of background, Doug Kass is a major figure on Real Money and appears regularly on CNBC. He manages hedge funds that are dedicated to selling short. This means he bets on stocks going down. Over the time period that Northlake has been long Regal Entertainment, Doug was short most of the time.
I hope Doug Kass is sitting down when he reads this but I sold my position in Regal Entertainment yesterday. Doug and I have been back and forth on the merits of Regal for well over a year. For Doug it is a thematic short as he sees the movie theatre in long-term decline. For me it was a total return play in a stock that was too cheap because of what I believe to be the inaccurate myth that the box office is in long-term decline.
I think we both ended up right. I know at times Doug was short when the stock was moving between the upper teens and low $20s. I've been long since April 27th, 2006. I purchased the stock at $20.28 and sold it at $20.90 for a gain of just 3%. However, I have also collected 7 quarterly dividends of 30 cents and one special dividend of $2.00. Add that $4.10 to my side of the ledger and the total return is 23%. The S&P 500 is up less than 6% since then with dividends pushing the return to about 9%.
Regal turned out to be a pretty good investment for my clients but the reason I am quoting the returns is to remind subscribers that there are a lot of ways to make money on a stock. Total return investing is not as sexy as producing big capital gains but if you are going to make 23% who cares how you get there….
February 25, 2008 - Reviewing Rogers Communications:
I feel I have done a good job and a bad job with Northlake's investment in Rogers Communications (RCI). On the one hand, I initially purchased RCI for clients in December 2006 around $29. With the stock at $39, up 34%, I should have no complaints. However, in early November the stock was in the low $50s, and it ended 2007 at $25.25. Unlike a lot of my big winners, I didn’t trim my RCI position on the way up. It is a loser on more recent new money or new client purchases and it has hurt clients' absolute and relative performance meaningfully so far in 2008.
The company reported 4Q07 financial results on Friday. The numbers were pretty good but there was not that much suspense as the equally important year end subscriber statistics and 2008 guidance was issued in mid-January. The subscriber metrics and guidance were both disappointing, compounding the investment case for the shares following initial worries about the May spectrum auction which will bring new wireless competition to Canada. The official auction rules were viewed as more favorable to new entrants than expected and as the current market leader and sole GSM provider in Canada, investors worry that RCI has the most to lose.
With the 4Q07 results in the books, I thought it would be a good time to review the investment case for RCI. I plan to continue to hold the shares but don’t expect to make real good money until the second half of the year. Developments surrounding the May 27th spectrum auctions, including the announcement of bidders on March 4th, seem likely to weigh on investor sentiment especially with new worries about flat rate pricing pans in the US and the spillover effect of a US recession.
However, I expect the stock to do much better and head back to at least the mid-$40s by year end. There are five reasons for my optimism. First, the shares are cheap at 7.4 times 2007 estimated EBTIDA. Second, growth remains robust with guidance calling for EBITDA growth of around 13% this year. Third, management has a consistent record of beating guidance. Fourth, the 4Q07 results and the conference call commentary reinforce that guidance is conservative and that the company is well prepared with its eyes wide open as far as new wireless competition is concerned. Fifth, the shareholder friendly actions taken in January, including a doubling of the dividend and initiation of a share repurchase show that management is effectively balancing competing shareholder interests of return of free cash flow and reinvestment in the operating businesses.
Wireless is the key to the RCI investment story as it provides 70% of projected 2008 EBITDA. RCI is the industry leader with 40-50% of net adds in Canada. Wireless penetration in Canada is well below the US but on the same penetration curve. If Canada follows the US penetration for several more years, subscriber growth should remain robust, enough to provide RCI, current competitors BCE and Telus, and new entrants with double digit growth.
RCI has benefited from operating the only GSM network in Canada. This gives the company dominant share of highly profitable international roaming revenue and the cheapest and best selection of handsets. New entrants via the spectrum auction will cut into these competitive advantages but it will be years before they are able to build out their own networks. Until that point RCI will be paid for roaming and access to its towers by the new entrants....
February 13, 2008 - News Corp Looking At Yahoo?:
News Corporation has sat out this week's rally, falling about 2%. I think the problem is fear over a bid for Yahoo. These fears persist despite very strong denials of interest from Rupert Murdoch and Peter Chernin on the quarterly conference call just ten days ago. The latest rumor is some sort of joint bid whereby News Corp puts Fox Interactive and a pile of cash into a new company that also contains Yahoo and another pile of cash dumped in by a private equity firm. News Corp would own a piece of the new entity, maybe around 20%. The new Yahoo/MySpace entity would outsource search to Google which would provide an immediate bump to operating income given that Google search monetizes at a substantial premium to Yahoo search.
Assuming this is a real deal, an assumption I would not make, and that the Google search deal would pass regulatory muster, another assumption I would not make, I have mixed feelings....
February 11, 2008 - In Line Quarter and Positive Guidance Clears The Way for Regal:
Prior to its 4Q07 earnings report last Thursday, shares of Regal Entertainment had already recovered from the sharp sell-off driven by poor box office trends during the fourth quarter. A strong start to the box office in 2008 also was helping. The recovery gained steam following the report which was inline with expectations and a first view of 2008 guidance. Here is a brief recap:
Regal Entertainment guided to the high end of analysts estimates for 2008. In 4Q, operating trends were exactly as expected given the box office performance. 4QEPS came in 4 cents ahead of consensus on better than expected margin performance and lower than expected interest expense. The tax rate was down but still stood at a normal 37%. The conference call had a positive tone.
Based on the new guidance, I think the stock can trade to $21-22, up 16%, which along with a current yield of 6.5% makes this an interesting total return situation. The key near-term risk is the tough March comp at the box office due to the popularity of the movie 300 a year ago.
The upside should get a boost from rising analyst estimates for 2008 based on the new guidance and the strong start to the box office this year. I know of two analysts who are estimating 1Q box office to be down 9-10%. It is hard to see how anything short of a small gain will be the ultimate outcome with the box office up 19% through this past weekend.
Comps get particularly tough in late June so my current plan is to sell into strength I anticipate over the next few months.
February 06, 2008 - Disney Proving Skeptics Wrong:
Disney reported an exceptional quarter. EPS of 63 cents and revenues of $10.45 billion crushed estimates of 52 cents and $10.04 billion. Revenue growth was 9% and operating income gained 15% vs. expectations of 3%. Non-recurring items contributed no more than 2 cents to the EPS number.
On the conference call, management indicated that so far they see no signs of the economy causing a slowdown. Management pointed specifically to the fact that room bookings for the March through September quarters are running modestly ahead of last year. Given the fair argument that families don’t usually cancel vacations once they are booked, it seems that the near-term worries about Disney's theme parks are unwarranted.
In fact, I think a strong argument can be made that FY08 ending in September is pretty much in bag as a decent growth year well ahead of the outlook implied by recent estimate cuts. The debate is now going to shift to FY2009 where comparisons just got tougher and theme parks could come under pressure due to unwilling ness to book vacations based on current economic conditions and headlines.
Disney has incredible creative momentum. Hannah Montana, High School Musical, Cars, Pirates of the Caribbean, new hit shows on ABC, new sports rights at ESPN, the Jonas Brothers, Club Penguin, Enchanted. Each of these properties is driving current revenue. New properties are regularly created and old properties are revived and extended. For example, Toy Story did $400 million n retail merchandise sales in 2007. In 2009, the two original Toy Story films will be re-released in 3-D ahead of the 2010 release of Toy Story 3 and a whole new merchandising push.
Along with the revenue push from creative content, Disney is very tightly managed. Margins were very good in every segment except for the studio which faced an adverse mix shift from DVDs to box office.
Ultimately, the outlook for Disney comes down to a battle between the momentum of creative content and tight cost controls vs. a weakening economy. I think it is clear that at least for the next quarter or two Disney is very well positioned to weather the economic storm. On that basis the shares look modestly undervalued for the short-term and exceptionally undervalued for the long-term assuming the economy recovers in the second half of 2008.
Here are brief segment highlights….
February 06, 2008 - CETV Gets The Rest of Ukraine:
Central European Media Enterprises (CETV), announced very good news yesterday. CETV will purchase the minority interests in its lead station in Ukraine, Studio 1+1. CETV will immediately take its 60% interest to 90% and has a put call option exercisable a year after closing for the remaining 10%. The 30% piece is being purchased for $220 million. The 10% piece has a rising price starting at $95 million and scaling to a minimum of $109 million after one year subject to an independent valuation.
Based on my estimate of 2008 EBITDA at 1+1, the multiple is 19 times in a range of 17 to 25 for the two step transaction. This is a high price but it provides full control and thus requires a premium. Full control is worth a lot to CETV as it dramatically reduces emerging market risk related to underdeveloped legal and regulatory systems. More importantly, full control in the past has meant a big bump in revenues and profit margins as CETV's proven and superior management team applies its full expertise. The most recent example is Slovakia where EBITDA will be triple the 2005 pre-full ownership base in 2008.
CETV still retains risk associated with emerging markets. Many investors use it as a proxy for emerging markets exposure. This leaves the stock vulnerable to sharp sell-offs in emerging markets such as what occurred in January. However, there is no question that the fundamental outlook for growth is superb. The stock is a bargain at 11 times my 2008 EBITDA estimate as long as you can stomach well above average volatility in market downturns.
February 05, 2008 - Good News Corp:
News Corporation reported excellent third quarter beating consensus estimates on EPS, revenue, and operating income. Strength was virtually across the board with every segment beating estimates on the operating income line. Topping off the good news, operating income growth guidance was raised from low teens to mid teens.
On the call management addressed the two most pressing short-term issues for the stock. First, Rupert Murdoch said that NWS is "definitely not making a bid for Yahoo." Just to be extra clear, COO Peter Chernin repeated Rupert's comment. Second, Chernin said that Google should not have been surprised by the profitability of their MySpace deal as it was on target with initial projections.
The only question left for the bulls is that even the higher guidance assumes a significant slowdown in the second half of the company's fiscal year. Halfway through FY08, operating income has grown 24%, yet the upwardly revised guidance is only mid teens. The math suggests that implied growth in 2H08 is upper single digits. Personally, I think they are just being exceptionally conservative in light of the continuing uncertainty about the US economy which seems particularly worrisome to Rupert Murdoch.
The bottom line is that NWS will likely beat and raise again next quarter. The shares deserve to trade much higher and the just reported quarter and commentary should provide an immediate boost. NWS is the best positioned large cap media stock for long side investors over the next year.
In 2Q08, NWS reported adjusted EPS of 32 cents, comfortably ahead of the consensus of 27 cents. Revenues of $8.59 billion beat consensus of $8.24 billion. Operating income grew by 24% vs. expectations of 9% growth. Every segment but Other comfortably beat its operating income estimate. Revenues were better than expected in Cable Networks, SkyItalia, Newspapers, and Other. In Other Fox Interactive Media, which includes MySpace, had revenue growth of 87% and showed an operating profit of $47 million vs. a loss of $11 million a year ago....
February 04, 2008 - Disney Earnings Preview: Slower Growth But Looking For A Positive Surprise:
Disney is expected to report its weakest growth quarter in several years but I do think investors should interpret it as the end of Disney's multiyear run of superior financial results. Tough comparisons and the challenges of a weakening consumer are driving the slower growth but there is a good chance Disney will beat estimates which will remind investors that the company is coping quite well and deserves a higher valuation.
For its fiscal first quarter ending December 31st, Disney is expected to report EPs of 52% on revenues of $10.04 billion. These figures represent EPS growth of 6% and revenue growth of 3%. Operating income which is the most closely watched financial metric at Disney is projected to grow just 3%.
These figures understate the health of Disney's business as 2007 ended because a 20% decline in profits at the company's Studio Entertainment segments is dragging down results. Each of the company's other segments including Broadcasting, Cable Networks, Theme Parks, and Consumer Products should enjoy double digit growth in operating income in the quarter.
A couple of things to keep your eye on in the report and on the call are (1) the pace of share buybacks which have been very aggressive, (2) the outlook for the theme parks given that visibility has shortened, (3) comments on progress building out the internet businesses, and (4) any impact from the writer's strike.
Here is a brief look at the company's business segments....
February 04, 2008 - News Corp Earnings Preview: Expect Good News:
I anticipate a strong quarter from News Corporation after the close on Monday and a positive reaction from the market. The stock jumped 3% on Friday as investors began to look ahead to earnings and considered the impact of the Yahoo-Microsoft deal on MySpace. I think plenty of upside remains in the near-term and long-term and would be long heading into the report as a trade and an investment.
NWS is expected to report 2Q08 results of 27 cents on revenues of $8.24 billion. EPS are expected to grow by 4$ on a 5% increase in revenue. The all important operating income line is expected to grow by 9-10%. This will be the lowest growth of the year for operating income with a substantial acceleration expected in the next two quarters. It is this acceleration which is expected to continue in the company's 2009 fiscal year starting July 1st that attracts me to the shares.
It is always best to analyze the big entertainment conglomerates on a segment basis. Here is a breakdown of expectations with brief highlights for the most important segments. In parentheses is the estimated revenue growth and operating income growth (rev %/op inc %)....
February 03, 2008 - February 2008 Model Signals:
There were no changes to Northlake's Market Cap and Style models for February. The Market Cap model continues to flash a mid cap signal while the Style model remains in growth mode. As always, thanks to Ned Davis Research who originally developed and continues to maintain these models.
The Market Cap model swung to mid cap for January after an 11 month run at large cap and remains at mid cap for February. There was absolutely no movement in the underlying factors for February leaving the model with what I classify as a weak mid cap signal. The Market Cap model is picking up conflicting signals on the economy and interest rate trends that are beginning to favor small caps but have yet to be confirmed by the technical indicators. Falling rates and bearish sentiment extremes favor small caps but slowing economic growth and the weak dollar favor large caps. The model defaults to mid cap in this situation.
The Style model remains in growth mode but the underlying indicators made a significant move in the direction of value for February. The one month reading is right on the borderline between growth and value but the two month smoothed reading is still probably deep enough in growth mode to give growth at least another month. The only big shift in an underlying factor was in the trend indicators which shifted to value after value massively outperformed growth in January. The value signal generated by rapidly rising and now well above historic level credit spreads also has contributed to the shift in favor of value.
The January signals offered a mixed performance picture....
February 01, 2008 - News Corporation December Quarter Preview:
I anticipate a strong quarter from News Corporation after the close on Monday and a positive reaction from the market. The stock jumped 3% on Friday as investors began to look ahead to earnings and considered the impact of the Yahoo-Microsoft deal on MySpace. I think plenty of upside remains in the near-term and long-term and would be long heading into the report as a trade and an investment.
NWS is expected to report 2Q08 results of 27 cents on revenues of $8.24 billion. EPS are expected to grow by 4$ on a 5% increase in revenue. The all important operating income line is expected to grow by 9-10%. This will be the lowest growth of the year for operating income with a substantial acceleration expected in the next two quarters. It is this acceleration which is expected to continue in the company's 2009 fiscal year starting July 1st that attracts me to the shares.
It is always best to analyze the big entertainment conglomerates on a segment basis. Here is a breakdown of expectations with brief highlights for the most important segments. In parentheses is the estimated revenue growth and operating income growth (rev %/op inc %)....
January 29, 2008 - Missing iPhones Found at Sundance:
I've been reading up on the phenomenon of the missing iPhones and the only thing I can conclude is they might all have been at Sundance. Honestly, it seemed every line we were standing in had multiple iPhones in use. I know that speaks more to where Apple has mindshare than anything else, but I can confidently state that iPhone market share among movie fans and Hollywood types is at least meeting expectations.
On a serious note, I think there are two issues. First is whether demand for the iPhone at current prices and as currently configured is less than expected. Second is whether meeting unit volume expectations through sale of unlocked phones is positive or negative for Apple.
The answer to the first question may be yes, particularly in Europe. However, enough phones have been sold and current customers are satisfied enough that demand issues can be solved with a 3G phone, a lower-priced unit, lower prices, or increased functionality. Say what you want but the activation of over 2 million phones in seven months suggests that the iPhone is here to say.
As for unlocked phones, Bernstein did some interesting work, suggesting that there is earnings downside if a higher-than-expected portion of the unit volume is unlocked due to the loss of carrier payments. Carrier payments might be as high as $20 a month at close to a 100% margin. Bernstein believes that if 3 million of the 10 million phones that might be sold in 2008 are unlocked, Apple would earn 37 cents less in EPS this year and next year. That works out to 8% and 6% of current 08 and 09 EPS estimates, respectively....
January 28, 2008 - Sundance Wrap Before Reality Returns:
If you love movies and have never been to Sundance I highly recommend it. This was my first visit and I found an incredibly well organized and orchestrated festival. Pulling it off is no easy task. There are seven venues with nine screens in Park City alone plus additional showings in Salt Lake City and Ogden. In Park City, eight films are simultaneously running from 9 AM through the midnight showings. We attended 9 films total including 4 each on Friday and Saturday. Every showing was easily sold out including last minute "wait list" tickets which are available in limited quantities in the two hours prior to the start of a show. The venues are scattered over several miles of Park City so a free transportation system of buses is available. We never had to wait more than 10 minutes for a shuttle and only got caught in a really packed bus a couple of times.
The only downside is the expense but the incredibly well staffed and friendly volunteers (many standing outside directing pedestrian traffic for hours at a time) make you accept the stiff price for meals. Film tickets were $15 and available at the main box office early morning for each day's showings.
Of the nine films I saw with my 17 year old indie movie addicted daughter, we liked Anywhere USA the best. It probably doesn't have much of a commercial future but it is really well done and makes its editorial viewpoint known without being preachy. We also enjoyed Hamlet 2, the big story out of Sundance because it sold for $10 million, the second largest sale ever after Little Miss Sunshine. It is a straight out comedy and was the far and away the crowd favorite. On Friday night we had dinner with several critics, including David Poland of Movie City News, who explained that Focus Features bought the film figuring if they could get the theatrical run to $20 million the film would be nicely profitable including DVD sales. Hamlet 2 is no academy award nominee but it should be a box office success.
Sorry to have used up space to chat about movies but I hope you enjoyed the diversion from the always intense and recently often sour market commentary. It's time to get back to reality, the market, and stocks.
January 25, 2008 - Slow Sales At Sundance:
I got to Sundance yesterday and caught my first movie. I am visiting a good friend in Salt Lake City so I won't be spending full time at the festival until today. I hope to catch 3-4 films on Saturday and Sunday before heading back to Chicago. Even though I've missed some good stock market rallying, it is very good to be away. My investments have done poorly so far this year. Space and distance helps to clear my head and will allow me to confront the difficult decisions better next week.
This is my first visit to the Sundance Film Festival. From Wall Street's perspective the festival only matters as it relates to the purchase of films by the major studios. Sundance historically ahs been a festival more about independent film that the sales of those same films. Over the past few years, it has become more of marketplace, and this year it the marketplace that is generating the most news. Or maybe I should lack of news.
Because of the writer's strike, which has postponed production on many films due in theaters in late 2008 and 2009, I believe expectations were raised that sales of films at Sundance would be robust in terms of both volume and price. Most of the stories about film sales at the festival have noted they have been slow and at prices below expectations. I suspect this is a case of the bar being set too high, much like with earnings on Wall Street. The agreement between the Director's Guild and the Studios may also be impacting sales because it has raised hopes for a quick end to the writer's strike.
I realize none of this has much to offer for market forecasts or stock ideas but it's been a crazy two weeks so I hope you appreciate the diversion. I'll be seeing the top selling movie on Saturday, Hamlet 2, which went for $10 million. I'll tell you what I think about it and the other films I see next week.
January 24, 2008 - More Thoughts on Apple:
In my Apple (AAPL) earnings summary on Tuesday, I said there were enough issues to prevent the stock from staging a quick rebound. Those issues don't justify the type of decline we saw yesterday (down big intraday), but the stock is overowned, and as Jim Cramer pointed out, the big money is rotating away from tech, industrials and energy to financials, retail and other early-cycle stocks.
Morning-after analyst commentary was predictable. Many analysts defended the stock, with several increasing estimates given the big beat in the fiscal first quarter. Most noted that guidance seems unusually conservative and that the company should still at least meet the consensus for the March quarter.
Also predictably, there were a few downgrades. The downgrades were based on loss of momentum for the stock and iPods and general worries about consumer spending (that, of course, brings up the question of whether Apple is a retailer or a tech stock).
Few would argue that Mac momentum remains robust and will have an outsized positive impact on financial results as Mac sales becomes a larger percentage of revenue due to the higher margins.
iPods, on the other hand, are creating real concern given the "non-linearity" of U.S. demand in December. In fact, U.S. iPod units were flat in the fiscal first quarter. International sales must have been better than expected given the overall numbers and management's comment that despite the slow December in the U.S., overall linearity for iPods was as expected in the December quarter....
January 24, 2008 - Mortgage Refinancings a Bullish Development:
I spent yesterday afternoon and evening traveling from Chicago to Salt Lake City on my way to the Sundance Film Festival in Park City.
In the morning, I chatted with my mortgage broker. He told me he was getting flooded with calls but not a lot of action yet. He said he many clients that are in position to refinance with 30 year fixed rate mortgages now at 5.4% and falling. One undeniable fact about the 175 basis points the Fed has cut is that it has brought mortgage rates way down. Tony has chronicled this well including the impact it can have on the subprime resets. If mortgage rates drop much further (Bill Gross thinks the Fed is targeting 4% to 4.5% for mortgage rates), it will be a huge boost to the beleaguered and unconfident consumer. Oil has backed off and heating season is going to be over soon. And more rates cuts are on the way.
With this in mind, I was pleased to read a Ned Davis Research report where their economist, Joe Kalish, noted that refi applications rose 17% last week to their highest level since March 2004. Furthermore, refi apps are up 150% in three weeks, the biggest increase in seven years.
Somewhere else I read that the average mortgage in the US carries a rate of 6.1% and nearly 70% of current mortgages could now be considered refinancable. That may have been on RealMoney but I was so busy preparing to leave for Utah that I didn't copy down a quote or link.
The bottom line is that interest rate reductions are starting to bite....
January 23, 2008 - Apple: Not Good Enough For This Stock:
I am not going to recap all the numbers from Apple as you can read that elsewhere. The December quarter was very good but not without issues. Mac and iPod sales came in a little below aggressive estimates. This was easily made up by better than expected ASPs. A bigger issue will be that US iPod units were flat and were a little weaker in the holiday season than the first part of the quarter. Be ready for the iPod is dead headlines. Management said it was happy to trade units for ASP and this was part of the strategy behind the Touch. I see nothing else to quibble about in the December quarter.
Guidance for the March quarter is the real issue that took the shares down 10% after hours. 94 cents on revenues of $6.8 billion is below the $1.09 and $6.98 billion consensus. In its last quarterly report Apple actually guided above consensus so while they are very conservative, there is some precedent to interpret this guidance unusually negative.
The guidance assumes much worse sequential performance than has occurred the last two years....
January 22, 2008 - Best Case For Apple:
I’ll be covering Apple’s earnings call after the close. Here is my preview. I decided to look at aggressive assumptions to see where a best case scenario might be for the December quarter. Since the stock needs both a substantial beat and decent guidance I wanted to see what the beat might look like.
Here are the assumptions I used: (1) 2.5 million Macs sold with ASPS up about $75 sequentially, (2) 25 million iPods with ASPs up to $175 vs. $163 last year, 2.5 million iPhones shipped generating $315 million in revenue, a 30% increase in all else driven by Leopard sales, and a 100 basis point sequential uptick in gross margins.
These assumptions lead to revenue of $9.85 billion and EPS of $1.88 versus the current high estimates of $9.96 billion and $1.77....
January 22, 2008 - Apple 1Q08 Preview:
Another Apple earnings report comes after the close today, so time for lots more overanalysis and outsized volatility in the usually volatile shares. Estimates have been rising as the quarter went along since it became apparent that Mac sales were booming. News from MacWorld that Leopard and iPhone sales were ahead of expectations in the December quarter raised the bar further. The only product line with any concern is iPods where there is some worry about unit volumes relative to high expectations....
January 22, 2008 - Special Market Comment:
Overseas markets continued to fall sharply last night in Asia and today in Europe. Two day losses in many markets while the US was closed for the Martin Luther King holiday reached 10% or more. US futures have been trading down between 4% and 7% since Sunday night.
In response to what can only be described as a global panic, the Federal Reserve cut the Federal Funds rate by 75 basis points to 3.50% at about 7:20 CST this morning. US markets initially cut their losses by about half but now, a half hour later, the market is right back to pre-Fed levels. Initial commentary on CNBC and websites like RealMoney.com are quite skeptical of the Fed action. They are stating that it reeks of desperation and is too little too late.
To be perfectly honest I have no idea what is going to happen in the short-term. We could head much lower as buyers just don’t seem willing to step up. We could also rebound quickly and sharply as short-covering ignites a rally that gives potential buyers some relief and confidence. I am surprised by the size and speed of this decline. I thought the market would be tough to navigate in early 2008 with risk skewed to the downside. However, I wasn’t expecting this.
I do not plan to trade today except to possibly do a little buying in accounts that are very heavy in cash reserves. The reason I would invest some money in these accounts today is that the Fed action reminds us that their will be a monetary and fiscal policy response that eventually will calm investor nerves and give the economy some traction for renewed growth.
Lower rates are a positive for the long run. Stock prices should be higher than current levels within six to twelve months as investors eventually look ahead to the next economic expansion. We may go lower first but at some point we will rebound. We also do. We always have.
The Fed cut might not help right away but it signals to me that this is not going to turn into a disaster. That means its time to hunker down, ride it out, and wait for stability at which time better decisions can be made without the emotion that lousy markets inevitably invite.
Market declines are very painful. It hurts to see your portfolios sink in value. But if you do not need your investments for a year or more this is painful experience but not the end of the world.
I am in the office and available if you want to talk further about the markets and your investments. I can be reached any time between 7:30 AM and 10 PM Chicago time.
January 08, 2008 - Disappointing Guidance From Rogers :
Before the open on Monday, Rogers Communications (RCI) announced 4Q07 subscriber growth below expectations, doubled its dividend, initiated its first ever share repurchase, and reported mixed 2008 guidance. In response, RCI shares fell 6.2%. I decided to hold off on writing up my thoughts until the smoke cleared and following a little defense by a couple of analysts, RCI shares bounce backed by 2.4% on Tuesday even as the market got drubbed in the afternoon.
RCI will be in the penalty box for awhile but despite the disappointing news I think the shares are cheap enough to hold especially given the facts that growth will still be excellent in 2008 on all key financial metrics and management is noted for its conservative guidance.
The problem at RCI is mostly with the 4Q07 wireless subscriber gain of 183,000 which fell 20,000 to 40,000 short of analyst estimates. Guidance for 2008 is a little under most analyst estimates pretty much across the board. RCI management tends to be conservative with guidance and might be more so this year given new entrants to Canadian wireless and stepped up promotional activity from Telus (TU). While the doubling of the dividend is excellent news, it was widely expected and the accompanying share repurchase is pretty small. I suspect management is keeping some powder dry in case it feels the need to respond more vigorously to the competitive wireless landscape in Canada....
January 08, 2008 - NII Holdings Gets Back On Track:
Yesterday, NII Holdings (NIHD) announced better than expected 4Q07 subscriber growth, completion of a large buyback, initiation of another buyback, and an impressive new CEO. The shares were up 9.5%. I added NIHD to a new account, the only one I have that didn’t already own a full position, just after the open yesterday and now think the shares could head quickly back to the $60s in a cooperative market.
The key element that drove the gains in NIHD shares was the announcement that 4Q subscriber growth was good enough to beat full year guidance. Significantly, subscriber growth in Mexico reaccelerated following a surprising sequential dip in 3Q07 due to increased competition. Following 3Q07 results, most analysts reduced their total company and Mexico subscriber estimates to below where 2007 ultimately came in. This sets up a round of estimate increases. If analysts don't increase estimates, look for positive surprises later this year. Also contributing to the stock price gains was the surprising announcement that NIHD completed its $500 million share buyback and initiated a new buyback of the same size. One thing that contributed to the stock getting cut in half in 2H07 was the fact that on the 3Q07 conference call management said it would not get aggressive with its share buyback. Analysts and investors took this as a sign that management was not confident in the future. Kudos to Pali Research which noted in mid-November after a meeting with NIHD management that they sensed the company was looking at much larger share buybacks....
January 02, 2008 - January 2008 Model Signals:
Northlake's Market Cap model (courtesy of Ned Davis Research) shifted from a large cap signal to a mid cap signal for January. There was no change in the Style model which continues to flash a growth signal. As a reminder the Market Cap and Style models I use send monthly signals predicting relative performance over an intermediate term time frame which I define as several quarters. The change in the Market Cap model led me to sell positions in the S&P 500 (SPY) and reinvest the proceeds in the S&P 400 Mid Cap (MDY). Northlake's long position in the Russell 1000 Growth (IWF) remains unchanged.
The new mid cap signal is a weak one, just barely moving across the line separating mid cap form large cap. The large cap signal had been in place since last February. It was an exceptionally strong signal from April through September, peaking in August and September at readings matching the strongest large cap signals in the 25 year history of the model. Since September, the large cap model has gradually weakened until it flipped for January.
The Market Cap model measures ten factors based on historical data for small cap and large cap performance. A mid cap signal is flashed if there is spilt decision. Since September when all ten factors lined up for large caps, five of the factors have shifted to small cap camp. These factors are widening credit spreads, rising bearish advisory service sentiment, the steepening of the yield curve, the collapse in consumer confidence, and falling interest rates. Each of these factors now correlates with relative performance favoring small caps.
Turning to the Style model, the reading remains firmly in the growth camp.
The signal is as strong now as it has been since the model shifted to growth in June. There was virtually no movement this month in the underlying indicators....
December 28, 2007 - Why I Bought News Corporation:
Back in July, I wrote a review of News Corporation for RealMoney.com outlining the bull case. The analysis remains relevant today so in light of the purchase of News Corporation shares for Northlake clients earlier this week, I am reproducing the article so you can learn more about this new holding….
I like News Corporation because it offers the fastest earnings growth among the mega cap media stocks but trades at the same P-E multiple as its peers on 2008 earnings. Furthermore, the company is active in M&A with a decent chance for a major transaction that would unlock value in MySpace. Since the Dow Jones (DJ) deal was announced, the shares have sat out the rally giving back gains made earlier this year. I think the weakness in the shares, down 10% since late May, has set up a great buying opportunity.
Some investors are concerned about the high price being paid for DJ and the strategic implications of the deal. However, I think they are overlooking NWS's recent announcements of asset sales (TV stations and Eastern European billboards) that will sell at similar premiums to DJ and finance half of the DJ deal. Additionally, the DJ deal represents just 10% of NWS market cap so I don’t view it as unusually risky even if it fails to offer the synergies that Rupert Murdoch must be expecting....
December 28, 2007 - DVD Sales Moderately Weak But No Disaster:
I still got my eye on holiday DVD sales. Data is now available at the-numbers.com through December 16th. This includes the launch of the latest Harry Potter film and the second week of sales for Pirates of the Caribbean: At World's End. Please note that this data is for the US only. This could be especially important for popular international titles like Harry Potter, Pirates, or especially Ratatouille which performed exceptionally well in the overseas box office.
My impression of these sales figures is that they are moderately light pretty much across the board relative to analyst estimates. Holiday DVD sales are very important to December quarter earnings for the major entertainment conglomerates which own movie studios including Disney, General Electric, Viacom, News Corporation, Time Warner, and Sony.
It is hard to call winners and losers among this group but I do have some observations....
December 27, 2007 - Selling Comcast. Buying News Corporation.:
Partially driven by tax considerations, I sold Northlake's entire position in Comcast yesterday. I used the proceeds to purchase a full position in News Corporation. I completed this trade across Northlake's entire base of separately managed client accounts and in my two main personal accounts.
The Comcast long proved to be disastrous. My analysis of the company's fundamentals and the stock market's likely reaction proved wrong. I bought the position last July at more that $27. It was a 3% for most accounts position so it cost clients about 1% relative to the S&P 500 benchmark. Ouch. I’ve chronicled repeatedly why I was long Comcast and why I think the stock is undervalued at these prices. I still believe the shares are undervalued but barring a dramatic action by management I don’t see the potential for a significant rebound (>20%) in the next six months. Current fundamentals aren’t nearly as bad as the stock price implies but they are weak relative to Wall Street expectations and risk remains that there is one more disappointment in operating metric or capital spending guidance.
On the other hand, fundamentals at News Corporation are very positive. 1Q08 results are already in the books and strongly suggested that estimates are too low. When Rupert Murdoch refused to raise guidance due to concerns about the economy, the shares sold off as the implication is that estimates for the remainder of the year are too high. I think this reasoning will be proved wrong and we will find out within the next six weeks when News Corporation presents at a major sell side conference and then reports its 2Q08 results.
Simply put, I think News Corporation is similarly undervalued to Comcast but it has positive operating momentum and a recognizable catalyst. Add in the tax loss benefit against gains I’ve realized this year in my market cap and style rotation strategies and on position trimming in Apple and Central European Media Enterprises and the swap from Comcast to News Corporation makes sense.
I’d like to reiterate that I think Comcast remains cheap and oversold at current prices. My investment strategy limits the number of long positions I can maintain at any point in time. Something had to be sacrificed. No doubt it will prove to be a sacrifice to the trading deities as well so you can hold the emails noting that I threw in the towel at the low that are sure to come my way when Comcast is trading in the low $20s.
December 26, 2007 - TV Ad Market Strong. For Now.:
On Monday, the New York Post reported that scatter market TV advertising on the big four broadcast networks is running up 18%. Scatter market represents TV ad inventory available for sale on the spot market. This price increase is occurring despite another year of accelerated declines in ratings for prime time network TV shows. What is happening is that advertisers have not achieved the reach they desired with their upfront ad purchases so they are aggressively bidding for limited inventory and driving up pricing. This situation bodes well for 4Q EPS of the owners of the broadcast networks – Disney (ABC), News Corporation (FOX), CBS, and General Electric (NBC).
A gentler version of this rising ad prices/falling ratings dynamic has been going on for more than a decade enabling the broadcast network TV market to grow modestly despite the steady market share gains for cable TV and other forms of media. The concept sold by the broadcast networks has been that “we are the only place where you can still reach a mass audience even if it is ways less massive than it used to be.” The winners at any point in time are the networks that are on top of the ratings or sustaining ratings momentum (currently ABC and FOX)....
December 24, 2007 - Box Office Recovery Continues:
The box office continued its late year recovery with the three day weekend for the top 12 films rising 40% from a year ago. This strong performance builds the prior weekend’s gain of 37%. As recently as December 13th, the quarterly box office was running down 9.5% but two weekends of strong gains have reduced the deficit to 4.6%. With three films paying very well (National Treasure 2, I Am Legend, and Alvin and the Chipmunks) and another popular franchise to be released n Christmas Day (Alien vs. Predator), the box office should continue to expand vs. a year ago through the end of the year. By year end the quarterly decline may be around 2% and the year to date gain should be greater than 5%. The quarterly results will be at least as good as recently lowered estimates for the theatre stocks imply suggesting that the group could receive a January effect bounce starting any time. I remain long Regal Entertainment.
In other media news, News Corporation announced that it is selling 8 TV stations in mid-size markets for $1.1 billion. These stations have been for sale since mid year so no surprise here. However, I think the sale will remind investors that News Corporation is shifting its asset base toward a higher long-term growth profile. I remain long a small amount of News Corporation, looking to get much longer in the next few weeks as I free up cash from year end and early 2007 trades.
December 19, 2007 - Impact of Presidential Election:
There is a lot more on investor's minds these days than the 2008 Presidential election. However, the Iowa caucuses are just 16 days away and recent polls indicate the races in both parties are extremely unpredictable. Who knows if past market patterns in Presidential election years will hold given the overwhelming focus on the health of the economy and the credit markets. But as a reminder, I want to pass along some info from a Ned Davis Research commentary that went out on Monday.
First, the market tends to trend down in the first half of a Presidential election year regardless of which party ultimately wins the election. The depth of the decline has been more severe in years where the incumbent party loses the White House. Second, the market has rallied from a June low through September regardless of the election outcome. This would seem to coordinate with the determination of the nominees and the optimism that is generally sought at the late summer political conventions. Third, the end of the year has been sensitive to whether the incumbent party wins. When the incumbent party has won, the market has continued to rally right through to year end. When the incumbent party has lost, the market has peaked in September and trended lower until mid-December. Finally, Like many years, Presidential election years have shown a tendency to rally in late December and this has occurred whether the incumbent party wins or loses.....
December 18, 2007 - DVD Sales Mixed So Far:
Just before Thanksgiving I highlighted my concerns that holiday spending on DVDs could be weaker than expected. At the time, I identified two potential problems. First, the studios have to deal with a generally weak holiday spending environment. Second, the amazing success of the box office this summer put a glut of high profile DVDs on retailer shelves. So assuming consumers were inclined to spend on DVDs, any single title could get squeezed or all the titles might lag sales goals. Now, another problem has emerged which is great success for video game titles. Halo, Guitar Hero 3, and others appear to be selling very well this holiday season.
Early returns on DVD sales were mixed. Transformers was first out of the box and did very well selling 8 million units at its launch. Spiderman 3 was next and underwhelmed with 3 million units. Ratatouille got off to a good start with 3.8 million units but Shrek The Third, which had domestic box office more than 50% above Ratatouille, sold just 3.3 million units in its first week. Things looked a little better when Live Free or Die Hard sold a better than expected 2.1 million units.
While the jury remains out, the latest sales data is much more promising. Last week saw the release of Pirates of the Caribbean: At World's End and The Bourne Ultimatum and both performed very strongly. Pirates sold 8 million units and Bourne sold 3 million.
I suspect the final outcome will be a moderately weaker than expected DVD sales season with more titles than usual underperforming.....
December 17, 2007 - A Legendary Weekend At The Box Office:
Proving once again that people will buy tickets when there is appealing in the theatres, the weekend box office rose 38% for the top twelve films according to BoxOfficeMojo.com. It's easy to point to home theatres or digital distribution but this past weekend and last summer showed that demand for the movie theatre experience remains robust if the studios release good product.
That was certainly the case this weekend when the top two films massively exceeded expectations. I Am Legend set December box office records with $76.5 million vs. estimates of $40 million. This marks the seventh straight #1 opening for Will Smith who by any measure is now the most bankable star in Hollywood. The #2 film was Alvin and the Chipmunks. The film grossed $45 million, fully three times most estimates.
Entering the weekend the quarterly box office was running down 9.5% but assuming the gain holds through the weekday play dates, the gap should fall to 6% or less. The gap should close further through year end as the almost certain blockbuster National Treasure 2 opens on Friday. That would mean that there are three films pulling in ticket buyers where just one film was popular a year ago.
Year to date the box office is up over 5% despite the poor fall and early winter. This follows a gain of over 4% in 2006, helping to isolate 2005's 6.1% fall in receipts as the exception. Prior to 2005, the box office was up every year since 1992. The same can't be said for ticket sales (those are flat over the past two years) but studio and theatre costs are measured in absolute revenue not number of tickets sold. I stand by my belief that the 2005 drop was a fluke and continues to color the movie business much more negatively than it deserves.
If the rest of the year performs as strongly as I expect, on Wall Street the theatre companies should be the prime beneficiaries. Regal Entertainment, Cinemark, and Carmike are all trading at or very close to 52 week lows. Regal and Cinemark have excellent current yields that provide support. I think the stocks can rally a buck or two from here before year end.
December 13, 2007 - The Writer's Strike Is About To Bite:
I am surprised that the talks broke off between writers and producers. When the strike was launched there was a lot of discussion on both sides about how close they were to a deal. I figured that when they decided to start up negotiations again under a strict blackout a deal was at hand. My view was reinforced by two factors. First, the writers union is led by a folks who were willing to wage a strike so they had already proven to the producers that they were serious. Second, the fact that the writers seemed be winning the public relations war in a landslide. It seemed like a perfect setup for a deal.
Now things are looking ugly and the strike is dragging on long enough that it could impact media stocks. As a reminder, it is TV that could get hurt. That means that network owners and TV producers have the most to lose. Disney (ABC), NBC Universal (GE), News Corp (Fox), and CBS are the network owners. NBCU, Fox, Viacom, and Time Warner are the big TV producers.
The problem is most acute at the networks. Network TV is in a long-term state of decline as viewers diversify their media consumption. Cable networks have steadily gained share and now new digital distribution is starting to build viewership. With most popular original series about to run out of episodes, ratings will take a nosedive starting in January and February. The timing couldn't be worse as this is the first year advertisers are using the new currency of live commercial ratings plus three days of DVR playback. Ratings were unusually poor last TV season and although there is no an apples to apples comparison, they appear to be down sharply. Finally, the lousy ratings have actually tightened the ad market because the networks have had to offer "make goods" of ad time to compensate for low audience delivery. That means that if ratings nose dive under a prolonged strike scenario there is no obvious way for the networks to make good other than cut prices dramatically.
The financial impact of a prolonged strike on the networks is unlikely to hurt earnings at the networks owners because the cost of the replacement programming is going to be very cheap. However, the big picture risks of an accelerated decline in audience ratings and the shifting ad currency have serious long-term implications that could impact valuation of network assets. That said, CNBC is way overdoing the coverage of the strike relative to the stock price risks for the companies.
CBS is by far most exposed as the network is the primary driver of its profits. Disney and News Corporation have less to worry about given their broad base of entertainment assets. I remain bearish on CBS which also has serious ratings issues that put hundreds of million of operating income at stake. I still like News Corp and Disney which have plenty of growth levers away from network TV to drive operating income.
December 10, 2007 - UBS Media Conference Recap:
I'm back in Chicago and have had some time to digest the UBS Media and Communications Conference. Below are brief comments from every presentation I attended. As you read, keep in mind that I found the general background of the conference to be cautious. This impression is based mostly on the uncertain advertising environment and the decelerating growth in the cable sector. Don’t confuse my comments with a bearish view, however. Media companies are in pretty good shape to weather the storm due to strength in margins and cash flow, and new growth initiatives. The group as a whole may not work well for a few more quarters but there is enough good for individual ideas to be money makers.
The following comments are meant to provide my immediate impression of the presentations with an emphasis on stock price performance in 2008 weighted to the first half of the year. I am trying to find the best media stocks to own not necessarily big absolute price gainers. The comments are listed in the order of the presentations I attended....
December 07, 2007 - Morgan Stanley Upgrades Comcast:
Morgan Stanley, which was early, aggressive, and correct with a bearish outlook for cable stocks upgraded its industry outlook yesterday to attractive. Comcast was raised from a sell to a buy. Here is a summary from the morning notes on Comcast: "We base our upgrade on three factors. First, concerns over a maturing product set have shifted to fears of an all-out price war, which we believe is unlikely, and multiples have compressed to historical lows. Second, consensus has moved to our camp of higher capital spending related to competing on high-def with satellite, and we see lower risk of capex misses going forward. Finally, voice share gains, HD/DVR deployments, and increasing data speeds should all help support 15-20% normalized EPS/FCF growth – compelling growth at this historical low multiple."
Morgan's upgrade is consistent with my post from yesterday: fundamentals for cable are actually pretty good with double upper single digit to low double digit revenue and EBITDA growth and a probable resumption of free cash flow growth in 2008....
December 06, 2007 - December 2007 Model Signals:
There were no changes to Northlake's Market Cap and Style models for December. The signals remain on large cap and growth. As a result, client portfolios continue to own the S&P 500 (SPY) and the Russell 1000 Growth (IWD).
It looks like we could get a move in the Market Cap signal fairly soon, however. The model reading is on the very cusp of switching to a mid cap signal. If that occurs, positions in SPY will be sold in favor of the S&P 400 Mid Cap (MDY). For December five of the ten indicators in the model favor large cap and five favor small cap, a shift of two indicators in favor of small caps. Falling rates and widening yield spreads led to shifts this month. Lower rates definitely favor small caps which presumably have less access to capital. The credit crisis has widened spreads enough that they are now in a mode where in the past small caps have outperformed. These two indicators join bearish market sentiment, the steepening yield curve, and low consumer confidence in the camp favoring small caps. As a reminder, small caps often perform best when sentiment and the economy look worse. The model attempts to look ahead toward the next big move and when things look bleak the next big move is often up which creates an environment where the added volatility of small caps works in favor of investors.
The Style model, on the other hand, looks unlikely to make a shift away from growth any time soon. The model is still firmly in growth mode reflecting sluggish economic growth where unit growth stories are more valuable to investors. For December, two of the underlying indicators moved from value to growth mode: measure of relative strength for consumer stocks and the return of the yield curve to a normal upward sloping shape.
I find the current model signals consistent with my own views of how to invest in a weakening economy. My big worry about the current signals is that a countertrend rally in favor of small caps and value (financials are a big component of value indices) seems overdue.
December 06, 2007 - I Was Wrong On Comcast:
I enjoyed going on TV with my buddy Cody Willard. Unfortunately, since I debated Comcast with Cody and took the bull side, I'll probably never get invited back!
Not much I can say at this point other than admit the bullish stance I took in July when the stock was $27 was wrong. Nevertheless, I still think that the penalty the stock is paying is far worse than the reality of the company's fundamentals.
However, revenue and EBITDA growth are decelerating and, at least for 2007, free cash flow is down. Competition is rising, and cable bills are more sensitive to the economy than was previously thought. Against this backdrop, investor sentiment toward cable is not likely to improve. As a result, I don't expect much of a recovery in the shares even though I see them as oversold.
What will it take to for the shares to make a meaningful comeback? The first step is decent guidance for 2008. Management needs to guide revenue growth to at least 9%-10% with margin expansion pushing EBITDA growth to 11%-12%. More importantly, capital spending must be no worse than flat with the new elevated 2007 level. The most devastating part of company's new guidance is that they brought down the number of revenue generating units they will install (an RGU is a subscription to video, broadband or telephony) in 2007 while increasing capital spending. Comcast had assured us that as growth gradually slowed, capital spending would stabilize or fall, thus providing a big boost to free cash flow....
November 29, 2007 - Rogers Hit Hard:
The spectrum auction and build out rules in Canada are more favorable than expected for new entrants. As a result, Rogers Communications are trading down by 10% today. I have already seen two downgrades of the shares. Even with more favorable provisions for new entrants into the Canadian wireless market, I suspect that any impact on Rogers financial performance will be minimal for at least 2008 and 2009. However, the sharply negative tone of analyst and press coverage is likely to weigh heavily on sentiment toward the shares. It is also possible that Rogers will play it safe with its free cash flow and balance in order to protect its financial capacity against new competition. This could lead to a modest disappointment when the company announces its shareholder value plans next month. Rogers may also issue more conservative than expected 2008 subscriber and financial guidance in early 2008. Finally, even though quarterly earnings are likely to continue strong, the analysis will be more skeptical so even a minor issue will hurt sentiment toward the shares.
After saying all that, I am not ready to sell the shares, which even after today's drubbing will be up 50% this year. I'll be visiting with Rogers next week when they present at the UBS Media conference in NY. I'd like to hear their reaction and the tone of the Q&A portion of their presentation. I think it makes sense to let the dust clear before making a final decision.....
November 25, 2007 - Weekend Box Office Turns Up:
A strong opening for Disney's Enchanted, a surprisingly good opening for This Christmas, and decent showing for another 6 to 8 films led the box office to an up weekend following two straight negative weekend comparisons. The top 12 films pulled in 4.4% more than a year ago according to BoxOfficeMojo.com. The depth of films finding an audience is important given the poor box office performance so far this quarter with the total take down 10%. The next two weekends represent the easiest comparisons of the quarter so if the quarter is going to turn around the time is now. Besides the depth of films finding an audience this weekend, the release of The Golden Compass on December 7th should boost comparisons.
Enchanted is the first film opening on Thanksgiving weekend to win the holiday box office in five years. Hollywood has been opening anticipated Thanksgiving blockbusters on the weekend prior to the holiday over the past five years. Disney chose to buck the trend and used its brand and a well-reviewed film with appeal to a broad demographic to capture the to spot and bring in $50 million over the five day holiday weekend. Enchanted continues an amazing hot streak for Disney content whether it is films (Pirates of the Caribbean, Wild Hogs, Pixar films, The Game Plan) or Disney Channel Films and TV shows (Hannah Montana, High School Musical). Enchanted could prove particularly rewarding as it will transfer to theme parks, consumer products, Broadway, and sequels.
The other big story form the weekend is the performance of 3D and Digital screens showing Beowulf. FantasyMoguls.com is claiming that fully half of the $56 million gross for the film so far has been in non-traditional theaters. Theatre companies are currently upgrading many screens for 3D and several studios including Dreamworks Animation are planning 3D releases in the next few years. Theatres are able to charge a premium ticket price for 3D and analysts find the economics of upgrading screens attractive. In an industry lacking organic growth in ticket sales and facing secular challenges from digital downloads and home theatres, 3D is a potential positive. I am already seeing bullish comments on 3D from theatre company analysts and expect this to be a higher profile theme for the group in 2008.
Northlake remains long Disney, partially due to its content hot streak. Northlake also remains long Regal Entertainment, which currently yields a very safe 6.2%. The rally in the bond market makes this yield very attractive and could setup a trading opportunity if the box office recovers in the next two weeks.
November 23, 2007 - Verizon Raises Prices:
Dow Jones ran a news story on Tuesday noting that Verizon was raising the price of its FiOS TV service purchased outside the bundle by 12% for 2008. This is the second consecutive year that Verizon has raised FiOS TV prices.
Wait a second. I thought that FiOS TV was going to set off a price war with cable. At least that is what you might think if you looked at a chart of Comcast's stock price. The reality is that pricing for all parts of the triple play bundle has been very stable. Verizon is just facing its own reality - it can't buy programming at the same price as Comcast, DirecTV, et al because it doesn't qualify for subscriber discounts while it faces the same programming price hikes from cable network providers. And just in case he missed it, here's a shout out to FCC Chairman Martin. It isn't just the cable industry that is raising prices of multichannel video subscriptions. Lack of competition is not the issue. Multichannel video distributors are just passing through the annual increases charged to them by the likes of CNN, ESPN, and HGTV.
Cable still has serious issues with investors (though not nearly so serious with fundamentals) but after a summer and fall of discontent and bad news this is the first positive datapoint. Now if Brian Roberts would just step up his share buyback and show the same confidence with his actions that he expresses with his words.
November 21, 2007 - Holiday DVD Sales Could Disappoint Investors:
A significant risk for fourth-quarter earnings for the major entertainment conglomerates is an extremely crowded DVD release schedule. The risk is heightened by generally weak DVD sales for the past 18 months.
Early indications from the launch of several blockbuster movie titles are not promising, so investors should keep an eye on Disney (DIS) , DreamWorks Animation (DWA) , News Corp. (NWS) , Time Warner (TWX) and Viacom (VIA) for possible trouble.
DVD sales are critically important to the major movie studios. I have seen several analyst models in which the operating margin on DVD revenue is projected at more than 40%. Even for companies the size of Disney or Time Warner, the numbers are meaningful.
For example, a title such as Ratatouille might sell 25 million DVDs worldwide in its first release. At a wholesale price of $15, total revenue could be $375 million, and operating income could be north of $150 million. During the December quarter alone, Disney might sell 18 million units, generating operating income of over $100 million, which represents over 5% of projected operating income for the quarter.
During this holiday season, there are 16 movie titles set for DVD release that grossed over $100 million at the domestic box office. Several mega hits are for sale, including Ratatouille, Pirates 3, Shrek 3, Transformers, Spiderman 3 and Harry Potter 5. Crowding out is a definite risk, but it would not be so worrisome if DVD sales as a category were not already weak. According to Jessica Reif of Merrill Lynch, year-to-date DVD sales are down midsingle digits, the second consecutive year of flat to negative growth.
DVD sales peaked in 2005-2006 as penetration of DVD players into U.S. households reached saturation. For many years, DVD sales boomed, riding the wave of more players in more homes and the building of personal DVD libraries. A huge number of releases, including TV shows and movie catalogues, also boosted consumer interest and demand.
Growth ground to a halt as penetration of DVD players rose and early adopters finished building their initial libraries. Late adopters of DVD players naturally bought fewer DVDs. Adding to current sluggish sales trends is confusion over next-generation DVD technology (HD or Blu-ray) and initial developments in digital downloads.
Several Web sites track DVD sales and releases, including the-numbers.com and BoxOfficeMojo.com. According to sales data from early holiday season releases, the outlook for the rest of the quarter looks mixed.
Transformers (Viacom) got things off to a good start, selling over 8 million units so far, including a debut week of more than 5 million. Sales were not nearly so strong for Spider-Man 3 (Sony) or Shrek 3 (DreamWorks Animation). Spider-Man sold 2.4 million in its opening week and is at 3.4 million after two weeks in release. Ratatouille was the next major release, and it sold over 3.8 million units in its first week, a level variously described in trade publications as "very strong" and "as expected."
Shrek 3 was just released last week, so early sales have not been formally reported, but according to an article on VideoBusiness.com, sales are close to the Spider-Man level. This would translate to a disappointing quarter unless sales pick up considerably, given analyst estimates for 15 million to 20 million units.
Here is a brief look at the outlook for major studios this holiday season. Keep in mind that the holiday season is just starting, so it might be early to draw conclusions. Nonetheless, there is reason to be nervous based on early trends....
November 20, 2007 - AT&T-Echostar Has Implications For Comcast:
With an AT&T acquisition of Echostar apparently imminent, I want to reiterate that while in the short-term investors will see the deal as negative for cable, in the long run the outcome may not be nearly as dire feared.
On its most recent conference call, Comcast specifically pointed to AT&T discounting using the satellite bundle (Dish or DirecTV + AT&T wireline + AT&T DSL) as a cause of lower than expected subscriber additions. In fact, Comcast said that the wireline TV offerings form AT&T (U-Verse) and Verizon (FiOS) had not had a material impact. If this is to be believed, then in the short-term an acquisition of Echostar by AT&T looks ominous for cable. AT&T has shown a willingness to discount aggressively and with Echostar in house will be able to more easily execute the strategy nationally. Cable stocks were down 2-3% yesterday and I suspect that this is the reasoning.
While I can't argue with this near-term reaction, I think the long-term is a little trickier. By using Echostar as its primary multichannel TV offering, AT&T is foregoing massive cost synergies available to cable and Verizon which are able to offer the triple play across a single network. Maintenance, billing, and customer service will al be less efficient for AT&T than its peers. This should mean that AT&T's discounting strategy has a limited life. The high cost producer can not maintain the lowest price for long.
An AT&T-Echostar tie-up will surely sour the mood of potential cable investors even further. But if it hastens the day when a stable oligopoly re-emerges it might not be as bad a thing as feared.
November 15, 2007 - Buying More Endeavor/American Apparel:
With all the chatter about Lululemon Athletica (LULU) following the New York Times expose' on the seaweed or lack thereof in certain items the company sells, I thought it might be a good time to provide an overview of Northlake's only long position that is not involved in media and telecom.
Endeavor Acquisition Corporation (EDA) is a blank-check company that went public in late 2005 by raising $130 million. Blank check companies go public and then look to make acquisitions. One year ago EDA announced that it had found its acquisition target. American Apparel is the choice. And it's a good one. Recent SEC filings indicate the deal is on track to close in mid-December. At that time, EDA will change its name to American Apparel, Inc. I am not yet sure what the ticker symbol will be but with apologies to Alcoa, for the rest of this column I will refer to American Apparel as AA.
EDA/AA is not a widely followed stock. Nevertheless, I have read several research reports about the company. As discussed later, I think the lack of Wall Street sponsorship is a positive. The reason I mention this now is that I have recently gained a great deal of insight into EDA from a RealMoney.com subscriber. Special thanks to SG, a full-time investor who clearly knows his stuff.
I bought Northlake's initial position in EDA immediately following the announcement of the AA acquisition last December. I added the stock to new accounts during 2007 but it was only in the last few days that I increased client positions across the board. The analysis presented in this column is something I have believed in all year but I was hesitant to add to Northlake's position until I had a clear timeline for closure of the deal. That news was announced last week along with better than expected operating and financial results and guidance from AA.
My target on EDA/AA is a minimum of $15-20 based on my initial expectations for 2008, where I expect revenues to rise 30% and EBITDA to grow by 34%. This target assumes EDA/AA will trade at a similar multiple of sales, EBITDA, and/or EPS to other high growth specialty apparel retailers such as Urban Outfitters (URBN), Lululemon Athletica (LULU), Zumiez (ZUMZ), and Volcom (VLCM). I see URBN as the best comparable given a similar strategy of going to market as a progressive company that targets a broad demographic range....
November 12, 2007 - Box Office Struggles Again:
The winning streak at the weekend box office didn’t last long. After last weekend saw a string of six straight down weekends snapped, this weekend was back in negative territory. A disappointing opening for Fred Claus from Time Warner's Warner Brothers studios was the primary culprit in an 11% year-over-year decline for the top 12 movies. Most observers had pegged Fred Claus in the $28-30 million range while the current estimate for the weekend is $19 million. This lagging performance offset good holds for last weeks top two films, American Gangster and Bee Movie. Dan In Real Life also had a good hold, dropping just 25%; however, this film is heading toward a $40-45 million gross, great relative to expectations but not big enough to drive overall box office results.
Bee Movie fell 32% and took the top ranking with $26 million. American Gangster dropped 44% and came in second with $34 million. Investors may look favorably on Dreamworks Animation (DWA) since the film was not expected to win the top spot this weekend. Certainly, the performance is good news for DWA but the second weekend 32% decline is actually slightly larger than Over The Hedge, Tarzan, and Chicken Little, three films with similar opening weekend grosses. In addition, these three films ended with a total domestic gross ranging from $135 million to $171 million. Barring unusually good legs, Bee Movie will be lucky to reach the top end of this range. Most analysts had built in a domestic gross of up to $200 million in their models. A $20-30 million shortfall may not seem like much but when you multiply through lower grosses in the international, home video, and TV rights windows it could lead to a meaningful shortfall for DWA relative to estimates in 2008. Unit volumes of the Shrek 3 this quarter are more important to DWA's financial results and share price performance but the fact that Bee Movie looks like it will the end of expectations at best leaves little margin for error for DWA.
There are only a few other items of note in this weekend's box office....
November 09, 2007 - Routinely Good Quarter for Disney:
Disney reported 4Q07 EPS of 42 cents adjusted for a tax benefit compared to consensus of 41 cents. Revenues of $8.93 billion matched the $8.98 million consensus. Comparing the segment numbers to my spreadsheet shows a remarkable closeness. This is actually one the things I like about Disney: the company is very tightly managed and predictable (leaving aside the volatility in movie and TV production). Strong and consistent execution is especially valuable with concerns over consumer spending rising. It is also helpful to valuation of the shares. Disney trades inline with peers News Corporation and Viacom. I think the strength of management and the company's franchises are deserving of a premium valuation.
The quarter and management commentary will not do much to quell the debate over how fast Disney will grow in FY08. In general, management sounded confident about the December quarter with theme park attendance and occupancy trends looking up mid-single digits and scatter market advertising up "strong" double digits at ABC – I'd interpret that as over 20% --- and double digit at ESPN. The company has a good DVD lineup with Pirates 3, Ratatouille, and High School Musical 2.
The only issue I see in the 4Q report is the slight contraction in theme park margins....
November 09, 2007 - American Apparel/Endeavor Delivers Good News All Around:
In the midst of the carnage yesterday, Northlake had one winner: Endeavor Acquisition Corporation (EDA). EDA is in the final stages of completing its acquisition of privately held American Apparel, a very hot teen retailer. The shares rose over 5% on heavy volume in response to a very positive press release.
EDA announced that that it will file the definitive proxy to complete the acquisition by the end of November. A shareholder vote is scheduled for December 12th. These items while routine are significant because EDA's status as a blank check company means that it has to complete the deal by mid-December or return its assets to shareholders. Those assets are worth just $7 or $8.
More significantly for the long-term prospects of the company, EDA announced that AA's 3Q same store sales rose 27%. This is on top of a 24% gain in 2Q. Furthermore, EDA stated that AA has already produced over $40 million in EBITDA through nine months and would significantly exceed previous full year EBITDA guidance of $40 million.
As a result of AA's outstanding financial performance this year, the terms of the acquisition were amended to give AA's founder and CEO, Dov Charney, more shares. Additional shares were also allocated for AA employees while Charney's partner will now be bought for cash by EDA instead of Charney himself.
I believe that AA's operating and financial momentum will prove sustainable through at least 2008. If so, there is substantial upside to the shares as the EBITDA multiple is just under 13 on my 2008 estimate. For the hot teen retailer of the moment this is a cheap valuation. Previous hot retailers have traded at 15-20 times EBITDA. 15 times my 2008 estimate gets EDA to $16, 25% higher. Personally, I think this target will prove conservative. To back up my optimism I was bidding for more stock all day yesterday but I didn't buy any as I kept my bid too low given the crappy stock market action.
November 08, 2007 - Box Office Finally Revives:
Last weekend, the domestic box office broke a long slump with receipts rising for the first time in six weeks. American Gangster provided the oomph bringing in a better than expected $43.5 million. Bee Movie also helped with a gross of $38 million although the figure was below expectations of $40-45 million. These two films brought in 78% more than the top two films on the same weekend a year ago but lack of depth at the box office, indicative of weak performances for most films so far this fall, limited the overall weekend gain to just 3%.
Quarter to date the box office is down about 8% but summer strength leaves the year date gain north of 6%. This coming weekend could be a very large gain as last year saw just one new release that did not produce a big number. With the second weekend of American Gangster and Bee Movie and high expectations for family comedy Fred Clause, a significant dent in the negative quarterly comparison is in order. The pickup in weekend comps should generally continue through year end which ought to be enough to keep Regal Entertainment shares and their 5%+ current yield as a top pick in an uncertain market.
The other weekend box office news continues to be generated by Disney's Ratatouille which again won the overseas box office battle. Ratatouille brought in $15 million raising its international gross to $371 million and its total gross to $576 million. Both figures are significantly better than expected. Ratatouille has the lowest domestic gross of the last six Pixar films but it looks like it will pass The Incredibles to become the #2 Pixar film in international markets trailing only Finding Nemo. On a worldwide basis, Ratatouille will finish third among all Pixar films. This is all good news for Disney which should report a strong overall quarter after the close on Thursday.
November 08, 2007 - Disney 4Q07 Earnings Preview:
Disney is expected to report strong 4Q07 financial performance capping another great year. For 4Q, consensus calls for EPS of 42 cents, up 17%, on revenues of $9 billion, up 2%. Operating income, a key metric for Disney investors, is expected to rise 14%. Estimates are unchanged since the last quarterly report although the tone of commentary about the quarter and 2008 has improved.
Assuming the quarter contain minimal downside surprises, a good assumption in my opinion, the response in Disney shares will be all about the 21008 outlook. Disney is wrapping up its fifth consecutive year of double digit operating income growth. With stiff comparisons against 24% operating income growth in 2007 and Disney's well-chronicled exposure to consumer spending via theme parks and advertising, there is a lot of concern about how quickly growth will decelerate in 2008. Current EPS estimates show an 11% growth expectation in 2008. That is good but probably not enough to drive the shares significantly higher. However, indications form management that 2008 is shaping up better than expected, a real possibility in my opinion, would allow Disney shares to break to new highs if the market is cooperative. I am very comfortable being long heading into the report and expect to remain long for at least another quarter or two.
Here is a look at anticipated segment results for 4Q07 and FY08....
November 05, 2007 - November 2007 Model Signals:
There were no changes to the signals from Northlake's Market Cap and Style models for November. Large cap and growth remain favored over small/mid cap and value. There was some shift in favor of small/mid cap and value in the underlying indicators, however. I think the large cap growth trend is likely to stay in place for several more quarters but a temporary shift toward small cap and value would not surprising given the outperformance for large cap and growth over the past several months. Since the July 19th S&P 500 high, the S&P 500 is down just 3% compared to a fall of over 6% for the Russell 2000 and a 4% decline for the S&P 400 Mid Cap. In the style arena, the model shifted from value to growth on June 1. Since that time, the Russell 1000 Growth ETF is up 5%, while the Russell 1000 Value ETF is down almost 5%! That is basically technology stocks over financial stocks.
In the Market Cap model for August, all ten indicators were flashing growth. Four of the ten indicators now favor small cap. The shift has occurred in indicators which consider the shape of the yield curve, sentiment, breadth, and consumer confidence. In general, the indicators are picking up extreme readings that suggest a reversal could be at hand. This contrarian call would favor small caps.
The Style model is also drifting away from its long standing signal. In this case, the severely lagging performance of value over the past few months is driving a weakening of the growth signal.
I'd be surprised if either model moves enough this month to flash a new signal for December. January, on the other hand could see a shift to mid cap and value if current trends continue. If and when the signals change, I'll happily follow along. No reason to use a model like this if you are going to second guess it and neither model has given me any reason to second guess for the last three years.
As always thanks to Ned Davis Research for the initial development and ongoing maintenance of these models.
November 02, 2007 - Rogers Communications Reports Another Good Quarter:
Rogers Communications reported another excellent quarter with revenues, EBITDA, EPS, and free cash flow rising 13%, 26%, 61%, and 91%, respectively. These figures were at the high end of analyst estimates with the Cable and Media segments providing material upside to EBITDA. EBITDA and profit margins at wireless were a little lower than expected but that was caused almost entirely by much better than expected subscriber growth. I'll gladly trade a few million dollars in EBITDA for an extra 50,000 subscribers relative to estimates of 150,000 subscriber additions. The results helped RCI shares hold up reasonably well as the market got slaughtered on Thursday. By mid-day Friday, the shares were rallying against a still weak market, up almost $2 and hitting a new all-time high. I think the positive reaction is a correct interpretation of the results and more upside remains.
With three quarters under their belts and having just completed a better than expected quarter, RCI management stated that they have a "generally positive bias toward exceeding the higher ends of certain guidance." Specifically noted were EBITDA at Wireless, Cable, and on a consolidated basis, net subscribers at Wireless, and consolidated free cash flow. It is quite clear that RCI is sustaining momentum in its wireless and cable businesses at the current very high level. This bodes well for 2008 guidance which will begin to be provided in January when subscriber growth goals are announced.
Also on the agenda for sometime in the December through February time frame is an update on how the company plans to use its suddenly flowing free cash flow. On the earnings conference call, Ted Rogers ruled out large acquisitions. I expect some combination of higher annual dividends, special dividends, share buybacks and additional investments in its businesses. One thing I like about RCI is that they always talk about how much more work they have to do to prepare their businesses for competition. There is plenty of free cash flow to go around and the eventual announcement should be a positive for the shares....
November 02, 2007 - Good News At CETV Keeps On Flowing:
Given the proximity of Central European Media Enterprises (CETV) annual analyst meeting on October 19th to the third quarter earnings report, I figured there would not be much new news or stock reaction to the results. Ooops. As it turns out, CETV reported better than expected results with all six countries where its own TV properties contributing to the upside. The shares responded and traded up $9 following the pre-open earnings report on Thursday.
At its analyst meeting CETV provided detailed, country-by-country guidance for 2007. Given that we now have three quarters of results in the bank, it is quite easy to see the implied guidance for 4Q. And guess what? It looks quite conservative. Based on year-to-date trends, favorable currency exchange, and knowledge of advertising in Central and Eastern Europe, I think the implied fourth quarter guidance is particularly low in Romania and Slovakia and probably has upside in the Czech Republic.
Heading to the analyst meeting I expected guidance to go up, led by these three countries. Instead, management confirmed my estimates (which were above many analysts) and dramatically boosted guidance in Ukraine which had been cut earlier in the year due to weak ratings and uncertainty over the level of political spending. I now think my initial intuition was correct and we will see results at or above the high end of guidance when the company reports its full year results....
October 29, 2007 - Box Office Strength Flows Through Regal's Results:
Not much to say about Regal Entertainment's third quarter earnings report. Given the well-chronicled strength in the box office, Regal produced very good results as anticipated. Occasionally, Regal and theatre operators are unable to translate box office strength to earnings. This was not the case in the third quarter for Regal.
The company is optimistic that earnings and box office strength will continue in the fourth quarter even thought the box office is performing poorly in October. The big releases this year are all in November and December. Last year's holiday product generally performed poorly so comparisons are easy. For example, in 2006, weekly box office totals were in the $125-150 million range until early November. Blockbuster releases during holiday periods led to several weeks of over $200 million and one of over $300 million for the rest of the year. In other words, if comparisons are favorable for the holiday films the lagging box office so far in the fourth quarter can quickly turn to positive comparisons.
I looked over a few analyst models and the consensus estimates. Box office admissions revenue in the fourth quarter is forecast to be flat to down slightly and overall revenue growth, which includes concessions and in theatre advertising, is expected to be flat to up slightly. I think the bar is set appropriately low such that current box office weakness will not be an issue for the stock....
October 29, 2007 - Another Blowout Quarter For Apple:
Apple reported another great with upside to Mac unit volumes and operating margins producing much better than expected EPS of $1.01. Numbers had been rising recently such that analysts were looking for mid to upper 80 cents. Even more impressive than the September quarter results was the fact that Apple provided December quarter guidance which slightly exceeded Wall Street forecasts. Heading into the report, the consensus estimate for the December quarter was $1.39. Apple guided to $1.42. If memory serves, this is only the second time in the last three years where Apple provided guidance at or above Wall Street forecasts. Given the company guides conservatively, the forecast implies another very strong quarter.
The shares now trade on 2008 and 2009 prospects. For 2008, the current consensus is $5.00 with many estimates in the $5.15-$5.20 range. For 2009, the forecast is for over $6.00. Even taking into account over $15 per share in cash on Apple's balance sheet, the stock carries a high valuation with a P-E ratio of 36 times 2008 estimated earnings. Apple's recent huge upside surprises probably mean that 2008 estimates are way too low. This is almost certainly the case if iPhone sales meet company targets of 10 million units in 2008. The iPhone is very profitable thanks to revenue sharing on monthly bills of cell phone subscribers. Thus, despite the momentum in Mac sales, the refreshed iPod lineup, and likely continued significant share gains in Macs, the iPhone has become more important as a driver of Apple shares now that they have moved up to new highs in the $180s.....
October 26, 2007 - Central European Media Enterprises Meeting Recap:
The CETV analyst meeting that brought me to Bucharest, Romania, wrapped up just before the open of NY trading last Thursday. All is well. The company raised its 2007 guidance as I had expected in the preview of the meeting I posted earlier this week. Revenue guidance is now $795-820 million up from $764-798 million. EBITDA guidance is now $285-305 million up from $272-298 million.
As is often the case with CETV the composition of the results is somewhat different than I expected. The big upside in the new guidance is in Ukraine where third quarter political advertising and an uptick in ratings so far this fall now has EBITDA in a broad range of $22-35 million for the year. CETV has lost money in Ukraine year to date and had lowered guidance earlier this year when they were unsure of a turnaround. My spreadsheet had breakeven for 2007 heading into the meeting. Czech Republic, Romania, Slovenia, Croatia, and Slovakia all remain on track with my original expectations. I'd bet CETV reaches the upper of its guidance when all is said and done in 2007.
I also heard nothing to change my expectation for a couple of years of 20-30% growth off the 2007 base. If those numbers are achieved, plenty of upside remains.
Just for fun CETV showed a chart of its stock against GOOG indexed to just before GOOG's IPO. Pull it up. It made me not feel so bad about missing GOOG, the greatest media/advertising play on our side of the Atlantic. At least I got the one over in Central Europe.
October 26, 2007 - NII Holdings Gets Abused:
NII Holdings, (NIHD) had a rough day yesterday. Following its 3Q earnings report and conference call before the open, the shares fell 20%. The loss was on top of a decline of 15% already this month. Heading into the report the shares had been under pressure due to worries about growth in Mexico, the company's largest market. Fears about competition and the back-to-back-to-back hurricanes that hit in August had investors anticipating a miss. Mexico is critically important to NIHD shares because it accounts for 55% of revenue and 63% of EBITDA so far in 2007. Furthermore, the company just completed the build out of its network in Mexico and estimates for 2H07 and 2008 contain a big benefit from accelerated growth in revenue and subscribers and expanding margins.
NIHD reported fine headline numbers. Revenues of $853 million and EBITDA of $235 million both slightly beat estimates. Adjusted EPS of 61 cents beat consensus. Subscribers grew 38%, revenue grew 39%, EBITDA, grew 49%, and net income grew 58%.
So what the hell happened? First, net subscriber additions in Mexico were just 140,000, about 20,000 under consensus. Competition and weather were said to be equal culprits. Analysts delved deeply into the competition angle and are clearly worried about its intensity. Second, cost per gross subscriber addition in Brazil rose year-over-year. Brazil is NIHD's second largest market and is on the same path as Mexico with a plan to build out the network over the next few years currently in place. Subscriber, revenue, and operating income results in Brazil were at least as expected but that did not contain worries that Brazil is also becoming more competitive.
While the stock got murdered, management was firmly upbeat about its prospects in Mexico and Brazil....
October 25, 2007 - More Bad News On Comcast:
Comcast reported disappointing 3Q07 results. More importantly, the tone of management comments about a number of issues was quite cautious and does not support their words supporting sustained double digit growth in revenue, EBITDA, and free cash flow. This quarter will further collapse the multiple and the shares are lower. Given the likely path of company's financial performance over the next three to five years the stock is way too cheap. However, management is not providing investors with the confidence necessary for them to pay for the growth. This situation will not be resolved in the short-term. I am re-evaluating the position. Essentially the decision is whether to show patience since upside of 30% exists in the shares. But we probably will be waiting several months at least for that to get started and Comcast is very widely owned so there could be more downside near-term as everyone throws in the towel.
Comcast reported cable segment revenue and EBITDA of $7.4 billion and $2.983 billion, respectively. These figures matched estimates as did margin expansion to 40.2%. Unfortunately, all the underlying metrics slightly missed targets. Comcast lost 65,000 basic subs vs. expectations of 30,000-40,000. Digital subs of 489,000 were about 15,000 light. High speed data adds of 450,000 were as much as 50,000 light. Of notable concern, telephony subs of 662,000 missed estimates of 700,000 to 725,000 and were down sequentially for the first time.
Management noted increased competition and marginal impacts from a slowing economy. They indicated they would respond by sharpening price points and introducing new product offerings beyond the focus on the triple play. Satellite and Telcos are using more aggressive pricing on one and two product offerings as well as tiering of high speed data. Comcast has not responded until now....
October 15, 2007 - Central European Media Enterprises Gains Option To Increase Ownership In Ukraine:
The column I posted last week providing an overview of Central European Media Enterprises already requires updating. In it I mention that CETV was likely to increase its 60% ownership of Studio 1+1, the #2 TV station in Ukraine, within the next year. As it turns out late last week, the company took a major step toward completing this important strategic goal.
After the close on Thursday, the company announced that Igor Kolomoisky, CETV's newest Board member and one of the richest men in Ukraine, had secured a "valid right" to purchase an additional 21%. Upon Kolomoisky's completion of the acquisition, an agreement is in place for CETV to purchase the stake for an amount not to exceed $140 million. Although there is no guarantee Kolomoisky's right will turn into an acquired asset, based on the company's past history of gaining incremental ownership in its operations, I expect the two-part transaction to be completed reasonably soon.
This announcement is very positive for CETV for two reasons. First, moving the stake up to 81%, along with September's announcement that the company had secured control of the license, should allow CETV to exercise greater management control over 1+1. When ownership stakes turned into control in other countries, most recently Slovakia, revenue and EBITDA growth accelerated sharply....
October 11, 2007 - An Overview of Central European Media Enterpises:
Since I'll be spending most of next week in Bucharest, Romania at the annual analyst meeting for Central European Media Enterprises (CETV), I thought an overview of this long-time favorite was in order. CETV is currently the largest position in Northlake client accounts and my personal accounts.
CETV is the largest broadcaster in Central and Eastern Europe. The company owns leading TV stations in the Czech Republic, Romania, Slovenia, Slovakia, Ukraine, and Croatia. In 2007, I expect the Czech Republic to produce 36% of revenue, followed by Romania at 26%, Slovakia at 14%, Ukraine at 13%, Slovenia at 8%, and Croatia at 3%.
The investment case is simple: CETV is a pure play on the emerging consumer economies of Central and Eastern Europe. CETV is a US company using US GAAP accounting. Revenue, cash flow, and earnings are growing rapidly. Most importantly, management has consistently delivered on its promises to investors whether they are producing upside earnings surprises or meeting strategic goals for developing and enhancing the value of the company.
CETV is one of the fastest growing media companies in the world capitalizing on booming economies and advertising growth throughout Central and Eastern Europe. GDP in its markets is growing from mid-to-upper single digits, double or triple the rate of growth in Western Europe or the US. TV advertising growth in the region has been 20-30%, driven by high levels of foreign direct investment and rapidly emerging consumer economies. Management has recently been noting how advertising categories like consumer staples are still growth categories whereas in Western Europe these are considered mature. Further boosting the company's growth profile is that the countries it operates in have per capita advertising spending at just 1/3rd the level of the entire Central European region and 1/6th the level of Eastern Europe. This gap is already narrowing.
CETV set a new all-time high on Thursday. The shares are up 45% this year and have tripled since early 2005. The market cap is $4.5 billion. Net debt at June 30th was $435 million. The company is free cash flow positive and produces significant earnings per share. Due to currency fluctuations, EPS are volatile and less useful as a valuation tool.
Like most media companies, total enterprise value to EBITDA is the most widely used valuation metric. The shares currently trade at 15.6 times my 2007 estimate of $284 million in broadcast EBITDA and 12.8 times my 2008 EBITDA estimate of $364 million. I ignore corporate overhead and new media investments but value Croatia at $0, a very conservative assumption.
My 2007 estimate is at the low end of management guidance. I think there is a decent chance that the company will raise the low end of its guidance range at next week's analyst meeting due to favorable currency, strength in the Czech Republic, Slovakia, and Romania, and signs of stabilization in Ukraine. Despite the huge move in the shares, I think plenty of upside remains. My current target is $127 based on 15 times my 2008 estimate. Assuming the company sustains mid-teens EBITDA growth for a few years beyond 2008, something I believe is highly likely, the shares could double again within four years....
October 09, 2007 - Pirates, Cars, and Rats:
While preparing my fourth quarter box office preview column last week, I came across some interesting and positive data concerning Disney. One of the worries for Disney this year has been the tough comparison at the movie studio due to the phenomenal success last year of Pirates of the Caribbean: Dead man’s Chest and Cars. This year, Disney released Pirates of the Caribbean: At World’s End and Ratatouille. Domestically, both of the 2007 releases significantly trailed their 2007 counterparts. Pirates 2007 matched Pirates 2006 overseas, leaving it $100 million short. This is material difference but given the vagaries of studio accounting and the fact that the two films were made at the same time, I would be shocked if Disney even mentioned any differences in the two films profitability on its upcoming quarterly conference call.
The Cars vs. Ratatouille comparison is trickier. Cars grossed $244 million in the US vs. $203 million for Ratatouille. Overseas, however, Ratatouille looks like it will easily exceed Cars, thanks especially to fantastic grosses in France. In fact, thorough the end of September, Ratatouille had grossed $223 million abroad, $6 million more than Cars. Furthermore, Ratatouille had yet to open in the United Kingdom, Germany, Italy, Greece, or Denmark. These countries produced a combined gross of $67 million for Cars, suggesting that the final worldwide tally for Ratatouille will exceed Cars....
October 05, 2007 - Trimming The Tree of Apple Profits:
With the market ramping and Apple and other tech stocks leading the way, I sold a portion of Apple in many client accounts on Friday as it crossed $160. I completed sales only in accounts where the position size was pushing towards 4%.
I have a detailed spreadsheet on Apple and no matter how much I tweak it, I have a hard time getting to a target price too much above $160 based on assumptions about sales, earnings, and cash flow that I am willing to use right now. Another way of saying this is that Apple has reached my stretch target based upon my current estimates. When that occurs, my portfolio management discipline is to trim the position and capture some profits. Clients who have been with Northlake since early to mid-2005 will find this strategy to be familiar. In fact, for clients where I was buying Apple in the $30 in early 2005 this marks the third or fourth time I have trimmed it. Sure, with the benefit of hindsight I regret trimming it at $48, $71, and $110. However, there are no sure things on Wall Street and it never hurts to pocket some of your gain.
One legitimate question is whey I wouldn’t sell the entire position at $160 if it has reached my stretch target....
October 05, 2007 - NII Holdings Falls Sharply on Brazil News:
Yesterday NII Holdings (NIHD), one of Northlake's long positions, fell by more than 5% on huge volume. At one point in the morning the shares were off over 10%. NIHD operates Nextel service in Mexico, Brazil, Argentina, Peru, and Chile. I heard of several reasons for the sharp sell-off. Most of the concern centers on Brazil, NIHD's second largest market, accounting for a little less than 25% of EBITDA of 2Q07 EBITDA and an important high growth market for the company's future. First, Brazil completed new spectrum auctions this week and indicated more auctions are coming. Once the spectrum is built out, Brazil will have four or five nationwide carriers raising fears of increased competition. Second, on Monday, Brazil's telecom minister indicated that pricing of prepaid wireless services was way too high, above other emerging markets on an absolute basis and in relation to Brazilian post paid pricing. Independent of Brazil, I heard that Merrill cut numbers for NIHD slightly for 3Q but I was unable to confirm it.
I can see why there would be selling in NIHD on this stuff but the huge volume decline at the peak yesterday just shows how stupid Wall Street can be sometimes. Just a bunch of lemmings that see something down big and either sell without asking or short without asking. After all most of this news was out earlier this week and the spectrum auctions have been in the works for months.....
October 03, 2007 - Fourth Quarter Box Office Preview:
Earlier today, I provided a brief wrap-up of the excellent third quarter performance of the box office which rose at least 15%. Looking ahead to the fourth quarter of 2007, the comparison looks fairly easy although the lack of obvious mega blockbusters suggests only a moderate low to mid-single digit gain. For example, admissions revenue at Regal Entertainment is expected up in the mid single digits in the fourth quarter.
Last year in the fourth quarter, the domestic box office grossed $2.2 billion, unchanged vs. 2005. In fact, the fourth quarter box office has not grown since 2004. According to data compiled by Lehman Brothers and BoxOfficeMojo.com, there were seven films released in 4Q06 which grossed over $100 million, led by Night at the Museum with $250 million and Happy Feet with $187 million. In 2006, just 6 films crossed $100 million, while 2004 saw 10 films reach so-called blockbuster status.
Box office pundits expect 8 or 9 films to cross $100 million this year. However, there are no obvious home runs such as the big summer sequels with their built in audience. Among the most anticipated films form a box office perspective are The Golden Compass and I am Legend from Warner Brothers, The Bee Movie from Dreamworks Animation via distribution by Paramount, and National Treasure 2 from Disney.
For theatre stocks like Regal Entertainment, Carmike Cinemas, and Cinemark Holdings, the overall box office performance is a key factor driving the stocks. In theatre advertising company National Cinemedia is also sensitive to weekly box office trends. While I think that easy comparisons should lead to an up fourth quarter for the first time in several years, it does not look to me like there is much hope for a meaningful year-over-year increase. Coming off the big summer, momentum will slow significantly, something which is likely to occur again in 2008 as comparisons get really tough starting in May. Strong third quarter earnings reports and the potential for more dividend hikes, share buybacks, and special dividends, should provide near-term support for the theatre stocks but I am not as optimistic as I was earlier this year when I anticipated the big summer. Although it trades at a slight premium to its peers, I still like Regal Entertainment the best given its current yield of over 5% and the company's history of giving excess cash to shareholders via special dividends.
On the studio front, the key thing to watch is how this year's releases line up against the prior year. I see Disney, Viacom (Paramount), and Lionsgate as having the most favorable comparisons. Time Warner (Warner Brothers and New Line) and General Electric have neutral comparisons, while Sony and News Corp (20th Century Fox) have the toughest comparisons. Below are comments on Disney, Viacom, Time Warner, News Corporation on Lionsgate fourth quarter studio outlooks. I left off General Electric and Sony since those companies other business dwarf their studios.....
October 03, 2007 - Third Quarter Box Office Is A Blockbuster:
The final totals are in on the third quarter box office and as I have chronicled the results are spectacular. According to data I pull from BoxOfficeMojo.com, the box office rose 15% in the third quarter. My spreadsheet goes back to 2004 and that is by far the best comparison for any quarter.
The strength was driven by blockbusters. Five films released since May 4th have grossed between $290 million and $336 million. Four of those films are over $300 million, a level now reached by just 26 films ever. A total of 17 films released since May 4th have grossed over $100 million. By contrast, in 2006, there were just 11 films released in the summer season that grossed over $100 million.
The 3Q strength this year was similarly built on blockbuster releases. In 2006, just 3 of the 11 $100 million summer movies were released on after the last weekend of June. This year 10 films released in the same period grossed over $100 million including Transformers ($315 million, #3 this year, #20 all-time) and Harry Potter and the Goblet of Fire ($290 million, #5 this year, #30 all-time, and #2 of the five Potter films so far).
For theater companies, the news is all good....
October 01, 2007 - October 2007 Model Signals:
There are no changes to the signals from Northlake's Market Cap and Style models for October. The market cap model continues to flash a strong signal in favor of large cap outperformance. The style model is now flashing its strongest signal since the late 1999/early 2000 market peak for growth stocks. To capitalize on the signals, I continue to own the S&P 500 (SPY) and the Russell 1000 Growth (IWF) in client and personal accounts.
The market cap model did undergo a slight shift toward small caps as two of the ten factors went form a large cap signal to a small cap signal. Advisory Service Sentiment got extremely negative and then turned up in the past two months. This is normally bullish for small caps. In addition, consumer confidence has fallen to a level that favors small caps. This is a contrarian indicator. The concept is that low consumer confidence leads to the next move by the Fed or in the economy being favorable to investors. If so, why not own beta. Low and falling consumer confidence also often leads to falling interest rates. Falling interest rates are one of the strongest indicators of small cap outperformance. I still expect the large cap signal to hold for another month or two at least but the model suggests that outperformance of large caps may moderate.
And large caps have been outperforming. Since the current large cap signal went into place on February 1st, SPY is up 6% while the Russell 2000 as measured by IWM is up less than 1%. In the third quarter, SPY rose 1.5% while IWM fell over 3%. Even as the market rallied sharply in September, SPY was king, rising 3.4% vs. 1.6% for IWM.
As mentioned the Style model now has its strongest reading and its longest string of growth readings since the period from August 1999 though March 2000. The only change to the underlying factors for October was a shift in the insider activity indicator from value to neutral.
Since growth signal went into place in June, the Russell 1000 Growth (IWF) is up over 4% vs. a loss of almost 1% for the Russell 1000 Value (IWD).....
October 01, 2007 - Ukraine Elections Positive For Central European Media Enterprises:
Ukraine held elections for the third time in four years over the weekend. The pro-Western block of parties that originally formed the Orange Revolution were the surprise winners by a slight margin. Former Prime Minster Yulia Tymoshenko's party produced the upside surprise bringing in over 30% of the vote, possibly coming in first place. With current President and coalition partner Victor Yushchenko's party bringing home low to mid-teens support, the Orange coalition should be able to produce majority government and appoint Yulia Prime Minister.
Heading into the elections many observers thought current Prime Minister Victor Yanukovych would be forming the next government with his pro-Russian communist allies. Yanukovych's party may still take home the most votes but he will be unable to form a majority coalition. How he and his supporters react will determine whether Ukraine will finally have a stable coalition government.
The outcome of this election is important to Central European Media Enterprises.....
September 26, 2007 - Key Questions Heading Into Earnings Season:
With quarterly earnings reports set to pour in starting next week, I thought I'd provide a brief overview of what to look for in each of Northlake's individual stock holdings. Given recent volatility in stocks prices and growing concerns over the future of the US economy, 3Q earnings and guidance commentary may be the most important issued in several years.
Apple: With the stock surging to new highs, the bar has been set much higher for the quarter. Leaving aside the "beat and raise" mentality surrounding the shares, I'll be focused on overall margins and average selling prices for iPods. With NAND prices up, the massive beats in the last couple of quarters due to margin expansion are unlikely to repeat. This quarter could represent a normalized quarter, so I'd like to know whether margin levels are sustainable for FY08. One factor that will influence the answer is ASPs on iPods. The refresh of the iPod line announced earlier this month could boost ASPs which have trended sharply lower over the past year as the Shuffle and Nano have gained share relative to hard rive, high capacity iPods. Will the Touch and 160GB Classic shift ASPs upward?
Central European Media Enterprises: Will results in Ukraine bounce back such that the low end of 2007 guidance is increased? Will the surprising revenue gains in Croatia hold and lead to a quicker turn to profitability than expected? Are local currency revenue gains holding? Are estimates in Czech Republic, Romania, and especially Slovakia too low? Keep in mind that CETV is a big beneficiary of dollar weakness against the Euro.
For Comcast, Disney, Endeavor, NII Holdings, Regal Entertainment, and Rogers Communication, please follow the "Continue Reading" link immediately below....
September 24, 2007 - Box Office Update:
The weekend box office fell 2% for the top 12 grossing films. This breaks a string of 10 consecutive up weekends. The drop-off vs. last year is less than $1.7 million so it is possible, but doubtful, that when actual results as opposed to estimates are tallied the winning streak will continue.
The box office has also been up ten consecutive weeks, with the week ending July 12th being the last down comparison. Over the 70 days, the domestic box office total just over $2 billion, up 17% or $295 million, from 2006. At times I wonder about my own and others fascination with the box office totals but the bottom line is this is a big business. I follow lots of companies that don’t pull in $2 billion in revenue in a year!
The third quarter which began on June 29th for the theatre companies ends this coming Thursday. If the weekend comparison holds for the full week, the quarter will end up 15%. The year to date total through three quarters will be up 7.8%. As I have noted several times recently, analysts are seeing the big gains and estimates have risen steadily for Regal Entertainment and the other leading theatre chains. Regal shares have bounced back strongly and now sit just 4% below their all-time high, even after paying out $2.90 in dividends this year, including the going ex-dividend for 30 cents the week before last. With interest rates still well below levels of a few months ago, the shares still look attractive with easy box office comparisons continuing in the fourth quarter and a healthy current yield of 5.4%.
While the box office fell short this past weekend, there was good news for a couple of studios. Sony held the top spot with the third installment of the Resident Evil franchise. The film showed little deterioration from the first two installments. Lionsgate shareholders should also be happy as Good Luck Chuck opened to a slightly better than expected $14 million. Lionsgate has had a series of disappointments at the box office so far this year so the shares may respond to some good news.
September 21, 2007 - More Debate on Comcast:
Following my post yesterday on Comcast, my buddy, hedge fund manager and soon to be anchor on the Fox Business Channel, Cody Willard, replied with a bearish view of the stock. Among Cody's objections to my ongoing bullish stance on Comcast is, "$14 billion of market cap losses for wasting tens of billions of shareholder dollars building centrally-controlling systems is still just the beginning, IMHO. The point is that the company is in a secular declining industry since its entire model remains centered on controlling what and how and where and why people consume video."
I am sorry Cody but I would hardly call it a waste of money to build a network that supplies cable TV to 24 million homes, broadband internet to 13 million homes, and telephone service to 3 million homes. These homes pay Comcast an average of $96 per month on which the company earns an EBITDA margin of 40%. Even with the high level of capital spending required to install new customers for each service and maintain the competitiveness of the network, Comcast is presently generating $2-3 billion of free cash flow....
September 20, 2007 - Mea Culpa on Comcast:
Mea culpa. Comcast made a new low for this latest down move yesterday, falling more than 3% on what looks like its highest volume day ever before recovering slightly to lose 2.7%. This action occurred after the stock rose a whopping 11 cents in Tuesday's 335 point advance in the Dow. I feel your pain. As with all the individual stock and ETFs held in client accounts, I am long the stock in my own account.
The latest downdraft came after Comcast present at two Wall Street conferences over the last few days. This is secondhand but I am told that management was quite subdued in both presentations. They did not deny that recent hints they had provided that estimates for basic and broadband subscriber growth had to come down were real. The odds of a loss in basic subscribers in the seasonally strong 3Q now appear to be high....
September 17, 2007 - Review of Recent Market Action:
Periodically when the market is in an unusually volatile period I like to look at a performance of a wide variety of indices in order to see if there are any anomalies. This time I decided to look at the recovery off the August 16th intraday low. You will remember that was the day where the DJIA reversed a 350 point intraday loss to close down just 16 points. Overall, I don't see any trends in this data that would make me want to trade but there are some notable figures.
Since that time, most US market cap and style indices have recovered by a similar amount ranging from 7% to 9%. The NASDAQ and large cap growth, as measured by the iShares Russell 1000 Growth ETF (IWF) lead the way with recoveries of 9%. The Russell 2000 has been a laggard rising just 6.4% off its low. The worst recovery is in the Russell 2000 Value ETF (IWN) which has bounced just 5.4%. The heavy concentration of financials in IWN probably accounts for the weak recovery.
The divergences in performance have been greater when looking at returns in international indices. The EAFE has rebounded by 16% and emerging markets, as measured by the MSCI Emerging Markets ETF (EEM) has risen 23%. These two markets were the laggards form the July 19th highs to the August 16th lows so the outsized gains off the lows is not wholly unexpected. What might be surprising, however, is the fact that EEM is down just 2.6% since July 19th, the best performance/smallest loss of any of the indices I monitor. The DJIA, S&P 500, and NASDAQ are down from 4% to 4.5% since the high.
One other interesting return profile has been in Japan. As measured by EWJ in order to use prices during US trading on August 16th, the Japan has recovered 1.8% off its low. Using the Nikkei 225, Japan is down 11% from the July 19th high, the worst performance of any of the indices since that date.
September 14, 2007 - Will Consumer Slowdown Cut Into Comcast's Growth?:
Cable stocks have been poor performers all year. Things started badly when Comcast raised it s capital spending forecast in conjunction with its 4Q06 earnings reported. The second hit came with 2Q07 results when basic and broadband subscriber growth disappointed pretty much across the board. Access line losses for AT&T and Verizon, basic subscriber losses for cable companies, and broadband subscriber growth for all players came in short of estimates. Now fears of a consumer spending slowdown are adding to worries about broadband growth.
I chalked the 2Q07 shortfalls up to a combination of the housing slowdown and a regulatory driven need for the cable companies to focus on getting digital set top boxes into subscribers' homes which distracted customer service from retention and new service sales. I strongly suspect that 3Q and 4Q results will improve sentiment as subscriber growth, revenue, and EBITDA growth targets are hit. Nevertheless, investors have been worried that broadband growth is going to mature more quickly than previously expected with a new push coming from a consumer spending slowdown.
On this front, Jessica Reif of Merrill Lynch had some interesting insights in a report she issued on Comcast earlier this week. In the report, Jessica slightly lowered her broadband growth estimates for Comcast while strongly reiterating her recommendation of the shares. Her key conclusions on broadband was that penetration rates are following a similar curve to cable and satellite TV which means that ultimately 90% of households will purchase broadband. With penetration at just 50% today, there should be plenty of growth left. Jessica also noted that while 2Q subscriber counts fell short if looked at from an incremental penetration perspective, the results were on the low end of historical 2Q results.
Most interesting though was a look back at 1990-1992 cable subscriber additions and 2001-2002 wireless subscriber additions. Both periods saw penetration levels begin close to where broadband is today. Both periods saw a sharp slowdown or recession in consumer spending. So what happened to subscriber growth? It slowed significantly but it remained positive. In fact, you can make a pretty strong case that cable fundamentals were "defensive" in 1990-1992 as downside sensitivity to consumer spending was not as great as for other industries.
I think this is likely to repeat if consumer spending slows now. Broadband and especially cable telephony are still early in their growth cycles. Rising penetration should allow overall revenue and EBITDA growth to hold at good levels (10% or better) even if a consumer led recession occurs. Add in the likelihood that second half results should accelerate and the frustrating period of performance for cable stocks, and Comcast in particular will come to an end. Soon.
September 14, 2007 - About That iPhone Price Cut:
The following quotes come from a new report on the iPhone from Bernstein Research: "Apple could conceivably sell iPhone hardware at a substantial loss while generating greater profit per iPhone than it does from the highest end iPod…..this potentially gives Apple a storng incentive to price the iPhone aggressively to drive sales, even at the expense of cannibalization of the iPod business where ASPs and GMs (gross margins) are notably lower."
I don’t mean to flippant or a bull with my head in the sand but this analysis is hardly consistent with all the doom and gloom from last week when the iPhone price cut supposedly indicated the product was a flop, or as Tero Kuittinen of RealMoney.com called it, "a platinum turkey." On the day the price cut was announced I wrote, "since we don't know how the revenue share works with AT&T on iPhone sales and subscriptions, the financial impact of a price cut, particularly if it stimulates demand, is hard to gauge, even more so with the deferred revenue accounting."
Capturing the bearish spin that dominated coverage of the price cut, the next day Bernstein issued a bearish report on the price cut titled, "Big iPhone Price Cut and iPod Touch Product Positioning Both Raise Meaningful Questions." To Bernstein's credit, as usual they completed thorough analysis to answer the "meaningful questions" and published the results even though they appear to conflict with their initial assessment. This is a good example of why Bernstein's research is highly valued on Wall Street.
I know Apple is way overanalyzed and I am more guilty than most in that regard. I also know that we all tend to talk our book. Again, I plead guilty. But the universal assumption that the price cut represented a problem and the skepticism of Jobs statement that Apple really wanted to accelerate sales and establish the iPhone ecosystem in the US as quickly as possible appears to have been misplaced. Or at least wrongly or insufficiently analyzed.
September 07, 2007 - Central European Media Enterprises Gains Control of Ukraine License:
Central European Media Enterprises announced earlier this week that it had gained control of its broadcasting license in Ukraine. This is very good news as license control provides added protection against emerging market political and regulatory risk. CETV now controls its licenses in every country in which it operates (Czech Republic, Slovakia, Slovenia, Croatia, Romania, and Ukraine). The license control came without cost for CETV as ownership was established previously but the government had not completed the registration due to various issues within and without CETV's control. The next step will be to increase Ukraine ownership above the 60% level and gain full management control. When CETV completed this process in other countries (most recently Slovakia), results accelerated dramatically and quickly. Last week's news that CETV had sold a 3% stake to Ukrainian oligarch Igor Kolomoisky and invited him to join the Board is probably a prelude to the securing greater ownership in a partnership with Kolomoisky. Despite the shortfall and lowered guidance in Ukraine this year, all of this news is very positive for the longer term upside in Ukraine which has the potential to be CETV's largest market in the next five to ten years.
September 06, 2007 - New iPods Overshadowed By iPhone Price Cut:
As the Apple iPod event was going on yesterday, I posted this comment on RealMoney.com:
"New colors for the Shuffle, a redesigned Nano focused on an improved video experience, higher capacity classic iPods topping out at 160GB, and iPod Touch - it seems like an iPhone without the phone. Seems like a very good lineup for the holiday season to me. Something for everyone. After last year's 21 million unit holiday iPod blowout a fully refreshed and upgraded lineup was necessary to maintain growth in iPods. Regardless of where the stock goes in the very near-term, I think this new iPod lineup is as good as anyone could have hoped. With Mac sales booming, fresh iPods, reasonable iPhone sales, and the new operating system coming, I think the Apple earnings story is shaping up very well. I remain a bull on AAPL."
The stock sold off sharply once the event concluded keying off the $200 price cut on the 8GB iPhone. Investors interpreted this as a sign that demand was dropping off quickly. I probably can’t argue with those who want to interpret it as a negative datapoint as far as demand goes. However, the only two major complaints about the iPhone since its introduction have been the price and the AT&T network. Morgan Stanley wrote yesterday that they have seen studies that a price cut of this magnitude could stimulate demand by as much as 30%....
September 04, 2007 - September 2007 Model Signals:
For the third consecutive month there were no changes to Northlake's Market Cap and Style models. The signals remain large cap and growth. Client portfolios own the S&P 500 Spyder (SPY) and the iShares Russell 1000 Growth (IWF) to take advantage of the current signals.
The large cap signal from the Market Cap model remains one of the strongest readings in the monthly data I have going back to 1980. All ten factors covering a breadth of economic, interest rate, and stock market technical indicators are flashing a large cap signal. On their own, each factor has in the past shown predictive ability for anticipating relative performance of large caps vs. small caps as measured by the S&P 500 and Russell 2000. With the weight of the evidence from a broad array of previously accurate indicators lined up so solidly in favor of large caps, I feel very good about the prospects for large cap outperformance to continue for at least a few more months. The fact that large caps tend to hold up better when the market gets whacked is all the better given the uncertainty that remains in the market and economic outlook.
The growth signal coming from the Style model is not as strong but it is a solid reading in favor of growth. This marks the third consecutive month where the growth signal has sent a pretty strong reading. The three month stretch of solid growth readings is first since 2005, and only the third since the model started flashing value in the spring of 2000. With tech stocks acting better and concerns rising about economic growth and the balance sheets and earnings power of financial institutions (finance makes up over 30% of the Russell 1000 and Russell 300 Value indices), I also find the growth signal to be a comfortable place to be.
For July, the accuracy of the model signals was mixed....
September 03, 2007 - Central European Media Enterprises Attracts Important New Shareholder and Director:
Central European Media Enterprises (CETV) announced yesterday that it had sold 1.275 million shares at $86 for $110 million to Igor Kolomoisky and given him a seat on the Board of the Directors. Kolomoisky will own 3% of CETV, becoming the third largest shareholder after founder Ronald Lauder and private equity firm Apax Partners which bought 50% of Lauder's control stake in August 2006 at $60.
Kolomoisky is the richest man in Ukraine and a major force in economics and politics through his ownership of Privatbank and investments in energy and materials companies. CETV stumbled in Ukraine this year with poor ratings and EBITDA losses. Aligning with Kolomoisky is a strong signal supporting CEO Michael Garin's contention on the last conference call that despite the setback Ukraine will be the company's largest market one day in the future. Kolomoisky offers more immediate upside by possibly smoothing the way for CETV to gain control of its TV broadcasting license in Ukraine (the only market where it does not control its license) and increasing its economic stake in the Studio 1+1 TV network above the current 60%. Kolomoisky also may be helpful as CETV continues its strategy to add new TV stations and networks in Ukraine.
I remain very bullish on CETV with a $130 target based upon my expectations for 2008 EBITDA. The shares are volatile regularly but even more so lately given their status as an emerging markets play.
September 03, 2007 - Summer Box Office Shows Finishing Kick:
The summer box office ended with a bang with the best ever Labor Day weekend. Led by the latest edition of Halloween series, the box office for the top 12 films rose 21.6% over last year's holiday weekend. Based on data from BoxOfficeMojo.com, ticket sales for the weekend should be the highest since at least 1982. Halloween provided most of the gas this weekend, smashing the all-time Labor Day weekend record with a better than expected $31 million for the four days. The prior record holder was Transporter 2, which pulled in $20 million in 2005.
I'll have a full recap of the summer box office on Thursday. For now, it looks like the 2007 will be the best ever summer by as much as 8%, coming in $300 million ahead of the prior record in 2004. Using BoxOfficeMojo data for ticket prices, it appears that ticket sales in summer 2007 exceeded 2004 by 2% and may have approached the 2002 ticket sale record.
Quarter-to-date the box office remains up 17%. Analysts are beginning to ratchet up estimates with Regal Entertainment seeing at least two boosts in the last ten days. The shares have responded, rising 5.3% in August and sitting just 2.6% below the all-time high, reached in May and early June as anticipation of a strong summer box office initially peaked....
August 30, 2007 - Apple iPod Event on September 5th:
Earlier this week, Apple sent out invitations to a "special event" on September 5th. The invitation clearly signals iPod related announcements. The better websites in the Apple rumor mill are suggesting that the company will convert all iPods to flash, a new flatter and wider nano (presumably to offer better video capabilities), and touchscreen video iPod modeled after the iPhone. In addition, the Mac operating system in use on the iPhone will be used on the new iPods (which may mean the end of the infamous and highly successful click wheel in some models). The last few words of the invitation copy the final words of The Beatles last press release so Beatles music on iTunes seems like a possibility as well.
As you know, I have been a vocal Apple bull and I am a big believer in the Mac market share story and think that the software side of Apple is underappreciated asset. I've been long Apple for Northlake clients since January of 2005, while both trimming and adding to positions on the way up. My most recent trades were to add shares in the past two weeks in the range of $114 to $123. On Street Insight and Real Money, I have actively and readily defended the shares and regularly reminded readers of the bull case.
The iPod rumors are consistent with my own expectations. In fact, I think the rumors are a minimum requirement for Apple bulls in the near-term. December quarter iPod comparisons are extremely difficult as last year the company sold 21 million iPods, up 50% from the blowout 2005 holiday season. iPhones will help, especially due to the high average selling price (last year the phenomenal success of the Shuffle caused a serious drag on ASPs), but strong demand for traditional iPods is necessary to keep the over 30% of revenue driven off the music platform growing at a solid clip. iPod revenue was down 1% in the March quarter and up just 5% in the June quarter...
August 28, 2007 - Summer Box Office Record Falls:
The weekend box saw another gain, rising 4.9% vs. a year ago, the 7th straight up weekend. Quarter to date the box office is now up 16.5% and the year-to-date gain is 7.7%. Gains should continue to moderate now that kids are back in school and studios are no longer releasing potential blockbusters. September is typically the second or third slowest month of the year and studios either dump films thought to be lacking a potential audience or offer fare that is pointed the Oscars and major awards.
Sometime last week, the summer box office surpassed the all-time record of 2004. Manu media outlets are reporting that summer receipts now exceed $4 billion for the first time ever. My own spreadsheet shows the tally at $3.96 billion, up 3% over the 2004 record with the measuring period ending on Labor Day. I started my calculation with the opening of Spiderman 3 on the first weekend in May while others went back to May 1st.
Gross receipts matter because costs inflate with ticket prices. Nevertheless, on the basis of tickets sold, according to Media By Numbers as quoted in the Wall Street Journal, the summer of 2007 only ranks in terms of ticket sales likely to end up around 606 million. The all-time record summer for ticket sales was 2002 with 653 million. The top grossing movies in the summer of 2002 were the original Spiderman, Star Wars: Episode 2 – Attack of the Clones, Signs, Austin Powers in Goldmember, and Men In Black II. According to BoxOfficeMojo.com, the original Spiderman sold 69 million tickets, while Spiderman 3, the top grossing film this summer sold 51 million tickets.
I still like Regal Entertainment as a long trade off the record breaking summer box office....
August 22, 2007 - Strong Quarter Boosts American Apparel:
Outside of ETFs, Northlake clients own only one stock that is not involved in media or telecom. The company, Endeavor Acquisition Corporation (EDA), is a special purpose vehicle that has agreed to purchase teen retailer American Apparel (AA). The deal was announced last December and is scheduled to close in the second half of 2007. EDA is required to close the deal by mid-December or it must give back the initial investment to its shareholders. With EDA trading at $11 and the IPO having been completed around $8, obviously both management and shareholders will benefit if the deal closes.
Yesterday, EDA shares rose 6% following the a press release updating investors on American Apparel's second quarter results and progress toward closing the deal. I have not yet read the 10-Q that accompanied the press release, but on the surface the news looks very good.
AA reported a 35% increase in 2Q revenue to $96 million. The gain was led by the retail stores where sales rose 51% to $53 million. The critical same store sales number was an impressive 24%. Wholesale revenue (AA sells blank t-shirts) rose by 19% to $43 million. The sales gains translated to improved profitability. EBITDA rose 70% to $18 million. EBITDA margins expanded from 15% to 19%.
These results were better than expected. In April, EDA announced that it was proceeding with the AA acquisition even though it was waiving a condition that AA budget $50 million in EBITDA in 2007. The new "guidance" was $40 million. Following the April press release, I commented that I thought the simultaneous announcement that 1Q same store sales rose 17% would offset the lower guidance. That turned out to be a bad prediction as EDA shares pulled back in April and never recovered even as the market moved to new highs.
The latest news should put concerns raised by the April guidance to rest....
August 20, 2007 - Special Market Comment:
It seems appropriate to make a comment on the market following the sharp downside volatility over the past few weeks. However, to be perfectly honest, I think predicting the short-term is pretty much impossible at this point. My gut feeling is that six or nine months from now we will look back on this period as a good buying opportunity and another of Wall Street's periodic panics that have little relevancy to the broader economy. But compared to prior panics, this one has greater potential to lead to a recession. The fact that August, September, and October have been some of the worst months for the market over the years makes predicting the short-term that much more difficult.
I do think that the Fed did something very important on Friday by reducing the discount rate and issuing a new statement indicating that it had shifted from a primary occupation with preventing inflation to a focus on sustaining growth. This action clearly puts an interest rate cut or a series of interest rate cuts on the table. That increases the risk for bearish speculators to try to drive the market lower as they know that any statement or action by the Fed will trap them in positions with big losses. I think the Fed was probably growing concerned with all the rumors in the market last week and wanted to first and foremost calm things down. With this accomplished, the workout of the serious problems in mortgage financing and the trickle on effects on junk bonds, emerging markets, and merger and acquisition financing have been granted time to work themselves out. The Fed does not want to bail out speculators and hedge funds that made bad investments. On the other hand, protecting homeowners stuck in bad mortgages is important relative to the goal of maintaining strong and consistent economic growth. The Fed probably feels that by letting the market know it understands the problems it will buy time for all concerned....
August 20, 2007 - Box Office Remains Strong:
The box office continues to roar with the top 12 movies up 23% this past weekend. Last week marked the fifth straight up week and the weekend was up for the sixth consecutive time. Gains should moderate from this point forward as all the major releases are now in theatres. However,, gains should continue thanks to expected good legs from a few films.
Superbad, from the same creative team behind The 40 Year Old Virgin and Knocked Up, led the weekend box office with a much better than expected opening weekend of $31 million. Coming in second was Rush Hour 3, which fell an acceptable 55% in its second weekend. In third place showing good legs was The Bourne Ultimatum which fell just 42% in its third weekend. By comparison, The Simpsons Movie fell 55% in its third weekend. In fact, Bourne has grossed just $1.5 million less than Simpsons in one less week. The point is not to denigrate SImpsons but to show that Bourne is showing good legs that will help overall box office comparisons for the next several weeks.
The big story though is likely to be Superbad. Both Virgin and Knocked Up showed very good legs. The success of those films may have set the stage for a more front loaded run for Superbad but with a little competition on the horizon, I expect the film to perform well at least through Labor Day.
Quarter to date the box office is now up 16.6%. The back end loaded summer which I had stressed in many comments over the past two months has come to fruition and the 2004 summer box office record will fall this weekend. With a few more weeks, albeit historically slow ones for movies going, it looks like the old summer record will be exceeded by at least 4%.
This should be good news for theatres stocks like Regal Entertainment (RGC), Cinemark Holdings, and National Cinemedia (NCMI)....
August 16, 2007 - Brief Apple Update:
I have been waiting to round out long positions in Apple and build new positions for clients. SInce the stock brokedown and the market collapsed, I had been targeting $125 for Apple but decided to wait and with the stock decisively breaking that level I decided to make the move. I am optimistic about near-term trends in Mac sales. I am counting on an iPod refresh for the holiday season. I believe those who are saying iPhone sales are on track.
The stock is trading at 27 times 2008 estimates. It is a little cheaper adjusted for $15 per share in net cash on the balance sheet that has been rising by over $1 per quarter. Given my comfort with a 20% EPS growth rate for several years off the FY07 base, I think the valuation is reasonable. I know that the technicals stink and that the stock tends to move in major multi-month cycles but sometimes value wins out over emotion.
August 16, 2007 - International Box Office Strength:
One of the things I have not stressed enough in my comments on the box office has been the strength of the international box office. According to Variety.com's international weekend wrap-up, the non-US box office is up 20% year-to-day with summer gains exceeding those of the US. Unlike my domestic box office commentary which focuses on the impact on US theatre exhibitors like Regal Entertainment (RGC) and Cinemark Holdings (CNK), for investors, the international box office is important for the studios that produce and market the films. The top studios are owned by News Corporation, Disney, Viacom, Sony, General Electric, and Time Warner.
The reason the international box office matters is because of the well known escalation in the cost of producing and marketing films. Most major releases cost at least $100 million to produce and market and it is not unusual for these costs to balloon to $250-300 million or more. This data is not readily available and what data exists probably understates the true costs.
Strength in international box office accrues to the benefit of the studios by helping to cover the production and marketing costs with box office receipts (the holy grail of Hollywood!) and providing revenue from sale of DVDs, sales and licensing of merchandise, and the sale of international broadcast and pay TV rights.
According to data at BoxOfficeMojo.com, the international box office has risen from $4.4 billion in 2000 to $9.6 billion in 2006, a CAGR of 14%. During this same time frame, the domestic box office has risen from $7.7 billion to $9.2 billion, a CAGR of just 3%. Looked at another way, international box office was 36% of the total global box office in 2000 but had risen to 51% in 2000.
The growth in the international box office has come from a variety of factors. Economic growth abroad and rising living standards has led to greater consumption of movies in many countries. Distributors have responded by investing in new theatres around the globe including the multiplexes with stadium seating common to the US. Greater marketing emphasis has been placed abroad to tap new markets and films have been produced with international audiences in mind (witness the use of Asian, African, and European pirates in this year's release of Pirates of the Caribbean: At World's End. Local productions have also helped with thriving movie studios existing not just in mature markets like Germany but in emerging markets like Romania....
August 15, 2007 - Market Returns Since the All-Time Highs in July:
The sell-off since the S&P 500 and Dow Jones Industrial Average made all-time closing highs on July 19th has been broad. All the major indices I track are down between 7% and 11%. I track these indices looking for divergences in returns that might be a clue to where leadership is emerging and whether prior leaders are turning to laggards. Given recent discussions on Wall Street about trends for large cap vs. small cap and growth vs. value, I thought a broad look returns since the market turned lower would be useful.
From the July 19th peak through the close on August 14th, the DJIA has fallen 6.9% making it the best performing major US index. The S&P 500 and NASDAQ are down by 8.1%, while the S&P 400 Midcap has fallen 9.4%. Within the market cap indices, the Russell 2000 has been the worst performer, declining by 10.5%. I see little predictive value in these returns as they strike me to be consistent with expectations given the greater volatility of the Mid Cap and Russell indices.
Looking at style, using the Russell 1000 and 2000 Growth and Value ETFs, there has been a slight edge for growth. Large cap growth is down 7% vs. an 8.9% decline for large cap value. The discrepancy in returns is larger in small caps style indices. The Russell 2000 Growth is down 8.8% vs. an 11.3% decline for the Russell 2000 Value. I suspect the carnage in small cap financial stocks accounts for the lagging performance of small cap value.
International markets have suffered similarly to the US markets. Based on the ETFs, the EAFE is down 8.9% while emerging markets (EEM) are down 11%, quite similar to small cap US. Japan has held up better, with the Nikkei 225 falling just 7%, but Japan had lagged the US and Europe in the weeks prior to the July 19th peak.
August 13, 2007 - Summer Box Office Sizzle Continues:
Investors continue to flock to the nation's theatres to escape the heat and take their mind off the stock market. The weekend box office rose 29.8% according to BoxOfficeMojo.com based on the gross of the top 12 films. This marks the fifth straight and sixth of the last seven weekends with significant year-over gains. Quarter to date the box office is very healthy with receipts up 17%, while the year-to-date gain has now risen to 7%.
Similar gains should hold through next weekend as there is one remaining picture expected to open strongly, Superbad from the team behind the 40 Year Old Virgin and this summer's surprise hit Knocked Up. In addition, The Bourne Ultimatum is showing good legs and although it opened below expectations at $50 million, Rush Hour 3 will have one more another sizable weekend even with a sharp 60% decline. After next weekend, the year-over year gains should moderate but the summer record is sure to fall and analyst estimates for 3Q admissions revenue at the major theatre chains are sure to be too low.
Regal Entertainment shares have bounced back over 3% from the heavy selling that occurred on Thursday. I still think the shares can bounce further and the 5.5% current yield makes the shares a good defensive investment if the market again suffers heavy losses.
August 09, 2007 - Cablevision Results Cause Comcast Pain:
Comcast (CMCSA/CMCSK) took a serious dive yesterday, trailing the market action all day including a 3% drop when the DJIA was up close to 200 points, before recovering in the last half hour to close down 1%. I am certain that the poor quarter and reduced guidance from Cablevision (CVC) was at fault.
CVC missed expectations in its Telecom division pretty much across the board. The worst results were the 4% gain in EBITDA against expectations for a 13% gain and worse than expected subscriber additions in all four components: basic cable, digital cable, high speed internet, and telephony. The poor results from CVC cap a lousy quarter across the cable industry and a similarly poor quarter for AT&T (T) and Verizon (VZ) in terms of high speed data additions.
Cable bulls like me have little to fall back on in the short-term other than hope that the second half strength forecast by Comcast and Time Warner Cable (TWC) comes to fruition. If it does, there probably won’t have been a better time to buy cable since a similar nadir almost two years ago exactly. At that time, investors were convinced that the competitive battle between cable and telco was going to drive pricing for all services lower and crush margins right as capital spending would escalate to meet the worsening competitive landscape.
The bearishness in 2005 turned out to be way off base as cable financial and subscriber results accelerated throughout 2006 and cable stocks soared – Comcast was up over 70%. Now the bear case has been reinvigorated because estimates look too high in the face of slower subscriber growth.
CVC's results suggest a slightly different call for the bears. ...
August 08, 2007 - Box Office Strength Continues:
It seems as though everyone is going to the movies to take their minds off the lousy stock market. The weekend box office rose 36% as The Bourne Ultimatum earned $70.1 million, the biggest ever opening for a movie in August and the 28th best opening weekend ever. Bourne also had a bigger opening than any James Bond film. This was the fourth straight weekend the box office has been up and follows on the heels of last weekend when the year over year gain was 48%.
Quarter to date, the box office is now up 17% pulling the year to date gain to 7%. August should continue to produce stellar gains as there are still two movies to be released with high expectations: Rush Hour 3 this coming weekend and Superbad the following weekend. The Bourne Ultimatum should also keep pulling in big bucks as it received stellar reviews and plays well to an older crowd, two things which normally provide good legs.
It seems pretty clear now that the "box office is dead" theory was noting more than a myth. July 2007 was the biggest single month ever, pulling in over $1.3 billion and besting the previous best month by more than 12%. I read somewhere that July also ha the most ticket sales for any month since the 1950s but I can’t verify that fact. This summer will easily break the all-time summer record of $3.8 billion set in 2004 with the final total likely over $4 billion. The year to date gain of 7% comes on top of last year's gain of 4.2%and 2007 should market the second consecutive year of higher ticket sales after three straight declines....
August 07, 2007 - August 2007 Model Signals:
There were no changes of Northlake's Market Cap and Style models for August. The signals continue to be Large Cap and Growth. The large cap signal remains one of the strongest in the close to 400 monthly readings I have going back to 1980. The growth signal move from weak to solid this month and is the strongest reading in favor of growth since the value trend kicked of in 1999. There have been a couple of false starts since then but ultimately the trend reverted to value. I think this time the growth signal will hold for awhile. Both signals were accurate in July when the market dived lower. Large caps fell 3% last month but the decline in mid caps and small caps was 5% and 7%, respectively. Growth fell about 2-4% last month vs. declines 5%-8% for value.
Given the lack of changes in the models, I decided to offer you a post I did for Real Money describing the latest reading on the Style model and providing some background on how the model works and the theory behind it. The comments work for the Market Cap model as well. This might be a good refresher course.Posted On RealMoney.com on August 2, 2007 at 8:08 ET:
I've posted before that I use monthly models originally developed by Ned Davis Research to rotate substantial funds between the Russell Growth and Russell Value ETFs. My definition of growth and value is whatever Russell puts in these indices. I am buying growth or value as an index, not an individual stock. The model chooses one index or the other with the goal of being in the best performing index.
The model shows an unmistakable trend toward growth after favoring value for much of the past seven years....
August 02, 2007 - Ukraine Shortfall Pressures CETV Despite Otherwise Great Results:
Central European Media Enterprises (CETV) reported second quarter revenues and EBITDA above estimates. However, the composition of the results caused concern among investors leading to a sharp 5.4% decline in the stock on above average volume. I think investors overreacted and remain very bullish on CETV shares. I was adding to positions in some client and personal accounts into the weakness.
CETV report a 38% increase in revenues and EBITDA, both comfortably ahead of my estimates. Second quarter results represented an acceleration form the first quarter when revenues and EBITDA grew 21%. The Czech Republic, Slovakia, Romania, Slovenia, and Ukraine all matched or exceeded estimates. However, Ukraine had a very poor quarter due to political turmoil and weak ratings. First quarter results in Ukraine were also poor.
As a result of the weak first half in Ukraine, continued low visibility with elections coming up on September 30, and uncertainty on ratings in the fall TV season, management dropped the bottom end of its guidance range for revenue and EBITDA. I believe this is the reason for the negative reaction of the shares. Getting less notice was the fact that management did not adjust the upper end of guidance. In other words, management feels that it is possible to make up the shortfall in Ukraine in the other five countries. Given the momentum in those countries revealed in their exceptional second quarter results, I am extremely confident that full year results for all of CETV will be in the upper half of guidance. The bottom line is that despite assuming Ukraine moves from 12% of 2006 EBITDA to a small loss in 2007, CETV will still make at least what I expected prior to the second quarter report.
I still expect CETV to report 30% growth in revenues and EBITDA in 2007 excluding a $10 million investment in developing the company's internet properties. Excluding Ukraine, I expect revenue growth of 35% and EBITDA growth of 55%. High growth should continue in 2008 where I am looking for 18% and 25% growth in revenue and EBITDA excluding Ukraine. Should the September elections lead to a stable government, CETV's results in Ukraine in 2008 are likely to bounce back with revenue growing more than 30% and a return to EBITDA profits even assuming no rebound in ratings. History would suggest that ratings improvement would occur....
August 02, 2007 - Disney Earnings Growth Continues Unabated:
Disney (DIS) reported another strong quarter. EPS of 58 cents exceeded the 55 cent consensus estimate with revenues in line with expectations at $9.05 billion. The upside came from margins with Broadcasting being unusually strong with operating income up 127%. Cable Networks also had higher margins than analysts were expecting. The only shortfall was operating income at Studio Entertainment but this segment has notoriously volatile and difficult to predict financial performance.
Commentary about the fourth quarter and general big picture thoughts about 2008 and beyond was all positive. Between the upside surprise and the confidence expressed by management I think the concerns over DIS's future growth will moderate somewhat. This should allow the shares to resume their leadership among megacap entertainment conglomerates. All you really need to do is juxtapose the earnings reports and conference calls of Disney and Time Warner from yesterday to see why Disney shares remain attractive.
Disney also announced the acquisition of Club Penguin, a social networking site focused on the kids demographic. DIS will make an upfront payment of $350 million with an additional $350 million due if certain incentives are met. The deal should be accretive in year one and accretion will rise if the incentives are met. Club Penguin could have about $50 million in revenue and I would guess pre-tax margins are near 40%. I like the deal for DIS. Promoting Club Penguin across Disney properties should accelerate growth and in the long run the ability to use Club Penguin across the company's other assets seems plausible.
Looking more carefully at the segment level, it was another quarter of solid growth. Revenues were up 7% and operating income again rose double digits, gaining 14%. EPS for the first nine months of the fiscal year have grown by 24%....
August 01, 2007 - Central European Media Enterprises Earnings Preview:
Central European Media Enterprises (CETV) reports second quarter earnings tomorrow morning. CETV is the largest TV broadcaster dedicated to serving Central and Eastern Europe and owns leading TV stations in the Czech Republic, Slovakia, Romania, Slovenia, Croatia, and Ukraine. CETV is a sizable US company controlled by Ronald Lauder and Apax Partners. The current market cap is $3.8 billion. The company is modestly leveraged with net debt of $325 million. I am expecting 2007 sales of over $750 million and EBITDA of more than $300 million. My model has CETV trading at 11 times 2008 EBITDA. Foreign exchange fluctuations make earnings a crapshoot but my attempt at smoothing calculates EPS north of $3.00 this year.
Revenue and EBITDA has grown rapidly over the past five years as advertising in these markets has grown at rates well in excess of upper single digit GDP growth. With CETV, you get immature and rapidly growing advertising markets, excellent management, GAAP accounting, and a media market where traditional TV stations still dominate and still have room to gain advertising share. I like to compare the Central and Eastern European TV markets to the US prior to the advent of cable TV. Back then, TV was growth industry. In Central and Eastern Europe it still is.
I expect good 2Q results for CETV with revenues rising greater than 20% and expanding margins driving a larger gain in EBITDA....
July 31, 2007 - Disney 3Q07 Earnings Preview:
Disney (DIS) faces a tough comparison when it reports its 3Q07. Projected EPS of 55 cents are up just 4% vs. a year ago. Analysts have long expected this to be the toughest comparison so it should not come as a surprise. Given ongoing concerns that DIS' best financial performance is behind it, the report and conference call could be significant to resolving the debate.
DIS has been growing at a double digit rate for several years and the stock price has responded accordingly. Financial performance in all divisions has been excellent and current profitability levels are at all-time highs pretty much across the board. No one argues that DIS' growth will not slow. Rather it is the magnitude of slowing where the debate occurs. I am in the bull camp, believing that double digit growth can continue. The stock is acting like the growth string is near the end. A good report with confident talk about the future – DIS does not provide guidance – should be greeted well but any shortfall or signs that the rest of 2007 will remain sluggish probably means the end of the bull run in DIS shares for the time being.
For 3Q07, DIS is expected to report EPS of 55 cents on revenues of $9.04 billion. Revenue growth is projected at 6%. Operating income is the key metric for DIS and it is projected to grow at or slightly ahead of revenues indicating flat to slightly higher margins.
As with most of the major media stocks, it is segment level results where the action takes place. Here is a brief preview of each segment...
July 31, 2007 - Good Quarter, Bad Reaction For Rogers Communications:
Rogers Communications (RCI) reported 2Q07 earnings on July 31st. The results were at the upper end of expectations and management raised the high end of the guidance range for many key metrics. Nevertheless, the shares traded off as much as 4% initially, cut the loss in half as the conference call was occurring, and closed down 5% succumbing to the last hour sell-off in the market..
I think the negative reaction to a solid earnings report occurred for five reasons. First, expectations were too high given that Rogers' shares had risen over 30% since the last quarterly report due to heightened takeover activity in Canadian telecom and recognition of the growth and profitability of the company's #1 position in Canadian wireless telephony. Second, this quarter was not the blowout positive surprise that the company had usually provided over the past six quarters. Again, the expectations game worked against the shares. Third, the guidance increases were widely expected and the new ranges did not exceed current analyst estimates. Fourth, margins at Rogers Cable retreated for the second consecutive quarter. Finally, the company was quiet on further uses of the growing free cash flow to enhance shareholder value. Additional dividend increases, tuck-in acquisitions, and capital spending to "bullet proof" the company's network and customer service infrastructure for the cable and wireless businesses were mentioned. Major acquisitions and share repurchases were ruled out. I believe that some investors were looking for a more aggressive stance including a major share buyback.
Despite the reaction of the shares, I came away from the quarter more positive on Rogers. Plugging fresh numbers at the high end of the upwardly revised guidance raises my target for the shares to $54. Two major factors are at work. Wireless is booming and free cash flow in 2008 looks even better than I had thought....
July 30, 2007 - The Simpsons Drive Huge Gain at the Box Office:
A bull market existed at one place over the weekend: the nation's movie theatres. Thanks to a huge opening for The Simpsons Movie and good holds for all the other top movies, the weekend box office rose 45% vs. the same weekend a year ago. Since June 29th, when the second quarter started for the theatre companies, the box office is up 14.8%. This figure is well above upper single digit gains built into analyst models.
Th box office comparison should remain favorable but with a more modest gain this weekend with the opening of The Bourne Ultimatum and solid performances from holdovers. In 2006, this coming weekend was the last decent weekend for the summer when Talladega Nights opened to $47 million. The rest of this summer faces easy comparisons with a couple of more films to be released that are expected to do solid business.
The box office is on track to comfortably exceed the all-time summer record set in 2004. According to data compiled from BoxOfficeMojo.com by David Poland of TheHotBlog.com, the box office is presently running $220 million, or 6-7% ahead of 2004. Year-to-date, the box office is now up 5.9%, the second consecutive year of strong growth following last year's gain of 4%. This year is also on track for the second consecutive gain in tickets sold following a three year slump. This data should put to bed the "going to the movies is dying" theme.
Movie-going is not a great growth a business but it is a stable business that produces significant free cash flow for the theatre companies. Regal Entertainment (RGC), widely owned by Northlake clients, represents a great way to play the summer box office momentum and the overly negative sentiment on the industry. Regal is also attractive in the currently unstable stock market environment as it has a 5.6% current yield. Regal was up 10 cents on Friday and fell just 7 cents, less than one-third of one percent, combined on Thursday and Friday.
July 27, 2007 - Earnings Looking Good So Far:
Between Wednesday's market close and Thursday's market open, four stocks held widely by Northlake clients reported earnings and held conference calls. Apple (APPL) did quite well, NII Holdings (NIHD) was solid, Regal Entertainment (RGC) was as expected, and Comcast (CMCSA/CMCSK) was a little below my expectations. Overall, I am quite satisfied with the start of earnings season as far as Northlake stocks are concerned. Here is a brief recap of each report:
Apple reported another great quarter. Following a day or two of controversy over the first weekend sales of iPhones, Apple reminded us that business momentum in Macs and iPods remains excellent. Earnings of 92 cents crushed analyst estimates of 73 cents. Revenues were a little better than expected as Mac sales came in at 1.7 million units vs. estimates of 1.6 million and iPod shipments of 9.8 million were at the high end of estimates. The big story, however, was margins which again expanded sharply as Apple's brand strength is allowing it to maintain prices as commodity costs for memory collapse. Looking ahead, management is assuming that commodity costs increase and new products have lower price points, so guidance calls for EPS of just 65 cents in the September quarter. I expect that to be too low but memory prices have definitely increased. Management also did a good job on the call of reigning in overly bullish iPhone estimates. Overall, Apple proved that its operating momentum remains intact and that future earnings power maybe above street estimates. I see another 15-20% upside in the stock on the basis of new product introductions that will drive December quarter earnings.
NIHD reported better than expected subscriber growth, in line revenues and EBITDA, and a few penny shortfall in EPS. The stock fell sharply on Thursday but I think that was due to the market not the earnings report. Looking ahead, management raised 2007 guidance for revenue, EBITDA, and subscriber growth. More importantly, NIHD announced new investments to expand the networks in Brazil and Chile. Brazil has been performing great the last few quarters and is a very large market. Chile is a brand new market with significant potential and a profile that looks favorable for NIHD's push-to-talk Nextel cellular service. The timing of the new investments is good as NIHD has completed the expansion of its network in Mexico, its largest market, and will begin to reap the financial benefits as subscriber growth accelerates with launch expenses winding down. Brazil and Chile should insure an another leg of growth that will extend the outlook for at least 25-30% growth annually out to 2011. NIHD is a true growth stock with substantial upside as long as Latin American stock markets do not collapse.
Regal Entertainment's results closely tracked the 1% increase in the box office for the second quarter. Initial estimates of 2Q box office called for an upper single digit gain which left me worried that the earnings report would disappoint investors. However, the stock has held in well even as the market had dropped indicating that the pullback in the shares earlier this month compensated for weaker than expected box office. July is off to a fantastic start with box office up 11% and a strong film slate against easy comparison for the rest of the summer. I'd like to take profits in RGC shares for clients that don’t need high income if the renewed box office momentum pulls the stock back to new highs. I think that will happen.
Comcast reported mixed results that were greeted poorly by investors. The fact that they reported mixed results on such a bad day in the market led the shares to perform worse than reality. Revenues and operating cash flow grew 12% and 13%, respectively, just short but very close to estimates. Digital TV and VOIP telephony subscribers comfortably exceeded estimates while basic cable TV and high speed internet subscribers fell short. During 2Q, Comcast made a huge effort to ship digital TV set top boxes ahead of new regulations on July 1st that requires new box technology. This effort hurt the execution in other products and held back the results. I am very confident that operating trends will accelerate in the second half of the year. The acceleration should allay investor concerns about competition from Verizon and AT&T and lead the stock to much higher levels.
July 25, 2007 - Summer Box Office Update #2:
As I expected, the summer box office momentum resumed at the end of June. Since June 29th, the box office is up 11%, ahead of analyst estimates built into 3Q models for the theatres companies. I think the rest of July and August should be able to sustain the gains with some possibility for further gains as the release schedule looks good and early reviews and buzz on upcoming films is favorable.
The renewed momentum should allow theatre stocks to move back to their early summer highs over the next six weeks. Regal Entertainment (RGC), held widely across the Northlake client base should be a primary beneficiary
Coming into the summer, analysts were looking for an upper single digit gain for the season which runs from the first weekend in May through Labor Day. Box office gurus also were expecting the summer to beat the all-time record from 2004 of $3.8 billion. Most of the excitement surrounded the big three May blockbusters, Spiderman 3, Shrek The Third, and Pirates of the Caribbean: At World's End. While none of these films missed analyst estimates, the strength mostly occurred overseas. The combined domestic gross of the films is almost $960 million but I think many prognosticators felt that $1.1 billion was realistic. Two other early June releases also fell short of expectations. Evan Almighty will miss by about $70 million and Oceans 13 will miss by about 45 millionThe shortfall of $265 million for these five films soured sentiment on the theatre stocks and cost the box office about 7% versus the record summer of 2004. As a box office and theatre stock bull, I was disappointed but I didn’t get too shook up because I was aware that this was going to be a backend loaded summer.
I had completed an analysis which revealed that last summer there were only two films released in July or August that grossed over $100 million -- Pirates of the Caribbean: Dead Man's Chest reached $423 million and Talladega Nights brought in $148 million. However, for 2007, the gurus expected as many as nine films released from the last weekend in June onward to gross over $100 million and two of those films, Transformers and Harry Potter and the Order of the Phoenix, had the potential to bring in $200 million to $300 million. Fortunately for box office bulls, the recent releases have done very well and as I mentioned buzz is good for the yet to be released films....
July 24, 2007 - Apple 3Q07 Earnings Preview:
My friend and Real Money colleague, Bob Faulkner, is handling the Apple conference call for the website this quarter. Bob specializes in technology so his input is especially interesting. I'll be listening to the call as well.
In the "Continue Reading" section I have reporduced Bob's preview. I generally agree with him across the board. Beyond what Bob has mentioned, key things to watch are Mac and iPod unit sales and ASPs and comments surrounding margins and memory pricing. Estimates for Mac sales are around 1.6 million units while iPod estimates have been drifting lower to 9.0 to 9.5 million. On margins, expect cautious commentary toward 4Q due to the recent increases in memory pricing. I think this area represents the greatest risk to Apple shares in the near-term.
Here is Bob's preview....
July 23, 2007 - Comcast Bidding for Virgin Media?:
Big headline is something called City A.M. in the UK claims an inside source says that Comcast is considering a bid for Virgin Media. While Comcast may have requested info from the bankers running the auction I'll be shocked if they bid. I think the Comcast-Virgin Media rumors are being planted by the Virgin Media side to boost the pressure on private equity to bid higher. Comcast has a great groove going and won't mess it up by buying into the hyper-competitive, low growth UK market where cable is not leader as it is in the US. The same article mentions Time Warner as a potential bidder, another rumor I don't believe. Weakness in Comcast or Time Warner on this news should be bought.
July 23, 2007 - Summer Box Office Growth Still On Track:
The third quarter improvement in the summer box office continued over the weekend but at a slower pace. Led by the new Adam Sandler film, I Now Pronounce You Chuck and Larry, the box office for the top 12 films was up 3.5% according to data from BoxOfficeMojo.com. Harry Potter and the Order of the Phoenix came in second followed by the opening weekend for Hairspray. I had hoped for a few million more from the Potter film and Hairspray and a gain in the range of 6-8%. However, things are still shaping up well for this quarter with next weekend looking particularly good when The Simpsons Movie is expected to open to a big number. Some observers are looking for a monster opening in the $40-50 million range for The Simpsons Movie, while last year the #1 movie on the same weekend was Miami Vice which brought in just $25.7 million.
Since June 29th, which will be the start of the third quarter for the theatre exhibitors, the box office is up 11%. Theatre exhibitors begin to report earnings this week with my favorite, Regal Entertainment (RGC), announcing before the open on Thursday. I believe the strength so far this quarter will offset the fact that earnings will almost certainly fall short of estimates in 2Q due to the fact that the box office gained just 2.5% against analyst models that were built an upper single digit gain. Furthermore, the recent rally in interest rates, with the 10-year falling below 5%, makes RGC's current yield of 5.5% a lot more attractive and leaves the shares with good downside protection.
July 20, 2007 - Financial Times Writes Up Central European Media Enterprises:
The Financial Times posted an interesting article on CETV and its role in consolidation of European TV stations. The article touched on CETV as a seller and buyer and included some surprisingly frank comments by Wallace Macmillan, the company's CFO.
As a reminder, last year private equity firm Apax Partners bought control of half off Ronald Lauder's controlling stake in CETV. Apax could easily drive CETV to be either a buyer or seller but in the first three years if CETV were a seller Apax has the right to reject anything short of $120. There are a little over two years left.
I think CETV shares can double again in the next few years based on growth in cash flow assuming the stock market cooperates. I also think a buyout in the near-term would probably be in the $140 range.
As for CETV buying more assets in the region including Poland and Russia, at the right price I'd be happy with most deals.
Click on the "Continue Reading" link below for the full FT article. It is beyond the jump due to copyright issues....
July 17, 2007 - Good News: Central European Media Enterprises Acquires Minority Interests in Slovakia:
Central European Media Enterprises (CETV), a name familiar to former Street Insight subscribers as my favorite long-term growth idea in media, announced some good news on Friday. CETV purchased the remaining 21% minority interest in Markiza, its TV station in Slovakia for $79 million. CETV now owns 100% of its Slovakian operations. The purchase price of $79 million equates to a station value of $400 million, a multiple of 13 times my probably conservative estimate of Markiza's 2007 EBITDA. With Markiza likely to grow by 45% this year and at least 20% next year this is a bargain price. Furthermore, I am highly confident that if CETV were to sell Markiza in an open auction the deal multiple would be at 16-20 times EBITDA. Consequently, I view this as a very good and accretive use of CETV's strong balance sheet.
Besides a 10% minority stake in Romania controlled by a put-call option, the only remaining country in which CETV does not own 100% of its assets is Ukraine where a complicated structure leaves the company with a 60% economic interest and a minority stake in the broadcast license. I am certain CETV is working very hard to purchase the other 40% and gain control of license now that a dispute over the ownership of the minority stake has been resolved. I think a deal is probably close but contingent on a more stable political environment in Ukraine that will hopefully emerge following the September parliamentary elections. Even without full ownership and control in Ukraine, CETV's emerging market risk has been reduced over the past few years as the minority stakes and licenses have been purchased....
July 17, 2007 - Summer Box Office Back On Track:
After a weaker than expected June, the summer box office is now on track for an all-time record. With Harry Potter and the Order of the Phoenix opening at the high end of expectations and transformers showing great legs, the weekend box office for the top 12 films was up 14% according to BoxOfficeMojo.com. Since June 29th when Ratatouille opened, the box office is up 12% and the comparisons look favorable for the next four weeks.
For example, this coming weekend will see the opening of Hairspray and I Now Pronounce You Chuck and Larry, two films with the potential to exceed $100 million in domestic box office. Both films could open to $30 million next weekend while Potter earns around $35 million, Transformers pulls in more than $15 million, and Ratatouille earns $10 million. That works out to $120 million for the top five films against $99 million for the same weekend last year. The following weekend brings the highly anticipated The Simpsons Movie with The Bourne Ultimatum and Rush Hour 3 opening on each of the next two weekends.This is good news for my bullish summer box office thesis and could lead to a nice bounce in the theatre stocks which have pulled back lately while the market has reached new highs. I think the pullback has been driven by the weaker than expected June and the realization that the June quarter estimates for the theatre stocks are too high. Current and projected box office strength should cause investors to look ahead providing a good trading opportunity in Regal Entertainment (RGC). I still think the shares can rise $23-24 this summer which would be a good opportunity to exit the position at a substantial profit and total return.
July 13, 2007 - Purchasing Comcast At Last:
After writing positively about Comcast (CMCSA) for two years on Media Talk and in my contributions for theStreet.com, I finally decided it was time to buy the stock for Northlake clients. The main reason I had not bought Comcast previously was that I was very satisfied with the current portfolio of stocks held by clients. Northlake's equity management strategy imposes a strict discipline on individual stock holdings by limiting holdings to just 6 to 8 companies. So it wasn't that I did not think Comcast was a good investment but rather that it didn't make my top 8. With the shares up just 2% this year against a gain of 10% for the S&P 500, I think enough value has been created that Comcast now makes the top 8. Consequently, on Friday morning I purchased Comcast across the entire Northlake client base.
The investment thesis for Comcast is that the company will sustain growth of 12-15% for several more years in revenue and earnings on the back of its triple offering of cable TV, high speed internet, and telephony to consumers and businesses. Furthermore, Comcast will maintain this growth without any significant increases in capital spending beyond the equipment at customers' premises that is required to activate the services. This should lead to growing free cash flow enhancing an already extremely strong financial position. Comcast will use its growing financial strength to enhance shareholder value through acquisitions, share buybacks, initiation of a meaningful annual dividend, and capital investment to protect its competitive position.
The shares are presently trading below their recent average multiple of operating cash flow despite this excellent outlook. As Comcast meets its financial targets over the next few quarters, investor concern about competition from Verizon and AT&T should moderate leading to an expansion in Comcast's valuation at the same time that growth is above street expectations. This is usually a recipe for big gains in the stock price....
July 02, 2007 - July 2007 Model Signals:
I received the latest monthly updates Sunday night from Northlake's Market Cap and Style models. The Market Cap model continues to flash a very strong signal in favor of large caps. My data goes back to 1980 and the strength of the large signal is in the top 5% of all monthly readings. The Style model is now flashing a growth signal following a five month run in favor of value.
As a result, yesterday I sold all client positions in the Russell 1000 Value ETF (IWD) and moved it to the Russell 1000 Growth ETF (IWF).....
June 25, 2007 - Central European Media Enterprises Joins Russell and Receives Good News In The Czech Republic:
Central European Media Enterprises (CETV) rose to a new all-time high on Friday. The shares have been unusually strong over the last few weeks even as the market has pulled back. I suspect that much of the strength is related to the fact that CETV is being added to the Russell indices on this year's rebalancing. But something else may be at work.
I've also noticed strength each morning in Prague where the stock has a secondary listing. CETV's largest TV station is in the Czech Republic and should generate about one-third of revenues and half of EBITDA for the entire company this year. Two factors could be fueling buying by Czech and Central European investors. First, TV Nova has sustained strong ratings this year. Second, and probably more importantly, a compromise has been reached on the awarding of digital TV licenses in the Czech Republic. Late last week a bill cleared a parliamentary committee that will grant three new licenses to CETV and its primary commercial competitor while also allowing six licenses previously awarded to new entrants to escape legal limbo. Additionally, the scheduled elimination of advertising on the state-owned TV has been adjusted but in a manner that should still cut state TV advertising revenue by at least 75%. The only downside for CETV is that the new digital license holders can launch services as soon as they want. I'd be surprised if the new stations were able to gain much market share as initial reach will be only 30% of the population and the analog signals won’t be turned until 2012 lessening urgency for households to upgrade to digital....
June 21, 2007 - Barron's Discovers Rogers Communications:
Barron's Online gave Rogers Communications (RCI) a nice write-up yesterday, succinctly outlining the bull case. Barron's noted the positive dynamics of the Canadian wireless market which has just 60% penetration and therefore promises several more years of well above average growth (unless Canadians end up being a lot less fond of mobile phones than the rest of the world). Remember wireless service was launched in Canada about three years after the US and if you overlay the penetration curves from the launch date they look remarkably similar. The US saw double digit growth throughout the period that Canada is entering. RCI also benefits because Canada presently has just three national wireless operators vs. six in the US. As a result, the market is less competitive and supports higher margins. Last quarter, RCI and Telus (TU) each had margins over 50%. In the US, only Verizon enjoys a similar level of profitability....
June 14, 2007 - News On Northlake Stocks:
Several stocks in the Northlake portfolio have had newsworthy items over the past week. Here is a recap of the latest news, all of which I think is positive.
Disney (DIS) completed the sale of almost all of its radio operations to Citadel Broadcasting (CDL). DIS shareholders received .0768 shares of CDL for each share of DIS they owned. DIS received $1.35 billion in cash from CDL. I plan to hold CDL and will look to add to the small positions if the shares come under pressure as DIS shareholders sell their small holdings. The profile of a DIS and CDL shareholder would seem to have little in common which could lead to lots of selling. Given that the DIS deal about doubles CDL shares outstanding, I think supply-demand imbalances could put some downward pressure on CDL. That was not the case yesterday when CDL rallied on the first day of post-closing trading. CDL has a current yield of over 5% which should limit downside....
June 08, 2007 - Advertising Growth Remains Below Par:
According to AdAge.com, advertising spending in the first quarter fell by 0.3% excluding paid search. The data is from a study by TNS Media Intelligence. With GDP growth in the low to mid single digits, historical correlations would suggest that advertising growth should have been closer to 3-5%. Part of the problem was a tough comparison to 1Q06 when Winter Olympics spending added to the total. TNS thinks that adjusting for the Olympics ad spending grew just over 2%, still a weak performance that indicates traditional advertising is losing market share to online advertising. TNS believes that major advertisers have also been spending cautiously given slower economic growth and concerns about the health of consumer spending. An interesting aspect of the study is that for the first time in several years growth in advertising outside of the top 100 advertisers was flat. These smaller advertisers had been picking up the slack and driving overall growth above the rate of major advertisers.
TNS also tracks spending by media and by advertiser industry. There are 19 categories of measured media advertising and in 1Q only 6 were up year over year. Outdoor and Spanish TV were up 2-4%, cable TV and consumer magazines rose 6-7%, Spanish magazines were up 14%, and internet ex-paid search was up 17%. Among industries, domestic auto continues to be a major laggard, falling almost 11%. This is especially negative for newspaper which are losing the most market share in auto advertising to the internet. Other industries with notable declines include telecom, foreign auto, and travel and tourism. The only industry mentioned in the Ad Age article that showed an increase was direct response companies.....
June 06, 2007 - Summer Box Office Update:
The big three summer movies have now each been in theatres for more than two weeks. Together they are on track to gross about $900 million domestically, a huge number by any means (only 23 movies have ever grossed $300 million), but one that is a modest disappointment to many observers including myself.
Spiderman 3 looks like it is headed to $330 million with Shrek The Third heading towards the low $300 million range and Pirates of the Caribbean: At World's End probably finishing between the other two. I think Spiderman and Shrek will wind up about $40 million below where many expected and Pirates may finish $60 million short. These shortfalls are irrelevant to the financial performance of the studios involved (Sony (SNE), Dreamworks Animation (DWA), and Disney (DIS) but they do dampen enthusiasm toward the box office slightly. I think optimism will pick up over the next 8 weeks as comparisons remain pretty favorable.
In an interesting twist, foreign box office for Spiderman and Pirates is running well ahead of the previous films in those franchises even as domestic performance is running 15-20% behind (Shrek will be released in international markets this weekend). In fact, Spiderman 3 will likely end up the highest grossing of the three films on a global basis. This bodes well for ancillary revenue streams from these films and is reminder that international theatrical exhibition is a growth industry for U.S. studios...
June 05, 2007 - Regal Entertainment Competitor Completes IPO:
Yesterday several brokerage firms initiated coverage on recent IPO Cinemark Holdings (CNK), the third largest operator of movie theatres. Not surprisingly, the underwriters are providing favorable coverage including new buy recommendations. A few brokers expressed their preference for CNK over Regal Entertainment (RGC), the largest theatre operator and one of my long positions. The analysts argue that CNK is cheaper than RGC and due its geography it offers more upside potential though organic growth of new theatres. Additionally, CNK has more room for upside in its dividend than RGC given the 51% payout ratio. CNK has a current yield of 3.7% vs. 5.3% for RGC.
These are valid points as CNK trades at under 8 times 2008 estimated EBITDA while RGC trades closer to 9 times. Additionally, most models have no screen growth for RGC while CNK is expected to increase its screen count by about 4% per year taking advantage of population growth in its largest markets of Texas and California, while adding theatres in major metropolitan areas where its is underrepresented. Finally, a little over 20% of CNK's screens are in Latin America where long-term growth opportunities could be substantial. The organic growth is clearly seen in 2008 estimates (box office comparisons will be extremely tough) where most analysts have RGC's EBITDA flat to down vs. a 2-4% gain for CNK. It does seem inconsistent for CNK to trade at a discount given the higher internal growth, especially in an industry where everyone pretty much offers the exact same product.
Nevertheless, while I need to do further work on CNK, my initial thought is that I still prefer RGC....
June 04, 2007 - June 2007 Models:
There were no changes to Northlake's Market Cap and Style models for June. The signals remain large cap and value. The large cap signal remains very strong, while the value signal remains weak. As a result of the updated signals, there are no changes to the holdings in the portion of the portfolios I manage using these models. Clients continue to own the S&P 500 (SPY) and the Russell 1000 Value (IWD).
This is the fifth consecutive month that the market cap model has flashed a large cap signal. The average holding period for this model based on data since 1980 is four to six months. For the last several months, the signal has been very strong favoring relative outperformance of large caps over small caps. In fact, there have only been 13 months with stronger signals in favor of large caps out of the 339 months that I have data on the model. All ten indicators in the market cap model are flashing a large cap signal. The model is picking up a moderately growing and slowing economy, rising interest rates and the recent technical deterioration of the Russell 2000 versus the S&P 500.
This is also the fifth consecutive month that the style model has flashed a value signal. The average holding period in the style model is five to seven months based on data since 1981. The value signal remains a weak one with just five of the nine indicators in the model flashing a value signal. Flipping of just one indicator or changes in the strength of one or two underlying indicators would be enough to change the model to a growth signal....
May 31, 2007 - Bullish News For NII Holdings:
NII Holdings (NIHD) shares rose over 3% yesterday following an announcement that the company would be issuing $1 billion in new convertible notes and buying back $500 million shares. Four million shares will be purchased contemporaneously with the closing of the convertible offering. Full use of the authority will retire about 3% of the outstanding shares. Essentially, NIHD is buying back shares at current prices and selling an option to buy shares near $115. The message is quite positive.
The convertible will have attractive pricing from the NIHD perpsective with around a 3% coupon and a conversion premium of 45-50%. NIHD stated that proceeds of the convertible and the green shoe if exercised would be used for the possible purchase of spectrum or other telecom assets, accelerated build out of the networks in Brazil and Chile, the balance of the share repurchase authority, the refinancing of other debt, and general corporate purposes.
Analysts applauded the move and reiterated their mostly bullish recommendations. NIHD is about to finish the build out of its Mexican network leading to a surge in operating margins and free cash flow. By authorizing and executing a share repurchase at current prices, management is showing great confidence in the business outlook and strongly indicating what the use of free cash flow will be in the future. Not to be overlooked is the fact that share repurchase is being completed following a doubling of the share price in the last 18 months and with the shares near all-time highs....
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May 30, 2007 - Disney Radio Sale Set To Close:
While Disney (DIS) shareholders digest the box office and stock market reaction to Pirates of the Caribbean: At World's End, the company announced details of the divestiture of most its radio business. According to press release issued Friday, on June 12th, DIS shareholders will receive .0766 shares of Citadel Broadcasting (CDL) for each share of DIS they own as of the close on June 6th. CDL is buying DIS's radio business including radio stations and the ABC Radio Network. DIS will continue to be involved in radio through its ownership of the Radio Disney and ESPN radio networks and a few stations operating with content from these networks.
CDL shares have performed poorly since announcing the acquisition of the DIS radio assets last year. CDL is essentially doubling down on radio as the DIS assets are as large as CDL's current business. CDL is paying an above market price for the DIS even after DIS agreed to a modest renegotiation of the deal terms. Compounding the troubles for CDL has been deteriorating advertising growth for the radio industry as it loses share to online advertising.
While CDL shares have worked steadily lower since mid-February, radio stocks as a group have actually performed fairly well, beating the market's return about 75% of the week's so far this year according to recent data from Credit Suisse. Consequently, I think it is possible that consummation of the DIS deal might allow CDL shares to perform relatively well for a few weeks. On the other hand, the newly issued and distributed CDL shares seem likely to be sold creating a near-term supply-demand imbalance. CDL is issuing approximately 150 million shares to DIS shareholders vs. 100 million currently outstanding. Given the vastly different investment profiles of DIS and CDL, it seems fair to assume that many individual and institutional DIS shareholders will be looking to sell their newly received CDL shares....
May 29, 2007 - Pirates Sets Sail Under Moderate Winds:
Pirates of the Caribbean: At World's End performed in line with expectations pulling in $156 million over the Memorial Day weekend to set a new record for the holiday period. However, whisper numbers were higher as many observers, including myself, thought the film could bring in $175-200 million. Most Wall Street analysts were looking for the lower figure so estimates at Disney (DIS) should not be impacted but depending on the second weekend gross, some potential upside in DIS's numbers I was hoping for may be not come about.
Despite the somewhat lower than expected numbers for Pirates and a good but not great second weekend for Shrek, the box office set a Memorial Day weekend record with receipts up 8% vs. last year for the top 12 films. The box office remains on pace for a record setting year with total gross admissions up 7.1% though Monday. Receipts are also running over 4% ahead of 2004, the all-time record year. These figures and a favorable release schedule through June leaves the short-term bull case for the theatre stocks intact. I remain long Regal Entertainment (RGC) and still anticipate the shares can move to $23-24 by the end of June....
May 24, 2007 - Central European Media Enterprises Pulls Back On Czech News:
Central European Media Enterprises (CETV) shares have pulled back this week amid news out of the Czech Republic concerning the awarding of new digital television licenses. The licensing process has been full of fits and starts with the government initially awarding six new national licenses but failing to provide licenses for the two national analog stations including CETV's TV Nova which is far and away the number one station in the Czech Republic. Following objections from Nova and the #2 station, TV Prima owned by Modern Times Group, the government threw out the awards.
Without warning, earlier this week the government announced that the six licenses originally awarded would be granted and that Nova and Prima would receive their licenses for free. The new licenses would be provisional with a five year term. Analog services would be turned off in 2009 when the switch to digital went nationwide. The government also gave interested parties just 48 hours to respond compared to the constitutionally mandated 13 days.
This news has plusses and minuses for CETV. On the downside, the six new national digital stations would be on the air several years sooner than expected. When the initial awards were thrown out, it was presumed that the whole process would be restarted and no new national stations would launch before 2012. Another problem for Nova would be the analog signal going dark in 2009. Short of the government handing out new digital set top boxes there is no way that all the TV households in the Czech Republic would be able to watch TV on the new digital channels. The combination of new national competitors and loss of reach clearly would be a negative for the long-term growth of CETV's largest asset. This is partially offset by the granting of a free license for the digital Nova, which could be broadcasting from day one of the digital era without any new programming investments unlike the new competitors which would have to spend huge sums on programming and infrastructure with no established audience.
Based on my discussions with management of CETV and other large shareholders, I don’t see how the latest moves by the government will pass constitutional muster with the same Czech courts that already threw out the first awards. Besides Nova and Prima, there are other parties upset with the ruling including those who were passed over when the initial licenses were rewarded....
May 21, 2007 - Shrek The Third Off To A Good Start:
Shrek The Third beat expectations this weekend as I thought it would. The total box office of $122 million is the third highest opening weekend of all time behind only Spiderman 3 and Pirates 2. It will fall to fourth next weekend when Pirates 3 likely surpasses Spiderman 3. The weekend box office was up more than 9%and the summer season is off to a great start. Year-to-date the box office is now up 7%. The quarter is also shaping well and comparisons remain favorable next weekend and through June. Regal Entertainment (RGC) closed at an all-time high on Friday and still has some room to run.
May 18, 2007 - Shrek The Third Hits Theatres:
The second big movie of the summer season, Shrek The Third, hits theatres today (actually showings began at 10 PM on Thursday night but those will count as opening day and opening weekend totals). No other new films are in wide release this weekend and Spiderman 3 is fading fast – even though it is still headed well over $300 million it will fall well short of the first two installments.
Expectations for Shrek 3 are for an opening around $110 million, well behind the new record set by Spiderman 3 of $151 million set just two weeks ago. My sense is that there is some worry that Shrek 3 may get squeezed between Spiderman 3 and Pirates 3 which opens next weekend and is apparently tracking extremely well.
All three Shrek movies opened on the same weekend. The original opened in 2001 and pulled in $42 million its first weekend on its way to $267 million domestically. On the second Memorial Day weekend, the three day gross matched the opening weekend. The film showed great legs, finishing with six times its opening weekend gross.
Shrek 2 opened on a Wednesday in 2004 and pulled in $21 million the first two days before picking up $108 million on its first weekend. The second Memorial Day weekend saw the gross fall to $72 million on its way to domestic box office of $441 million, good for second all-time if you disregard the gross form the 1997 re-release of Star Wars. Shrek 2 also showed good legs, especially as the era of frontloaded box office receipts was firmly in place by its 2004 release.
Shrek 3 should benefit from the broadening of the audience base as evidenced by the much larger gross of the second film compared to the first. However, early reviews have been mixed to poor which could hurt. The first two films were very well reviewed. Then again, Spiderman 3 met with mixed reviews before blowing away the opening weekend record and beating high expectations.
I think that Shrek 3 may surprise to the upside because expectations have been held in check by its placement between Spiderman 3 and Pirates 3.....
May 14, 2007 - Media Madness for May 14, 2007:
Lots of Madness in Mid-May following the completion of quarterly earnings season:
• The Wall Street Journal speculates that a merger between the NBC Universal division of General Electric (GE) and Yahoo (YHOO) could be structured to help all concerned parties. GE would obtain a premium valuation for NBC and gain strategic benefits in selling advertising. YHOO would gain scale and content and get a premium on its stock price allowing the under siege management team to save face. The Journal also speculated that Comcast (CMCSA/CMCSK) could be interested in buying NBC Universal. I see both of these possibilities as highly unlikely. Comcast shares look a little lower this morning, possibly on this rumor. Comcast acted very poorly following its aborted attempt to takeover Disney (DIS) a few years ago because investors thought is signaled lack of confidence in the cable business. A similar reaction would occur in a major way today. Comcast repeatedly indicate it is not interested in a DIS type deal. I think we should believe them.
• The Journal is also reporting that CBS (CBS) is scrapping its internet strategy that was designed to drive traffic to CBS.com to watch TV shows. CBS will now make its content available widely over the web while selling the ads that will appear in the shows and clips. This is not new news to media analysts who have generally applauded CBS new internet strategy. I think it is a good move as well. Content has great value and making it as widely available as possible is the best way to monetize it. Two risks seem obvious. First, you could devalue the content by making it too easily available at what will be hugely discounted advertising prices to the TV network. Second, CBS will probably encounter resistance to its plan from major internet sites that won't like CBS keeping the overwhelming share of the ad revenue. I think these are risks worth taking. However, I still CBS shares are going to have problems due to severely deteriorating ratings for its primetime lineup, especially key shows on Thursday nights....
May 09, 2007 - Another Good Quarter For Disney:
Disney (DIS) reported very good 2Q07 results driven by strong margin performance across all five operating segments. Better profitability allowed EPS to easily exceed consensus estimates coming in at 44 cents, up 19%, vs. expectations of 38 cents, up 3%. Revenues fell very slightly short of estimates at $8.07 billion, $60 million short of estimates. The revenue shortfall was concentrated in the Broadcasting and Studio Entertainment segments but was offset by better than expected revenue for Theme Parks and Consumer Products.
Despite the big beat on EPS, DIS shares immediately traded about 1.5-2% lower following the report. I suspect it is just a sell the news reaction as I really don’t see any problems at all unless you consider a $60 million revenue miss on over $8 billion in revenues a big deal. I don’t, especially when operating income exceed estimates in four of five segments and was $200-300 million ahead of the street.
The upcoming 3Q represents DIS's toughest comparison of the year. Presently, EPS are projected to be flat at 53 cents. For the first six months adjusted EPS are up 31%, so earnings momentum looks set to slack. The major issue for 3Q is that last year DIS released The Chronicles of Narnia DVD which sold extremely well. No comparable release exists this year. I'd guess that alone could cost the company in excess of $100 million in operating profits over the balance of the fiscal year, with most of the shortfall coming in 3Q. On a base of $2 billion in operating income this represents a serious challenge to overall corporate growth.
Offsetting the tough Studio comparison is the fact that for two consecutive quarters DIS's margins have expanded sharply. If overall corporate profitability has taken a full step higher then DIS earnings power is greater than currently anticipated. While some of the margin expansion can surely be linked to outstanding content performance, I think there is some permanent flow through, particularly at the Studio and Theme Parks. Strong scatter pricing at ABC and a recent ratings surge should also boost 3Q....
May 08, 2007 - Taking Profits on Japan:
Northlake clients have owned a position in Japan via the iShares MSCI Japan Index (EWJ) for over two years. Until yesterday that is. At the open, I sold the entire position. My opinion that Japan is exiting a multi-decade economic and stock market slump has not changed. Rather, with the market having been so strong, seasonals turning negative, and most client accounts being fully invested, I felt it was prudent to raise some cash.
With Disney (DIS) pending after the close, all of the individual stocks held by Northlake clients have reported outstanding quarterly earnings and guidance was either increased or a bias for higher guidance was implied (see my recent coverage of earnings calls for AAPL, CETV, NIHD, RG, and RGC). With increased confidence in the outlook for these stocks and their ability to bounce back from any market related weakness, I feel that clients are in good shape holding these positions even as I desire to raise cash. Away from individual stocks, other client holdings were EWJ and the money dedicated to Northlake's Market Cap and Style models. The allocation toward the models is permanent as part of a relative performance strategy, so that left me with Japan as a possible sale....
May 08, 2007 - Disney: Slowing Growth, High Expectations Raise The Bar:
Margin expansion should propel Disney (DIS) to another quarter of greater than 10% growth in operating income when it reports 2Q07 results after the close on Tuesday. Revenue and EPS growth are only projected to grow in the low single digits due to tough comparisons. DIS has produced significant positive surprises in each of the last four quarters and estimates have been rising slightly so the expectation bar is high. With 3Q also facing a tough comp and slower growth than in recent quarters, DIS probably needs to report a positive surprise and indicate 3Q is shaping up well for the shares to move higher. An as expected quarter could lead to a sell the news reaction.
DIS is being very tightly and adeptly managed and has great momentum in its content divisions. I think the company will produce a quarter that satisfies investors. I am long and expect to remain long following the quarter looking for an exit closer to the $40 level.
Current consensus estimates call for EPS of 38 cents on revenues of $8.13 billion. A year ago EPS was 37 cents on revenues of $8.02 billion so growth is expected be just 1-2% in the headline numbers. Margin expansion at almost all division will produce better operating income growth which is the key measurement for investors....
May 07, 2007 - Spiderman 3 Spins A Massive Web:
Spiderman 3 blew away the all-time opening weekend box office brining in $148 million in domestic box office. The old record was set last year by Pirates of the Caribbean: Dead Man's Chest which grossed $135.6 million. Look for Pirates of the Caribbean: At World's End to be the new record holder when it opens this coming Memorial Day record. And that little film Shrek The Third due a week from Friday seems on target to open north of $100 million. So much for the death of the theatre business.
Spiderman has also opened in many overseas markets where it similar opening day and opening weekend records. The film has already grossed $375 million globally placing it in 96Th place on the all-time list. Spiderman is ahead of Batman Returns and Beauty and the Beast and just short of last winter's blockbuster, Happy feet, which grossed $384 million globally for its entire run.
We won’t know how high Spiderman 3 is headed until we see mid-week and second weekend box office but with little competition next weekend, the numbers will likely remain huge. A 60% decline would still leave Spiderman 3 with $60 million on its second weekend, which would be good enough for 35th place on the all-time opening weekend list. The biggest ever second weekend belongs to Shrek 2 at $72 million just ahead of $71 million for the original Spiderman. Pirates 2 is 3rd with $62 million on its second weekend a year ago.
My own estimate for Spiderman was $130 million, low but good enough to allow me to reward myself with the closest guess in last week's contest.
Here are a few other interesting facts on the weekend box office. Spiderman 3’s gross of $148 million exceeded the entire comparable weekend from a year ago where all the films in release brought in just $110 million with Mission:Impossible 3 leading the way in its opening weekend at $48 million. The total box office tally for this weekend is $181 million with the $71 million gain moving the quarterly box office from a 5.3% decline to a 3.5% gain. The gain should build considerably this coming weekend when the comparable period a year ago saw just $99 million in box office as the summer’s biggest flop, Poseidon, opened in second place to just $22 million, $5 million behind MI3: Spiderman 3 is likely to beat to beat the combined gross of those two films by at least $10 million next weekend and its weekday grosses will blow away MI3’s from a year ago. There are two new films in wide release this coming weekend that could find moderate interest including 28 Weeks Later, the sequel to the cult hit 28 Days Later, and Georgia Rule, a chick flick with a strong cast that might be good counter programming to the second weekend of Spiderman 3.....
May 04, 2007 - Good Quarter and Great Guidance From Central European Media Enterprises:
1Q07 results and 2007 guidance from Central European Media Enterprises (CETV) are very positive. My bullish interpretation was further reinforced following the conference call and a quick read of the 10-Q. I think the guidance was the primary reason the shares moved up $5 yesterday. I am not done with my spreadsheet yet but I expect my revised target to be $120 assuming 2007 guidance is met and 2008 is a 15-20% up year. The story is very much intact and substantial upside beyond $120 is very plausible in 2008 and 2009.
CETV reported revenue of $148 million and EBITDA of $40 million, representing growth of 22% in both cases. Results were really good in the Czech Republic, Slovakia, and Romania. Slovenia and the start-ups in Croatia and Ukraine were as expected. Ukraine has a significant but well explained shortfall.
Guidance was very strong across the board. The company is no longer providing country-by-country guidance for competitive reasons. The established markets of the Czech Republic, Romania, Ukraine, Slovenia, and Slovakia are being grouped together while Croatia and the Ukraine start-ups are being itemized. Aligning my spreadsheet similarly shows that the established markets are way ahead of street estimates and exceed my most aggressive estimates for revenue and EBITDA. Revenues in Croatia and the Ukraine start-ups are ahead of my estimates as is the EBITDA loss. Foreign currency assumptions are that 1Q07 ending levels are maintained for the rest of the year. The other major assumption is that despite 1Q weakness in Ukraine the country's primary station will grow in line with forecasted 2007 TV ad market growth of 28-31%....
May 03, 2007 - May 2007 Model Signals:
There were no changes to Northlake's Market Cap and Style models for May. The Market Cap model continues to flash an extremely strong signal favoring large caps. The Style model continues to flash a weak signal in favor of value. As a reminder, these models are designed to predict relative performance and have minimal predictive ability for the stock market direction. The latest signals leave my exposure in the S&P 500 (SPY) and the Russell 1000 Value (IWD).
There was almost no movement in the factors underlying the two models this month. The only change was a shift to small cap from large in the NYSE Breadth factor reflecting steady, if unspectacular improvement in breadth during April's market rally. Despite this change the overall model actually moved a touch deeper into large cap territory. The large cap signal has not been this strong since the end of 1995. Since the start of my data in the spring of 1979, there have been only about a dozen monthly readings more strongly in favor of large cap outperformance. The current reading will take several months to switch to a small or mid cap signal even if the underlying factors begin to move in favor of small caps. I think it is a good bet that the model won’t shirt again to small caps without a large move in either the stock market or the economy. It seems most likely those moves would be to the downside as the small caps are favored at extremes rather than in moderate or soft landing scenarios....
May 02, 2007 - Another Great Quarter For Rogers:
Rogers Communications (RG) reported another very strong quarter, continuing a string of positive news that has led to a double in the stock over the past year. EPS in US dollars looks like 23 cents vs. expectations for 18 cents. Revenues appear to be inline at $2 billion. I am hesitant about those numbers due to the fact the company reports in Canadian dollars.
Getting down to the segment level, it seems clear that the results are quite good. Wireless revenues were at the high end of expectations with dramatically higher margins than expected. Service revenue margin rose by 700 basis points well ahead of estimates that were looking for a still substantial 400 basis point expansion. Margin expansion likely emanates from a big jump in data revenue that led to much higher ARPU than expected. Minutes of use also grew rapidly and cost per gross add was stable. RG may have also benefited from a slight shortfall in net adds which came in at 86,000 vs. some analysts looking for 90,000 to 110,000. Fewer new customers typically helps EBITDA. Net adds were still up dramatically vs. a year ago indicating that growth in the Canadian wireless market continues. It is probable that RG focused on customer retention this quarter since wireless number portability just arrived in Canada. On the call, management said portability was not having any negative impact so far.
In Cable, RG performed very well with revenues rising 14.2% and EBITDA rising 14.9%. Subscriber additions were up vs. a year ago in all products. Telephony subs fell sequentially as RG focused on data and internet in the quarter. Management indicated that RG would refocus on telephony this quarter. Cable growth closely matched street expectations....
May 02, 2007 - Central European Media Enterprises 1Q07 Earnings Preview:
I am having a hard time getting a read on expectations for 1Q07 earnings from Central European Media Enterprises (CETV). I expect very strong results driven by the Czech Republic and Slovakia but I don’t have much in the way of analyst reports to get a sense of where street expectations lie. Isn’t it amazing that a stock with a $3.7 market cap that has almost triple since the beginning of 2005 and will produce over $700 million in revenue this year has virtually no coverage? Actually that is one of my favorite things about CETV. It is a lot easier to make money when you are early.
For the record, Yahoo Finance shows one analyst estimate of 5 cents on revenues of $141 million. My spreadsheet calls for revenues of $159 million and EBITDA of $53 million representing growth of 31% and 63%, respectively. Management has not provided guidance so I built my estimate based on my own view of growth and margins by country along with a view to how much the seasonally 1Q has contributed on a country-by-country basis in the past. In other words, my expectations are high but could be way off.
The 1Q call is when CETV historically provides full year guidance. The company has previously provided guidance in the Czech Republic for 2007 and 2008. Based on the sharp jump in 4Q results, very good ratings, and positive management commentary I think that 2007 guidance could jump sharply. Along with continued strong growth in Romania, renewed growth in Slovakia and Slovenia, and lessening losses in Croatia, the stage is set for a good year. Political turmoil in Ukraine and a slight dip in ratings in Romania are the mostly likely areas to provide caution to the guidance. I think guidance will be favorable. My spreadsheet calls for revenues of over $700 million and EBITDA nearing $300 million, representing growth of approximately 20% and 40%, respectively....
May 01, 2007 - Weekend Box Office: Spiderman is Coming:
The weekend box office was extremely week, declining 27% against the same weekend a year ago. The total haul of $75 million was the lowest since last the weekend after Labor Day last September. According to BoxOfficeMojo.com, it was the lowest final weekend of April since 2000.
Back-to-back poor weekends leave the box office down 5% so far this quarter and have pulled the year-to-date comparison to up just 3% vs. a year ago. Is it time to be worried about the box office is dead theme re-emerging? NO. Spiderman 3, Shrek The Third, and Pirates of the Caribbean: At World's End are about to come riding to the rescue, kicking off what should be a record-breaking summer (yeah, summer box office starts the first weekend in May).
Next weekend along could bring the quarter back to even and by the time Shrek hits theatres the following the weekend the quarterly and yearly growth comparisons will be looking real good again. Last summer got off to a lousy start with Mission: Impossible 3 and Poseidon opening to $47 million and $22 million, respectively. I guarantee you that Spiderman 3 will comfortably beat the combined openings of those two films on the first two weekends last May. Shrek will do the same. And Pirates will beat the at the time record Memorial Day opening weekend of X-Men by at least 15%.
If you are looking for a little for some guidance an how Spiderman might open, BoxOfficeMojo.com is a great site. Here is a link to the top 125 all-time opening weekends. I am calling Spiderman 3 at $130 million and the combined opening 3-day weekends at $378 million.
April 30, 2007 - Rogers Communcations 1Q07 Earnings Preview:
Rogers Communications is expected to report 1Q07 EPS of 18 cents on revenues of $2.03 billion. Those figures appear to be in US dollars but the company will report in Canadian dollars so look for about 15% more on both in the press release.
RG has been growing very rapidly over the past year thanks to its wireless business with cable providing an added bump. I expect 1Q07 to show a continuation of these trends. This should be good news for the stock but the likely privatization of BCE Inc. (BCE), Canada's largest telecom company, has taken precedence in recent stock price action for RG. RG shares have risen by 20% since late March. I think projected 2007 results support the current price but without the BCE news bringing the prospect of private equity taking a run at other Canadian telecoms, I don't think the shares would be this high already....
April 27, 2007 - Lots of Shine to Apple:
Apple (AAPL) 2Q07 results were spectacular and the feared "even more conservative than usual guidance" failed to materialize. I think the shares should be higher and my only concern is technical in that the muted upside suggests the massive battleground that has become AAPL will continue. I was especially pleased with Mac sales which showed a little upside in the quarter. I don’t think the upside was any more meaningful than the slight downside last quarter but the trend is unmistakable: Macs are gaining share. iPod sales were also solid although they were effectively preannounced. Growth in non-US markets continues strong (ex-Japan) which is key as iPod market share is much lower abroad. Assuming a decent stock market I think AAPL shares are entering a new higher trading range of $95-115 ahead of the iPhone launch. I have little fear about initial iPhone demand. What will matter is product reviews. I am perfectly happy to have so many bashers of the product out there as they are keeping expectations in check.
There is really a lot to say about AAPL this quarter than in the past. The quarter was fantastic and there is virtually no reason to complain. EPS came in at 87 cents easily beating consensus of 64 cents and the whisper number of 70 cents. Part of the upside came from better tan expected revenues due to an extra 100,000 Mac sales and stable average selling prices on iPods.....
April 27, 2007 - Regal Entertainment Has A Great First Quarter:
Regal Entertainment (RGC) shares rose 4% following better than expected 1Q07 earnings. RGC was able to convert the strong 1Q box office into better margins and EBITDA which bodes very well for the next two quarters when the box office should be record breaking. The shares have now regained more than the $2 special dividend paid earlier in April with proceeds of the National Cinemedia (NCMI) IPO. I think box office momentum can drive RGC to $23-24 at which point I expect to be a seller as comps will be tough in 2008. Since I started buying RGC for clients a little over year the company has paid $3.20 in special and quarterly dividends on top of $1.60 in share appreciation. The total return is 24%. Not bad for the supposedly comatose movie theatre industry.
RGC rode a 7% gain in domestic box office to a gain of over 8% in its own 1Q admissions revenue as a favorable mix of PG-13 and R-rated films led average ticket prices to be higher than expected. Coupled with good expense control, the revenue upside pushed operating margins a little above expectations as well. Better than expected EBITDA was the result and this is the key financial measure investors in theatres focus on....
April 27, 2007 - Excellent Results From NII Holdings - $100 Stock Price Within Reach:
NII Holdings (NIHD) 1Q07 numbers were virtually on top of my estimates across the board. Every financial and subscriber number on a corporate and country-by-country basis was right on target. Since my expectations were at the high end of the street estimates, this sets the stage for upside to current estimates later in the year. Despite the strong results, NIHD did not increase its won guidance but this is not anything to be concerned about as the company has typically waited until the second quarter conference call to update guidance.
NIHD has a history of beating estimates and its own guidance and momentum coming out of 1Q is excellent. Subscriber growth, revenue, margins, EBITDA, and free cash flow are all poised to accelerate as the build out of its network in Mexico and Brazil winds down later this year. Subscriber growth in 1Q in both markets was a little ahead of expectations setting up really strong operating leverage later this year and in 2008. Even more encouraging, the cost to acquire customers in 1Q was lower than expected. Normally, when a cellular company acquires more customers than expected operating income is below expectations because of the cost of acquiring the extra customers. If NIHD can sustain the lower cost per gross subscriber addition, operating leverage will be even better than expected....
April 25, 2007 - Apple 2Q07 Earnings Preview:
My colleague at StreetInsight.com, Ben Thomas, will be providing officail coverage of Apple's earnings report for the site. I'll be listening to the call and have my own comments but here is Ben's preview. He captures my views well although I'd add that guidance could be even more conservative than usual given the dealy in Leopard and the psssibility that the iPhone launch leads to a pause in iPod demand. Additionally, I thin consensus on iPod shipments in the March quarter is more like 10.5 million units.
Here is Ben's preview...
April 25, 2007 - Regal Entertainment and NII Holdings 1Q07 Earnings Previews:
Regal Entertainment (RGC) and NII Holdings (NIHD) report before the open on Thursday. I'll be visiting with clients out of town most of Wednesday and Thursday so I won’t be able to get any comments on the results until Friday. The following brief previews should help you put the numbers in perspective....
April 23, 2007 - San Jose Mercury News Clears Jobs of Criminal Activity in Options Probe:
In a lengthy article, the San Jose Mercury News is reporting that it is unlikely that Steve Jobs will be charged with a criminal offense in the Apple (AAPL) options backdating scandal. The article leaves open the possibility of SEC action but SEC action would not require Jobs to leave the company.
The article contains a timeline of Board actions that seem to exonerate Jobs. We won’t know the outcome of the investigations by the US Attorney’s office or the SEC until they are announced but for the short-term the market is likely to be very happy about the article.
Timing on this article is good as AAPL reports after the close on Wednesday.
April 23, 2007 - Monday Morning Media Madness:
Here is your Monday Morning Media Madness:
• On a year over year comparison basis, it was the worst weekend of 2007 for the box office. When all the data is tallied the decline should be a little over 20%. Fortunately, it is usually a small weekend as studios clear their inventory ahead of the launch of the summer on the first weekend in May. Quarter to date, the box office is still running 2.9% behind year ago levels but there is no to worry as May brings the third films in the Spiderman, Shrek, and Pirates of the Caribbean franchises. Speaking of Shrek, the distribution on that film is being handled by the Paramount division of Viacom (VIA). Paramount has now had the #1 film for four consecutive weekends (Disturbia and Blades of Glory) was the #1 film for the second consecutive weekend, continuing much improved performance for the studio. Paramount is only a small part of VIA, less than 10%, but every little but helps.
• Clear Channel (CCU) announced the sale of its TV stations for an attractive pre-tax multiple of 14-15X EBITDA. Additional radio station sales were alos announced at a price of around 11 times EBITDA. This news supports the recently upwardly revised offer of $39 from private equity and would have caused a major storm had it been announced prior the offer going up. I don’t think the TV sales will impact the outcome of the shareholder vote in either direction although it probably gives more talking points to those opposed to the deal. I'd still vote yes and be happy to escape with $39 if I were a CCU shareholder, which I am not....
April 19, 2007 - Mid-Week Media Madness:
Time for a little mid-week Media Madness:
• It appears that David Poland and I aren't the only voices proclaiming that "movie theatres are dying" is a flawed thesis. According to this article, long-time media analyst William Kidd of Wedbush Morgan agrees with us. Bill's report agrees with my thesis that most of the problem in 2005 was bad movies. Bill makes the additional point that trends in 2005's lousy box office were consistent in the US and abroad even though international markets are much less impacted by home theatres and other alternative entertainment options. I have not read Bill's report but one thing not mention in the article is the fact that 2005 faced the unique, likely unrepeatable $370 million box office of Passion of the Christ. Passion account for almost 4% of the total domestic box office in 2004. I have no way of proving it but I think it is fair to say that a significant portion of the Passion ticket sales would not have been made on any other movies released that year. This analyst recommends Regal Entertainment (RGC), a long position in Northlake accounts for over a year, as the best play on the renewed box office strength....
April 18, 2007 - Private Equity Comes To Canada - Officially:
It is now official that private equity has arrived in Canada. BCE Inc. (BCE), formerly Bell Canada, has announced that is negotiations with a group of Canadian pension funds being backed by Kohlberg, Kravis, and Roberts. KKR was the in the original stories about a possible private equity-financed takeover of BCE but the stories which broke last week indicated that Providence Equity would be the lead private equity firm working with a Canadian pension fund that is not included in the newly formed KKR group. For a more complete and Canadian perspective on the BCE story, here is an article from the Globe and Mail.
The latest news continues to drive shares of Rogers Communications meaningfully higher. RG made another all-time high yesterday, rising over 3%. The shares are now up 25% this year and 14% this month. RG is Canada's second largest telecommunications company behind BCE with whom it competes in wireless telephony and high speed internet access. RG is Canada's largest wireless company and offers the triple play as the nation's largest cable company.
My spreadsheet on RG calculates a target of $38.58 based on 10.5 times 2007 estimated EBITDA. The estimates are within RG's 2007 guidance that was announced in January. The multiple is consistent with trading levels for RG over the past year on forward estimates. Looking ahead to 2008 and assuming multiples hold and EBITDA grows 12%, my target is $45.54. It is worth noting that RG has consistently beat earnings estimates over the past year....
April 16, 2007 - Monday Morning Media Madness:
Here is your Monday Morning Media Madness for April 16, 2007:
• A tough comparison against a $40 million opening for Scary Movie 4 pulled the box office down 5% this past weekend. The weak comparison does little to year-to-date comparisons which remain up 6%. With the a very strong release schedule for the summer season set to kick off in early May, comparisons are likely to improve. In fact, this could end of being one of the best years ever. With the big movies this year yet to come, the box office is already running at an all-time best pace and is up vs. any year in the past five. This should be good news for Regal Entertainment (RGC) which has produced a total return of 19% in the past year. RGC shares have already recouped about $1.30 of the $2 special dividend they went ex-dividend in late March and the shares till have a 5.7% current yield. A target of $23-24 over the next couple of months is realistic.
• Comcast (CMCSA/CMCSK) is buying movie ticket selling site Fandango. Fandango will continue to exist as is and will also be the core of a new entertainment site called Fancast. Fandanago and Fancast should both benefit from more than 11 million broadband subscribers that buy broadband internet access from Comcast, 70% of whom use Comcast.net as their home page. Comcast is developing a sizable internet advertising business that has thus far gone largely unnoticed on Wall Street. According to a recent article in the Wall Street Journal, solely from its relationship with Google (GOOG), which provides search for Comcast.net, Comcast is receiving about $70 million in revenue. This deal is due to be renegotiated this year and Comcast could see a significant boost in its revenue. The Fandango deal may get investors to notice the rapidly growing internet advertising business buried within Comcast. This is just another positive in a bullish story for Comcast over the next couple of years....
April 13, 2007 - Follow-Up On Endeavor/American Apparel:
Back on April 5th, following a press release from Endeavor Acquisition Corp (EDA), updating investors on its acquisition of American Apparel (AA), I noted the news was mixed but thought that the good news (17% same store sales growth) would outweigh the bad news (a reduction in 2007 estimated EBITDA growth and the likelihood of an equity offering later this year). It turns out I was wrong and EDA shares have fallen about 8% since the press release. Nevertheless, EDA shares are still up almost 25% from the day after the acquisition was announced and 16% so far this year.
As a reminder, EDA announced that it was going ahead with the acquisition of EDA which was subject to certain conditions when it was announced in December.. The press release also stated that 2007 EBITDA, projected in the initial filing to be $50 million would actually come in near $40 million. EBITDA will still grow 33% in 2007. The shortfall from initial projections of 65% growth is attributed to AA's inability to access adequate bank financing to open as many stores as previously planned. The press release noted that AA's growth profile remained on track and would be back to previous expectations after the deal closed and the company had easier access to financing. Several comments in the press release clearly alluded to the fact that a portion of the new financing would be equity. Softening the blow was an announcement that same store sales for the March quarter were up 17%.
After reading the press release, I immediately went to retail consultant Elizabeth Haynes of Haynes and Company Consulting to get a second opinion. Here is what I wrote to Elizabeth initially:
Overall I think it will be favorable for the stock but the news is a little mixed. On the plus side, and the overwhelming takeaway, 1Q comps are +17%. That will boost the multiple considerably if it holds through the year. Also on the plus side is the 2006 results.
On the negative side, the 2007 EBITDA figure will be about $10 million short although still up 33%. They explain the shortfall well as it relates to lack of financing to expand the store base. Good news there is that it implies that new stores contribute quickly to EBITDA. Another potentially negative takeaway is that the press release pretty clearly states that after the deal closes there will be an equity offering of around 10 million shares ($120 million). On the one hand, it is dilutive. On the other hand, it will get the company lots of sponsorship and a much higher profile on Wall Street. That is especially good news if the comps are still double digit. Also, a better balance sheet does have benefits as the growth profile will be more clear.
So despite lowering the base of earnings in 2007 off which the growth will occur things still seem to look fine. I think this news might delay my reach upside target of $18 by 6-2 months but if the same store momentum holds and the news stores are opening that is still a realistic target in 2008.
Elizabeth generally agreed with my analysis but she did offer several valuable insights....
April 11, 2007 - Private Equity Comes To Canada - Good News For Rogers:
Private equity speculation comes to Canada. More rumors about a takeout of BCE Inc (BCE), formerly Bell Canada, emerged yesterday with speculation about a buyout led by the Ontario Teachers Pension Plan with the help of Providence Equity. BCE shares closed up more than 6% but remain well below a rumored bid from this group near $35 (C$40).
This news along with prior speculation of KKR financed bid have pushed the shares of Rogers Communications (RG) to a new all-time high. RG has been gaining wireless and cable telephony subscribers at the expense of BCE and is leading the healthy Canadian telecommunications industry with strong double digit operating income growth.
I got long RG back in December under $30 on the basis of the superb results coming from the company’s wireless and cable businesses. I established a $38 target based upon RG trading at 10.5 times 2007 EBITDA in 2H2007, a level consistent with where it has traded on forward estimates in the past year.
Since that time...
April 05, 2007 - Endeavor's American Apparel Purchase To Proceed:
Endeavor Acquisition Corporation (EDA) announced that the deal to purchase American Apparel (AA) will proceed. AA met the requirement that 2006 earnings before interest, taxes, depreciation and amortization (EBITDA) be at least $30 million. An additional requirement that 2007 budgeted EBITDA reach $50 million was waived. The press release says that AA did not have adequate access to financing to open as many stores as projected, leaving 2007 EBITDA to be budgeted at around $40 million. The press release also noted that AA same-store sales for 1Q07 were up 17%. EDA management expressed great confidence in AA and noted that when the deal closes and financing, including equity, becomes available, AA's growth will remain on track.
I'll have more on this soon but I think the takeaway on the Street will be positive as the same-store sales number will trump the reduction in 2007 EBITDA growth. Additionally, even without all of the new store openings, 2007 EBITDA is still projected to rise 33%.
I am still long EDA across the Northlake client base and believe that when I reset my spreadsheet the reach target of $18 will still be valid, but it might be delayed to 2008 instead of late 2007.
April 04, 2007 - April 2007 Model Signals:
For the second consecutive month there were no changes to Northlake's Market Cap and Style models. The signals are still flashing large cap and value. As a result, in the portion of the portfolios Northlake manages that are dedicated to the ETF rotation strategy, I continue to own the S&P 500 (SPY) and the Russell 1000 Value Index (IWD).
Despite the lack of changes in the signals, there is some exciting news. The Market Cap signal favoring large cap is at its strongest level since November and December of 1995! In fact, the signal strength is in the top ten going all the way back to the beginning of my measurement period in 1980. For what it's worth, the 1995 signals proved accurate as large caps outperformed small and mid caps over the next three months and especially in months six through eighteen following the signal. The models are designed to offer signals over an intermediate time frame which I define as six to twelve months. The average holding period for the market Cap model in the 25 plus years of back testing is five months....
April 03, 2007 - Central European Media Enterprises Update:
Central European Media Enterprises (CETV) shares had an outstanding first quarter, gaining 26.4%. Part of the gains recouped a $5 decline from mid-November through year end, a bullish period for the market when CETV would be expected to outperform.
Gains this year are tied to several factors. First, fourth quarter results were quite favorable and management was bullish about 2007 prospects on the conference call. Formal guidance won’t be issued until the company reports 1Q 07, likely on May 3rd, consistent with past practice. Second, even before management's comments several Central European based analysts raised estimates for CETV's largest TV station, TV Nova in the Czech Republic, well above previous guidance provided by management in mid-2006. Finally, investors and media industry observers are finally waking up the fact that Central and Eastern Europe offers the prospect for annual advertising gains of 20% plus for the foreseeable future. ZenithOptimedia reiterated its own optimistic in a recent report picked up by BroadbandTV News:
" ZenithOptimedia has identified Central and Eastern Europe as one of two regions containing the world’s fastest growing ad markets. It expects Moldova’s ad market to expand by 185.7% between 2005-9, while those in Romania, Russia and Slovakia will grow by 160.4%, 143.2% and 106.4% respectively. The value of the ad market in Central and Europe, including all media, is meanwhile expected to almost double from $19,160 million (€14,352 million) in 2005 to $33,428 million in 2009. Internet expenditure is the fastest growing in the world as a whole and is expected to account for 8.7% of the total in 2009. This will put it ahead of cinema (0.5%), outdoor (6.0%) and radio (7.9%) but still a long way behind TV (37.6%)."
As a reminder, CETV operates leading TV stations or networks in the Czech Republic, Romania, Ukraine, Slovenia, Slovakia, and Croatia....
April 02, 2007 - Monday Morning Media Madness:
Here is your Monday Morning Media Madness in honor of tonight's final game of March Madness.
• Is anyone else bored by the prospect of another national title game between Buckeyes and Gators? Probably not CBS (CBS) which is enjoying a good year in ratings for the hoops tourney, up 2% vs. a year ago. Two national powers rated in the to 4 all year should bring in another night of good ratings. I'll still be watching 24.
• The weekend box office slumped more than 10% vs. a year ago as OK openings for Blades of Glory and Meet The Robinsons had no change against the $68 million opening for Ice Age II> a year ago. For the sake of comparison, that $68 million is on par with Pixar's latest release Cars which debuted last summer. Disney (DIS) probably won’t be too worried about Meet The Robinsons as it didn’t bomb and it is the final animated picture that was pretty much completely done prior to the Pixar acquisition. The next picture film, Ratatouille is in theatres at the end of the June, a full month following the next film in the Pirates of the Caribbean franchise....
March 30, 2007 - Disney's March Quarter Shaping Up Well:
As mentioned in my overview of the 2007 Prudential Midwest Media Day, I came away from my meeting with Disney (DIS) with increased confidence in the outlook for March quarter earnings. The March quarter represents 2Q07 for DIS and will be reported after the close on May 8th with a conference beginning at 4:30 EDT.
There are several reasons for increased optimism about the March quarter including (1) strong scatter market pricing at ABC, (2) mid single digit gains in DVD revenue, ( 3) decent performance at the box office from this year's releases relative to what was expected to be a tough comparison, (4) fewer movie releases this year possibly offset by marketing costs for Meet The Robinsons falling in the March quarter against a June quarter theatrical release, (5) flat overall theme park attendance which is trending above conservative analyst estimates, and (6) ratings strength at ESPN and the Disney Channel and the financial benefit of ABC's taking over the #1 spot on Thursday's, the most lucrative night on TV..
The debate over DIS shares continues to revolve around the growth rate in the next 18 months....
March 29, 2007 - Prudential Midwest Media Day 2007:
I spent Tuesday at Prudential Securities Midwest Media Day. This is a great conference using a unique format combining very small group discussions with one-on-one meetings. Over the course of the day I met with CBS (CBS), Lee Enterprises (LEE), DreamWorks Animation (DWA), EW Scripps (SSP), Omnicom (OMC), Moody's (MCO), and Disney (DIS). Special thanks to Prudential media analyst Kathy Styponias and my institutional salesperson Michael Callahan for inviting me to the conference. Customer service is a hallmark of both of their efforts.
The only company at the conference that is presently owned broadly in Northlake client accounts is Disney (DIS). Nevertheless, I am positn gthis summary here instead of at Media Talk because broader conclusions about the media environment that impact actual Northlake holdings couldbe drawn.
I did not come away the conference with any new buy or sell ideas. However, I am incrementally more positive on CBS and SSP. I have been bearish on both stocks and don’t feel they are buys but I learned new information that challenges my core long-term bearish thesis on each stock.
On DIS, which I have been long on behalf of Northlake clients for a couple of years, I gained increased confidence in the upcoming March quarter earnings report. DIS is not included in this report but look for a separate note in the next couple of days.
Read on for individual company comments....
March 26, 2007 - More Media Madness:
The market had its best week since 2003. The weekend is 75 degrees and sunny in Chicago. Same forecast for today. All the windows are open creating the perfect sleeping weather we all covet. Is all this good news a sign I should make a new buy today? Or does all this good news mean a top is at hand and it is time to sell?
Here is your Monday morning Media Madness:
• Tribune (TRB) is reportedly leaning toward accepting a two-step takeover from Sam Zell that will ultimately pay shareholders about $33 per share in cash. Eli Broad and Ron Burkle, who made a similar bid aren’t happy and are asking for the Board for details. This scenario could squeeze another dollar or so for TRB shareholders. There isn’t much more value in TRB but the latest news suggests the stock has minimal downside, a change from last week when the possibility that no deal would exist had the stock headed for a long period in the mid $20s.
• Regal Entertainment (RGC) should trade ex-dividend for the $2 special dividend being paid with the proceeds of the National Cinemedia (NCMI) IPO. The current yield on the adjusted price is 6.1%. I think that is too high given current interest rates and strong box office results so far this year and coming up in 2Q. I believe the stock will rebound over $20 easily in the near-term.....
March 22, 2007 - National Cinemedia: Initial Research Observations:
The underwriters of the National Cinemedia (NCMI) IPO launched coverage this week. NCMI is the largest company in the rapidly growing cinema advertising industry and is 22% owned by Regal Entertainment (RGC). RGC is widely held throughout the Northlake client base.
In general, analysts are looking for modest additional upside in this well received IPO. The story is that cinema advertising has lots of room to grow because inventory sellouts can rise and CPMs are too low. Furthermore, an argument can be made that cinema advertising has room to take share of the advertising pie. In the UK this medium represents 1.4% of all advertising expenditures vs. just 0.2% in the US. Given studies showing that cinema advertising has very high recall rates and the fact that younger consumers make up the largest groups of ticket buyers, it seems plausible that cinema advertising will be one of the fastest growth areas of ad budgets.
NCMI further benefits as it gains access to more theatres....
March 20, 2007 - Media Madness:
A few small items in the media world that are cluttering up my desk:
• Last week FCC Chairman Kevin Martin appeared before Congress for the first time since the Democrats took control. The questioning made it very clear that the FCC will face much different Congressional oversight until at least January 2009. Fortunately, the agenda for media companies is not that heavy but pending and rumored mergers are likely to find a much tougher road to approval.
• Martin's testimony revealed that the FCC will consider reestablishing the 30% ownership cap for any multichannel service provider, cable or satellite. This should not create much of an obstacle to further industry consolidation. Presently, a DirecTV-Echostar merger would just barely slide in under the proposed cap. Additionally, either Time Warner Cable (TWC) or Comcast (CMCSA/K) could acquire Cablevision (CVC).
• According to a Reuters article, 40% of all sub prime loans were made to Hispanics. There are already some signs that Hispanic advertising growth is slowing from its historical rate. I wonder how much Hispanic radio and TV advertising was from sub prime lenders. I also wonder if the sub prime meltdown could cause damage specifically to the Hispanic economy that could impact general advertising trends to the important population. Negative implications might exist for Spanish Broadcasting (SBSA) and Entravision (EVC).....
March 19, 2007 - Apple Acting Well:
Apple (AAPL) held up well during the market pullback and now is leading to the upside, trading at its highest price since the breakdown following the December quarter earnings report in mid-January. I've written endlessly on Apple, as you can see if you click the AAPL link immediately below, so for another perspective here is a link to a well-written and well-reasoned bullish article that appeared on theStreet.com:
March 14, 2007 - Some Data Challenging the "Box Office is Dead" Hype:
Not to beat a dead horse but I wanted to follow-up on my post yesterday where I stated yet again that the hype that the domestic box office is dead or dying is off base.
Here is a link to the annual domestic box office performance since 1980 courtesy of BoxOfficeMojo.com. Several things jump out when you look at the data. First, a slowdown in growth beginning in 2003 is evident in both total box office and tickets sold. Second, 2005 was a really bad year. I am going to ignore the data that shows the cost to produce a film has risen much more rapidly than the domestic box office revenue. I'll address that in another post focusing on studios as opposed to theatres.
These highlights suggest that some of the bearish hype over the box office is warranted. However, I think several other factors are worth noting. Most importantly, the last few years aren't the first time the box office has slumped. 1985/86, 1990/91, and 1999/2000 each were back to back years where ticket sales fell. Growth picked up following each of those downturns....
March 12, 2007 - 300 is 1 Reason To Be Bullish on Movie Stocks:
Did you hear the hype that the domestic movie business is dead? Don’t believe it. I wish I had 300 reasons to tell you why it isn’t dead but I can give you one --- 300.
300 from the Warner Brothers division of Time Warner (TWX) broke box office records opening to $70 million, the best ever for a film that debuted in March. And for the skeptics out there, it also is the best ever opening adjusted for ticket price inflation --- measured by tickets sold, 300 just edged last year's Ice Age 2: The Meltdown and sold 2.5 million more tickets than the #3 March opener of all-time, Ice Age.
300 wasn't the only film to do well this weekend. The second weekend of Wild Hogs from the Buena Vista division of Disney (DIS) fell just 29% from its much better than expected opening weekend. #3 Bridge to Terabithia, also from DIS, fell just 23%. In fact, only two of the top ten films fell by more than 40% and none fell by more than 49%.
I've consistently noted that when there are good films in the theatres appealing to a broad array of moviegoers the box office performs well. The supposed problem for the box office isn’t digital downloads, alternative forms of entertainment, or ticket prices. It is making sure that there is a consistent supply of quality product. Movies are still a preferred form of consumer entertainment and relative to many other nights out aren’t that expensive.
Movies can still be a good business for studios as well.....
March 08, 2007 - Central European Media Enterprises: Entering Russia?:
BroadbandTV News yesterday noted an unconfirmed report in a local Russian newspaper that Central European Media Enterprises (CETV) was negotiating to enter the Russian TV market.
The target is supposedly a music station that competes with MTV Russia. I have no idea if there is any truth to this rumor but if it were accurate, I'd expect CETV to convert the station to more of a general interest channel. CETV does operate specialty channels in Romania and the Czech Republic but those stations are flanker channels to the core general interest channel that is a dominant #1 in prime time ratings.
On its most recent quarterly conference call, CETV specifically identified six countries where it was looking to expand: Russia, Poland, Hungary, Bulgaria, Turkey, and Ukraine. CETV already operates a leading station in Ukraine and is in the start-up phase on two smaller stations. CETV presently has no interest in any of the other countries. CEO Michael Garin stated that CETV is looking for major channels but in large markets like Russia and Turkey acquisition of a niche channel was possible. In hindsight, this comment was likely made to prepare investors for something long the lines of the rumored Russian deal....
March 05, 2007 - Correction or Bear Market?:
As usual, Ned Davis Research (NDR) has some interesting data on last week's sell-off in regards to answering the question whether we have entered a bear market. Defining a bear market as a 30% drop in the DJIA after 50 calendar days, a 13% decline in the DJAI over 145 calendar days, or a 30% drop in the Value Line Geometric Index, NDR calculates that there have been 33 bear markets since 1900. The average 5 day decline that began the bear market was 3% with a median decline of 2.3%.
Using February 20th as the peak for the DJIA, the first five days of the current decline cost the DJIA 4.5%. That decline was extended to 5.2% last Friday which was day 6 and I as I write this on Sunday night, the Nikkei is down 2% and the S&P 500 futures are down 43 points. Only 6 of the 33 bear markets had a fist 5-day decline greater than the 4.5% decline we have experienced so far. In two other cases the first 5-day decline exceeded 4%.
Based on this data it would appear that bear markets normally do not start with a large swift decline so the folks at NDR decided to look at the number of 5-day declines that have occurred in past cyclical markets. Defining a bull market as the exact opposite of a bear market – a 30% rise in the DJIA over 50 calendar days, a 13% rise after 145 calendar days, or a 30% upward reversal in the Value Line Geometric Index – NDR calculates that there have been 33 cyclical bull markets since 1900. During these bull markets, there were an average of 5.1 five-day declines greater than 4% and a median of four such declines.
With history pointing to the fact that bear markets don’t usually start with a swift and severe decline, NDR decided to look at corrections in bull markets. Including the current decline, this bull market, which NDR dates from 10/16/02, has experienced 8 five-day declines of 4% of more. Of the previous 33 bull markets, only five had more five-day declines of 4% or more, while two others had eight declines. Interestingly of the five bull markets with more than eight 4% declines, three have occurred since 1987. It is probably fair suggest that this is an indication of increasing volatility over the past 20 years.
History is not necessarily a good guide but it does help to put large positive and negative short-term market swings into perspective. I have no idea whether we are starting a bear market or just enduring another swift and steep correction that appear to be becoming more commonplace over the past 20 years. However, if history is a guide and these sorts of measurements are a guide to a history, a swift decline like we are currently experiencing is more likely to be a correction than the start of a bear market.
March 05, 2007 - Regal Declares $2 Per Share Special Dividend:
Regal Entertainment (RGC) announced that it would be using a portion of the proceeds it received from the IPO of National Cinemedia (NCMI) to pay a special dividend of $2.00 to RGC shareholders. This action continues a pattern of special dividends paid by RGC which along with an annual dividend of $1.20 and modest appreciation have allowed RGC shareholders to earn a compound annual total return of 15% on their shares since the company came public in 2004.
I think the newly announced special dividend will kick off another year of 15% total returns and strongly recommend investors be long RGC. The shares are especially valuable in the current uncertain market environment as the rally in the bond market has made the 6% current yield from the annual dividend even more valuable. Yesterday on Real Money, Jim Cramer was talking about stepping up to stocks with a 4% current yield. I emailed him all of my writing on RGC and told him he could find 6% here!
Most people write off RGC because they believe the movie theatre is dying a slow death due to alternative forms of digital entertainment. I believe those concerns are over hyped and point to last year's rebound in the box office to a gain of over 3% as evidence. However, even if you believe theatres are dying, you can’t overlook the fact that they are cash cows with high free cash flows.....
March 01, 2007 - March 2007 Model Signals:
There were no changes to Northlake's Market Cap or Style models for March. The signals remain Large Cap and Value. As a result in the portion of client portfolios dedicated to Northlake's ETF rotation strategy (generally ranging from 40% to 80% of equity portfolio value depending on account characteristics), I continue to own the S&P 500 (SPY) and the Russell 1000 Value (IWD).
Despite the lack of changes in the signal, there is one notable item when looking at the factors underlying the model. The current reading in favor of large caps is one of the two strongest signals since a five year run in favor of small and caps ended in 2005. Since then the model has rotated between mid cap and large cap with more recent data trending generally toward large caps.....
March 01, 2007 - Central European Media Enterprises: Even Better Than Expected:
I will likely have some follow-up comments on CETV after I check in with management and my key analyst contacts. Below is my commentary as written immediatley following completion of the conference call. The stock traded off because ivnestors are selling assets exposed to emerging markets risk. I think the quarter shows CETV is even stronger than I expected for the long-term so I'll weather whatever storm the market brings as I honeslty believe CETV shares could double ot triple over the next several years if the company hits my forecasts.
As I expected, Central European Media Enterprises (CETV) reported better than expected 4Q06 earnings. Revenue of $214 million exceeded my estimate of $202 million and EBITDA of $99 million beat my $88 million estimate. Romania and Slovakia had substantial upside surprises, while the Czech Republic, Slovenia, and Croatia also beat expectations. Ukraine was short of my estimates but still showed good growth.
Also as expected, CETV deferred comments on 2007 guidance to the 1Q07 conference call in May. CETV has always provided its annual guidance in May and has never provided quarterly guidance. There were some favorable hints and conclusions that can be drawn about 2007 suggesting that my prior expectations were too low. First, in the Czech Republic the prior 15% revenue guidance was indicated to be a minimum level. Even better it was noted that this is local currency growth. At recent exchange rates, currency is 5% favorable over the course of 2007. Second, management said that Croatia would produce a breakeven quarter in 2008 and for the full year of 2009. The tone of comments about Croatia which has been a lagging turnaround was much improved. Third, management feels that TV advertising in Ukraine would be in the 30-35% range in 2007, up from 28-30% in 2006. Management expects CETV to maintain its market share despite a competitive environment. Fourth, the upside surprise in Slovakia looks sustainable and management feels that there is a lot more good news to come from this market. CETV gained full management control of the station in 2006. Finally, management reiterated its long-term growth goal of doubling revenues in 4-5 years with slight margin expansion. This is organic growth solely form the current station group.....
February 28, 2007 - Expecting A Strong Quarter From Central European Media Enterprises:
Central European Media Enterprises (CETV) should report robust 4Q06 growth. I am forecasting revenues to rise 17% and EBITDA to grow 22%. Strong ratings in 2H06, a return to positive comparisons in the Czech Republic, improved execution in the Czech Republic, and favorable currency comparisons support the growth profile.
CETV shares are up about 15% this year despite getting shellacked for 8% in the last two days. CETV shares often trade up aggressively ahead of earnings and then sell off sharply following earnings regardless of the news. A 15% gain certainly qualifies a strong up move but maybe the recent sell-off will allow the shares to rally if the company reports a clean quarter and offer encouraging 2007 commentary as I suspect.
The biggest swing factor and focus of investor attention will be on TV Nova in the Czech Republic. Earlier this year, CETV reset the operating strategy and expectations for TV Nova. The goal was to improve ad pricing in the Czech Republic which was unchanged since 1999 despite great growth in the economy. Nova's competitor initially decided to steal market share by not raising prices. In the new TV season that began last fall, the price increases held and Nova's rating surged. I think it is possible that Nova will surprise significantly to the upside in 4Q relative to expectations included in the table below......
February 27, 2007 - NII Holdings Reports Solid Results and Offers Upbeat Guidance:
NII Holdings (NIHD) reported very good 4Q06 results that were inline to slightly ahead of analyst estimates and guidance. Headline numbers, country level results, and subscriber metrics were remarkably close to estimates across the board. This is a consistent pattern for NIHD which I think is a significant positive in the investment story given the perceived volatility of the emerging Latin American markets the company serves.
NIHD also issued 2007 guidance that was very close to current analyst estimates. Another year of mid-30% growth is in the cards. If there is any near-term issue coming out of the 4Q results it would be the forecast for only a 130 basis point increase in EBITDA margins in 2007. Some but not all analysts were looking for more significant margin expansion as the company reaches the end of a big investment cycle to expand its geographic reach in Mexico and Brazil. The margin forecast was accompanied by a higher than expected subscriber growth forecast of 1.2 million. Therefore, the incremental 100,000 subscribers compared to expectations may be the cause of the lesser margin expansion. New customers come on at very low or even negative margins in the initial year. I don’t want to make too big a deal out of this but the margin expansion story ultimately determines the level of free cash flow which will drive long-term shareholder value.
A very important point is that NIHD has a history of beating guidance....
February 22, 2007 - Regal Enterainment: Post National Cinemedia Update Looks Good:
Regal Entertainment (RGC) completed an SEC filing detailing the impact of the IPO of National Cinemedia (NCMI). The filing supports my bullish view of RGC which I believe offers a 15-20% total return opportunity over the balance of 2007. I expect to earn most of this return between now and the end of May as investors look ahead to the great lineup of blockbuster films this summer starting with the third films in the Spiderman, Pirates of the Caribbean, and Shrek franchises. Risk-reward is especially favorable for RGC as downside is supported by the $1.20 annual dividend which equates to a 5.5% current yield.
Northlake's initial purchases of RGC were made about 11 months ago and have produced a total return of 13%. This is slightly under the 20% total return CAGR for RGC shares since they came public in 2002. I expect a return to the historical return profile to occur in 2007 as investors realize the poor box office performance in 2005 was cyclical, not secular.
In its filing, RGC stated that it will receive $445 million in after-tax proceeds as a result of the NCMI IPO. This works out to a little under $3 per share. Twice in the past, RGC has paid large special dividends to shareholders and I expect that to occur again....
February 21, 2007 - Interesting New Report on Apple:
Bear Stearns is out this morning with a detailed new report on Apple. Bear is not changing its buy rating or earnings estimates. Instead, the report lays out Apple's growth profile focusing on four areas: Macs, iPods, Apple TV, and iPhone. The overall theme is that Apple is not a one product company but rather has multiple platforms for growth. This is new for Apple compared to its history. Bear Stearns goes on to outline the likely product development paths for each of the four platforms.
If you want to read the report, click "Continue Reading...." for a link to a PDF file.
February 20, 2007 - Year To Date Box Office Update: So Far So Good For Regal:
Following several sluggish weeks, the box office found some traction this weekend as several new releases exceeded expectations leading to an 18% gain vs. the holiday weekend a year ago. Based on a January 1st start to the year, the box office is presently down 1.5% vs. 2006. Regal Entertainment (RGC) started their quarter on 12/29/06. On this basis, year to date, the box office is up about 1% this year. The rest of the first quarter has easy comparisons as each week of 2006 was down vs. 2005. The release schedule also looks decent.
The current consensus revenue estimate for RGC for 1Q07 shows a decline of just under 1%. This is looking conservative as is RGC's 2007 guidance calling for a 1-2% gain in revenue and EBITDA for all of 2007. RGC's have pulled backed about 6% since the company reported 4Q06 results. With a good 1Q coming together and the excitement likely to occur surrounding May's big releases of Spiderman, Pirates of Caribbean, and Shrek, I think a good trading opportunity exists. Additionally, an announcement of how RGC will use its share of the proceeds of from the National Cinemedia (NCMI) should come in the next few months. Past history suggests a sizable special dividend. Look for RGC shares to rally to a new high in May at which point I will likely exit this position. Keep in mind that RGC pays a 30 cent quarterly dividend equating to a 5.5% current yield, so you get paid to wait and have some downside protection....
February 20, 2007 - Good Results From Rogers Communications:
Rogers Communications (RG) reported very strong 4Q06 results. Wireless was the star performer with margin expansion exceeding analyst estimates. The Cable and Media divisions also performed well with modest beats on both revenues and EBITDA. EPS look to be way ahead of expectations at 28 cents vs. an estimate of 11 cents but RG trades off revenue and EBITDA and based solely on 4Q results it should trade higher.
This is also the time of the year when RG provides full year guidance. I find the guidance to be good but not great relative to expectations. I don’t think that analysts will have any major issues but since it is not a blowout the guidance could dampen the positive impact of the great 4Q numbers. Net-net, I think the quarter and guidance are a winner and RG will continue to trend higher after closing at an all-time high just prior to the earnings report....
February 15, 2007 - Rogers Communication 4Q06 Earnings Preview:
Rogers Communications (RG) preannounced solid subscriber results that should be supportive of a good quarter when the company reports full EPS after the close on Thursday. There aren’t many estimates on RG and there could be some confusion relating to U.S vs. Canadian dollar numbers but with those caveats look for EPS of 9-11 cents on an 11% increase in revenues to $2.4 billion. EBITDA should be near $680 million, rising 33% vs. 2005, a similar growth rate to 3Q06.
Wireless telephony will represent a little over half of revenue. RG already announced subscriber results that showed slightly below par net adds but lower than expected churn. These results are similar to what has been reported by other leading wireless players in Canada and could be indicative of an environment that is favorable for margins. Wireless number portability is coming soon to Canada and it appears that operators are looking to lock down quality customers and focus on ARPU at the expense of subscriber counts. I think this is a good strategy, especially considering that at around 57%, wireless penetration in Canada trails pretty much every other major industrialized market. Penetration is closely tracking these other markets but just a few years behind so giving up a few subs now should not prove costly. For the quarter, RG should see wireless service revenues rise around 17% with sharply margin expansion that has been evident all year continuing and driving EBITDA up by 55%. Other wireless issues to keep on eye on are trends in data and roaming. RG is the only GSM in Canada which gives the company a competitive advantage on roaming minutes and for obtaining the best selection of handsets.
2007 guidance for wireless will be an important part of the RG earnings report....
February 15, 2007 - Bullish Indiactor For NII Holdings?:
One of the comparables I used in my thus far successful purchase of NII Holdings (NIHD) was Millicom International (MICC). NIHD offers wireless telephone service in Mexico, Brazil, Argentina, Peru, and Chile using Nextel's iDEN technology. MICC uses traditional GSM technology in markets it serves in Central and South America, Africa, and Southeast Asia.
What both companies have in common is a focus on emerging markets and very fast growth. Both also have very high margins although NIHD's focus on business customers vs. MICC's focus on prepaid consumers means that ARPU is much higher at NIHD.
The reason I mention this is that MICC rose over $7, up 10%, yesterday after it reported blow out 4Q06 results. NIHD doesn’t report until February 27th but there are enough similarities that MICC's results should be a good sign. Obviously, investors were thinking the same thing yesterday as NIHD tacked on $3, or 4%, yesterday.
NIHD and MICC do not overlap in any country in Central or South America but NIHD's results coming from Guatemala, Honduras, El Salvador, Bolivia, Columbia, and Paraguay indicate that mobile phone markets in these geographies are very healthy. In Central America, MICC reported subscriber growth of 89% and EBITDA growth of 62%, while in South America, MICC saw 65% subscriber growth and EBITDA more than doubled.
NIHD is a compelling story in its own right as I outlined in my initial Long/Short Investor recommendation. MICC's results make me more confident that my investment thesis will be validated on February 27th so despite a 16% jump in NIHD since my initial purchase at the very beginning of January, I am remaining long with growing confidence that my reach target of $100 in 2008 is in the cards.
February 09, 2007 - Disney: Strong 1Q07 Earnings Support Higher Target Price:
Disney (DIS) reported much better than expected 1Q07 earnings with EPS coming in at 50 cents against a consensus estimate of 39 cents. Revenues were also better than expected at $9.7 billion vs. an estimate of $9.5 billion. I don’t see any unusual items that would impact the 50 cent figure so this looks like a large and clean beat.
At the segment level, revue upside came from Broadcasting and Studio Entertainment with modest upside at Cable Networks. At the operating income level, DIS came in just short of $2 billion, over $300 million ahead of analyst estimates. Cable Networks and Studio Entertainment provided all of the upside.
DIS no longer provides guidance and Q&A on the conference call was a little short because the company is hosting an analyst meeting starting tonight. However, it was clear from the tone of the call that management is very confident in the FY07 outlook. Given the big beat and confident commentary, estimates will definitely be going up by "at least" the amount of the beat. DIS looks poised to produce another year of double digit EPS and operating income growth, something that many on Wall Street, including some bulls were worried might not happen. 1Q07 results provide for a little more upside in DIS shares but maybe as importantly they dramatically reduce the risk that 2007 turns out the be the year that the DIS story ends. The toughest quarterly comps are coming in the next two quarters so reaction in the shares might be limited but DIS is likely to continue beating conservative estimates providing upside momentum to the shares. The $40 level is now clearly within reach.
Here are brief segment comments....
February 06, 2007 - Regal Entertainment 4Q06 Preview:
Box office comparisons should ease this coming weekend with the fourth installment in the very popular Hannibal Lecter series but the big news this week for Regal Entertainment (RGC) will be the company's 4Q06 earnings report and the likely IPO of its 41% owned joint venture, National Cinemedia (NCMI).
Year to date the box office is down almost 7% against a fairly strong start to 2006. Hannibal Rising, due in theatres this coming weekend, could provide a boost as the first three films in the series averaged $130 million in domestic box office. Eddie Murphy also has his new comedy Norbitin theatres this weekend. Last year the top two movies were around $20 million so the comparison is favorable.
More important to RGC is 4Q06 earnings report due pre-open on Thursday....
February 05, 2007 - February 2007 Model Signals:
Both of the models in Northlake's ETF rotation strategy sent new signals for February. The market Cap model shifted from Mid Cap to Large Cap and the Style model shifted from Growth to Value. As a result of these changes, I swapped client positions in the S&P 400 Mid Cap (MDY) for the S&P 500 (SPY) and the Russell 1000 Growth (IWF) for the Russell 1000 Value (IWD).
Several indicators in the Market Cap model shifted in favor of large caps this month including many of the indicators that I refer to as stock market indicators. The measure of Advisory Service Sentiment moved from small cap to large cap as it dropped below recent highs indicating that peak in bullishness maybe at hand. Not surprisingly, history shows that large caps outperform small caps when bullish sentiment roles over. The indicators that measure breadth and trend also moved in favor of large caps. These indicators are picking up the lagging performance for small caps since the lows last May and June. The final indicator to change is the 3 month measure of bond momentum. Small caps underperform when interest rates are rising so the sharp rise in rates over the past month and a half clearly favors large caps.
Only one indicator shifted in the Style model: Advisory Service Sentiment. This indicator also has had predictive ability on the growth vs. value question. Similar to the Market Cap interpretation, this indicator favors value when it appears that bullish sentiment has peaked. Once again, the interpretation is that at peaks in bullish sentiment the next big move might be lower and it will pay to lower your risk value. Value, like large caps, is the place to be when risks are higher.
Both of the just vacated Mid Cap and Growth signals were in place for three months. The Mid Cap signal proved very good as over the 3 month period, MDY gained 5.77% to 4.33% for SPY and 4.09% for IWM. The Growth signal was inaccurate but did not prove too costly. As measured by the Russell 3000 Growth and Value ETFS (IWZ and IWW), value outperformed growth by 5.35% to 4.66%. Using the Russell 1000 or 2000 Growth and Value ETFs, the returns were about the same, growth underperformed value by 50-75 basis points.
January 29, 2007 - A Look at Apple's Valuation:
After reading through a lot of analyst comments about Apple's earnings, I think I captured the general consensus well with my follow-up piece. Most analysts agree with my bullish view and the fact that numerous catalysts exist over the balance of 2007, particularly as the June and September quarters become the focus of investor attention. As far as the March quarter, most analysts think that the guidance was conservative, especially as it relates to margins.
Following the big EPS beat in 1Q07, the consensus estimate has moved up to $3.18 vs. about $2.80 previously. Apple ended the quarter with $13.44 per share of cash. Extrapolating interest income from recent quarterly reports indicates that the cash balance might contribute about 43 cents to earnings in fiscal 2007. Adjusting the current price for the cash balance and its contribution to EPS reveals that APPL is trading about 27 times projected 2007 earnings. The multiple comes down another point if AAPL gets credit for its probable calendar year end cash balance. 2008 consensus is now at $3.75. Adjusting this figure for cash balances and interest income puts APPL about 21 times 2008 estimates.
As a comparison, Google trades.....
January 29, 2007 - Sears Holding Follow-Up:
Late last year, I sold my position in Sears Holding (SHLD) on the basis that I no longer had an edge in analyzing the shares. I am willing to buy back the shares if I feel my edge returns, so I was especially interested when Credit Suisse analyst Gary Balter, the clear axe in the stock, came out with a really interesting new report on SHLD last week.
What I like about Balter's latest post is that it cuts against the conventional wisdom coming from the retailing experts who are usually quoted whenever SHLD is in the news. Here is some of what Balter had to say in his latest report:
Chief among the many criticisms of Sears is the argument that they are not investing to build a long term sustainable retailer but are milking the business. That argument ignores among other items the investments in Sears Grand and Sears Essential, Lisa Schultz and the apparel effort, Maureen McGuire and her marketing changeover and of course Alwyn Lewis. In the latest sign that Sears is serious about its business, last night the company announced its highest profile higher since Mr. Lampert took control.
Balter goes on to discuss the hiring of a highly regarded Best Buy executive to the position of Chief Customer Officer and the Office of the Chairman. Retailing experts will no doubt argue that no amount of management talent can save Sears and Kmart but maybe what these experts are really admitting is that they don’t understand Lampert's strategy. Speaking of the retail strategy, Balter says:
Our view is that they do care, but that they care in a way that brings better service to the customer and better bottom line cash flow to the retailer. That is not the way the way many retailers drive their business, where comps is the primary factory, but is the way the better ones it….
Time will tell if the retailing strategy Lampert is using will prove successful. Depending on what strategic direction the company takes, the retail results may not even drive long-term stock performance. In the meantime, the lesson of SHLD, which has gone from less than $20 to $180, is that we should question conventional wisdom and remember that there is often more than one way to analyze a company.
January 25, 2007 - One Reason The Market Has Done So Well:
I am not a trader and Northlake's investment strategy is designed to outperform on a relative basis so whether the market goes up or down is a little less important to me than other money managers. However, that doesn’t mean that I am not amazed by the steady strength in the market since July. Steady adn strong are the operative words even though the absolute percentage gains have been large. Pullbacks have been minor and brief.
As I was driving the 465 miles home from Lake Superior to Chicago yesterday I was pondering the market and trying to get a better handle on what has been going on. When I pulled in for gas, a light went on. I know it is no surprise to anybody that oil and gas prices have collapsed but suddenly the impact on our collective pocketbook hit me. I paid $2.23 a gallon for gas down by over $1 per share from trips I took to Wisconsin in the past year. This trip is almost 1000 miles roundtrip, so at 20 miles a gallon in my 1992 Acura Vigor the savings is over $50. A commuter coming to downtown Chicago from some of the new suburbs might drive 60 miles roundtrip a day. That works out to a savings of over $60 per month. Small change to Wall Street tycoons maybe but real money in many checkbooks.....
January 22, 2007 - Many Bullish Catalysts For Apple Over Next Six Months:
Apple (AAPL) shares continue to pull back sharply following release of the company's latest quarterly earnings report. I remain surprised by the size of the pullback as well as the large amount of negative press Apple is getting surrounding the introduction of iPhone. I think a major disconnect has developed as many bullish catalysts exist over the next six months. Here are some follow-up comments to my earnings coverage now that I have had a chance to review analyst commentary:
First, I think comments that Mac sales were disappointing are fair. The number isn't bad and the market share gains are large, but a major thesis for Apple bulls, myself included, is that Mac sales would cover for any maturing in iPods or even disappointment in the iPhone. Mac sales will still cover these risks but maybe not as much as previously thought at least for 2007. In the short term, you can score that one for the bears.
However, I think that is about all you can score for the bears, leaving aside any debate over the iPhone.....
January 18, 2007 - Apple December Quarter: Great But Provides Some Ammunition For Bears; Bears Will Run Out of Ammo, However:
What follows is my analysis on Apple immediately following completion of the company's conference call to discuss December quarter earnings. I'll have more to say once I review analyst commentary but I am surprised that the shares are trading off sharply this morning. I think the drop will prove temporary – the results were good and there are plenty of positive catalysts ahead. This is a good example of short-term emotions and technical day trading driving a stock independent of long-term fundamentals.
Apple (AAPL) reported a great quarter, blowing away estimates. Revenues of $71 billion beat consensus of $6.4 billion and EPS came in at $1.14 versus estimates of 78 cents. Great gross margins and expense control allowed the excess revenues to flow through to net income. A slightly lower than expected tax rate added 2 cents.
As far the stock goes, I'd say the quarter leaves the debate over AAPL in pretty much the same place as before they reported. The company beat by 34 cents. Put a 30 multiple on that and you add $10 to the stock price. That is basically the increase in the AAPL shares heading into earnings and coming off MacWorld.
I think it is fair to say that analyst estimates won’t go up by much, probably by less than the beat. This factor will limit gains in the shares that would otherwise be expected by such a large beat. Management noted that unusually favorable commodity pricing boosted gross margin and that is unlikely to prove sustainable. Also, the massive beat on iPod units and good but not great Mac units will flow through analyst models in a way that limits EPS upside over the next three quarters.
I think the biggest issue that caused the stock to pullback off its initial post earnings spike was disappointment with Mac unit sales. The number was good at 1.6 million units but below many estimates, including my own, calling for 1.7 to 1.8 million. The effect on the income statement of any shortfall was mitigated by much better than expected ASPs which was a contributor to the gross margin beat.....
January 18, 2007 - Central European Media Enterprises: I Have Company For My $100 Target:
Central European Media Enterprises (CETV) broker out to new highs this week following an upgrade from Czech-based analyst Tibor Bokor of Wood Company. Tibor sharply raised his estimates for 2007 and 2008 and increased his price target to $100. Tibor's new optimism is based on his analysis of the likely 2007 and 2008 resutls for CETV's largest TV station, TV Nova in the Czech Republic. Tibor has established EBITDA estimates for Nova in 2007 and 2008 of $160 million and $212 million, respectively, versus his prior estimates of $109 million and $135 million and management guidance of $135 million and $170 million. In other words, Tibor has gone from a bear to a raging bull on CETV's largest asset which will account for around 50% of estimated 2007 EBITDA....
January 18, 2007 - Endeavor Acquisition Due Diligence:
Last week I had an opportunity to talk with Elizabeth Haynes of Haynes & Company Consulting about the acquisition of American Apparel (AA) by Endeavor Acquisition Corporation (EDA). Haynes & Company Consulting is a management consulting organization specializing in retail. Elizabeth's insights are especially valuable because she has spent time working on Wall Street and her company has completed projects for hedge funds.
Elizabeth was very positive on American Apparel and has not been surprised by the quick rise in EDA shares. She feels that EDA bought American Apparel on the cheap for two reasons. First, a traditional IPO was probably going to be difficult due to the controversy surrounding the company's founder and CEO Dov Charney. Second, by offering shares and a controlling interest in EDA, Charney would get back any discount on the deal with price appreciation.
For the next year or two, Elizabeth feels that AA's growth plan is likely to succeed....
January 16, 2007 - Apple December Quarter Earnings Preview:
Despite the sharp advance in Apple (AAPL) shares over the past week, I think the setup is favorable heading into the company's earnings report after the close on Wednesday. I expect better than expected Mac sales, solid results in iPods, and March quarter guidance no worse than the cautious commentary everyone is expecting. If I am correct, I think the shares can avoid a sell the news reaction and sprint to new highs across the $100 barrier.
Strong Mac sales have been key to my bullish stance on Apple for the past year. One Mac equals seven iPods at a higher margin so continued share gains for Macs really drives APPL's income statement. I expect December quarter sales to exceed estimates which call for 1.6 to 1.8 million units and flats ASPs. Stronger than expected Mac performance will support recent gains in the shares and leave the iPhone introduction as truly additive. Within the Mac line look for notebooks to be especially strong, potentially producing Apple's first ever quarter with over 1 million units. Desktop units are likely to be flat with the uptick awaiting the June quarter introduction of Adobe's new Creative Suite to drive an upgrade cycle for professionals....
January 16, 2007 - National Cinemedia IPO Ready To Go: Should Be Good For Regal:
One of the reasons that Regal Entertainment (RGC) shares have risen 10% since mid-December and consistently been on the 52 week high list is the pending IPO of its 41% owned joint venture, National Cinemedia (NCMI). NCMI completed a filing last week indicating that the IPO is imminent.
I think NCMI is an attractive investment if priced within the IPO range of $18-20. NCMI is the largest in-theatre advertising company in the world with affiliation agreements with its joint venture partners, RGC, AMC Entertainment, Loews Cineplex, and Cinemark. These four companies dominate the U.S. theatre business with about 40% of the total theatre locations and screens. For valuation purposes analysts are comparing NCMI to internet advertising and outdoor advertising stocks given the similar revenue growth and operating margin profile.
NCMI will have about 94 million shares outstanding plus $735 million in debt for a total enterprise value of $2.5 billion. Assuming 2007 EBITDA of $185 million, the EBITDA multiple is 13.6 times, in line with or slightly below the peer group.
More importantly from my perspective as an RGC long is the impact on RGC's valuation.....
January 11, 2007 - Why We Got A Buying Opportunity in NII Holdings:
NII Holdings (NIHD) rebounded nicely yesterday (and even more today) but I want to expand on some of the reasons the stock sold off since its December peak providing the buying opportunity I had been waiting for since the big move up following the company's presentation at the UBS Conference.
Lehman Brothers was out with a report yesterday addressing some of the recent issues and recommending investors use the weakness to buy the shares. The company also was able to address some of the issues when it presented yesterday afternoon at another Wall Street conference, Citigroup's Entertainment, Media, and Telecom Conference. I listened in on the presentation which was pretty much a repeat of what they said in December. Here is a link to a pdf file including the slides they used at Citigroup. It is an excellent overview if you want to learn more about NIHD:
Among the issues troubling the shares and cited by Lehman are the shortfalls at Motorola (MOT) and Sprint Nextel (S) and weakness in emerging markets, especially concerns related to Latin America following Hugo Chavez's moves to nationalize certain industries in Venezuela. As a reminder, NIHD is a major wireless carrier in Mexico, Brazil, Argentina, and Peru using the Nextel iDEN push-to-talk technology.
Lehman argues, and I agree, that the linkage between MOT, S, Chavez, and NIHD is weak....
January 10, 2007 - Apple's iPhone: Initial Impressons:
There is no doubt that the new iPhone from Apple, Inc. (AAPL) – they officially changed their name yesterday by dropping "computer" – has a serious WOW! factor. The product is substantially beyond any expectations and easily supports the 8% gain in APPL shares yesterday.
Make sure to head over to Apple's website and check out the various demos on the music, video, telephone, internet, email, and text messaging capabilities of the iPhone. It really is amazing. Something as simple as rotating the iPhone from portrait to landscape and watching a photo automatically reorient itself will make you go WOW!
Or better yet, watch this 4 minute live demo of the phone courtesy of CBSNews.com and YouTube.
Beyond the iPhone as a product, I tried to take a stab at what it could mean financially….
January 09, 2007 - Endeavor Gains First Buy Recommendation:
Endeavor Acquisition Corporation (EDA) gained its first analyst coverage which not surprisingly was a buy rating. Lazard picked up EDA with Buy rating and a $13 target price. I haven’t seen the report but apparently it talks about EDA as a play on the growth of American Apparel. One of my reasons for entering the shares was that American Apparel would attract Street sponsorship. Brokers have to jump through a lot of hoops before recommending stocks and I am a little surprised that Lazard acted so quickly. But I think this is just the beginning for analyst coverage and analysts don’t pick up stocks unless they have buy ratings. EDA popped 8% yesterday to close at $9.94. Until I have reason to doubt the numbers in EDA's filing about the deal, I think the shares can be legitimately valued anywhere from $10 to $18. And in case you missed it, we have company in EDA as SAC Capital Advisors has taken an 8.7% stake. A giant hedge fund like SAC taking a substantial long position should help attract analysts as well --- after all, SAC will want to trade around and eventually sell their position.
January 09, 2007 - Rogers Splits and Reports Subscriber Statistics:
Rogers Communications (RG) shares began trading on a 2 for 1 split adjusted basis yesterday when the company also announced preliminary 4Q06 subscriber statistics for their wireless and cable operations. Wireless subscriber growth was in line with Street estimates with a surprisingly low churn rate. Low churn ahead of the pending roll out of number portable in Canada is a good thing as it might indicate that RG is locking up its subscribers. Low churn and in line subscriber additions might also be good for 4Q06 wireless EBITDA. In cable, subscriber metrics were also largely in line with estimates. VOIP Telephony, the current growth driver, saw better than expected subscriber additions while basic and digital subscriber additions were each slightly short of estimates. RG reports its full results later this month. Based on the preliminary subscriber report I see no reason to alter my buy recommendation or target price of $36.
January 08, 2007 - We Have Good Company In Endeavor:
I have to admit that I am flying a little blind on Northlake's long position in Endeavor Acquisition Corporation (EDA), the blank-check company that has agreed to purchase American Apparel. Usually, I like to have an analyst report or two to review before making a new purchase but EDA had no coverage before it announced its acquisition of American Apparel.
So even though I am comfortable with my analysis of EDA, when InsiderScore.com reported that SAC Capital has taken an 8.7% position in EDA, I was quite pleased. SAC is one of the largest and most successful hedge funds in the world. Here is a paragraph that I excerpted from a longer story that appeared when I pulled up a quote on EDA at Yahoo! Finance:
"A "blank-check" company no more, last month, Endeavor agreed to purchase American Apparel Inc. for $244 million. Under the terms of the deal, EDA will pay American Apparel founder and CEO Dov Charney approximately 32.3 million shares of restricted stock, assume $100 million in debt, create a one-time merger bonus pool of $2.5 million, and reserve up to 2.7 million shares of additional common stock to be made available to American Apparel employees. Charney's stock will be locked up for at least three years, and he is expected to buy out an existing American Apparel investor for $60 million. He will also stay on with the company as CEO, and the deal is expected to close sometime this summer (and one would suspect that Endeavor will change its name at that time). On Dec. 29, SAC disclosed holdings of 1,751,550 shares of Endeavor, or an 8.7% stake. The firm's holdings include options for 200,000 shares, and it previously disclosed no holdings in Endeavor. SAC's filing lists Dec. 19 as the triggering date for its filing, the day it surpassed the 5% ownership mark and the same day Endeavor announced the American Apparel acquisition."
I also was buying EDA for clients on Dec. 19 and then again on Dec. 20. Good to know the millions of shares that traded those day were at least partially being purchased by someone with a good track record.
January 05, 2007 - NII Holdings: New Buy Provides Unique Exposure To Emerging Markets Wireless:
One of my favorite presentations at December's UBS Media & Communications Conference was from NII Holdings (NIHD). NIHD offers wireless telephone service using Nextel's iDEN standard in Mexico, Brazil, Argentina, and Peru. NIHD has approximately 3.2 million subscribers, primarily serving the business market.
I was interested in buying NIHD as soon as I returned from the conference in early December but the shares spiked higher following the company's well received presentation. The stock finally pulled back to an attractive point the first week of 2007 so I initiated a position across the entire Northlake client base.
Upside Potential Is Significant
NIHD shares trade at a well-deserved premium to other emerging markets wireless service providers due to the company's rapid growth and superior operating metrics in ARPU and churn. Margins are set to expand sharply after a multi-year period of investment to expand the reach of the network wraps up in 2007. At the UBS conference management was very confident that operating results were set to accelerate from already high growth levels. I think this can drive the shares to the high end of their historical valuation range, producing a stock price near $90 on 2007 estimates and $110 on 2008 estimates, or upside of 32% to 62%. I think that kind of upside provides plenty of compensation for the above average risk of operating in emerging markets (the risk is much greater to the stock price than the operating results as a review of the chart during last May's emerging market meltdown indicates)…
January 05, 2007 - MacWorld Preview: How Expecations Impact Apple:
MacWorld convenes next week and expectations of investors for good news out of Apple Computer (AAPL) are high. The shares have bounced significantly off their late December lows following what appears to a great reduction in risk related to the options backdating issue – in other words, investors are betting that Steve Jobs is safe even in the face of shareholder lawsuits and the distinct possibility of a formal SEC investigation.
Despite the pop, I think the trading ahead is subdued and sentiment is not particularly bullish. In fact, I think many investors are assuming that MacWorld is going to be disappointing and lead to a sell-off in the shares. I don’t know how to game it for trading purposes but I do the know the much bigger news for AAPL shares will be December quarter earnings and March quarter guidance which are due later this month.
As far MacWorld, rumors are running fast and furious....
January 04, 2007 - January 2007 Model Signals:
It's a new year but there were no changes to Northlake's Market Cap and Style model signals for January. The Market Cap Model continues to favor mid caps and the Style model remains firmly in the growth camp. Within my personal and Northlake client accounts, I am implementing the Market Cap signal by holding equal amounts of the S&P 500 (SPY) and the S&P 400 Mid Cap (MDY). The entire exposure to the Style model is in the Russell 1000 Growth (IWF).
Both signals are the results of a somewhat muddled group of indicators looking at economic, interest rate, and technical measures. My interpretation is that the indicators are picking up the slower economic growth increasingly evident over the past six months but the implications of the slowing are mixed for major investment themes. In other words, the market is operating without a major theme with all investment strategies rising and falling together. This is far different than the consistent themes of small caps and value that were evident from the bottom in the market in 2002 until the breakout last summer. I suspect the correct interpretation is that we are transitioning to new leadership. Large caps seem likely candidates but I don’t the evidence is strong enough yet to make a big bet on that outcome.
Since we are at year end, I thought I'd offer a look back at performance of the models in 2006....
January 03, 2007 - 2006 Box Office Wrap-Up:
Good breadth of popular movies appealing to all the major movie-going demographics allowed the box office to recover during the holiday season, pulling the fourth quarter to about breakeven with 2005 according to data from BoxOfficeMojo.com.
The final weekend of the year, including January 1st, saw box office receipts rise 15%, building on a gain of 6.8% in the prior week. The finishing kick allowed the fourth quarter to overcome a tough comparison in 2005 when three blockbusters (Harry Potter, Narnia, and King Kong) were released between Thanksgiving and Christmas.
For the full year, BoxOfficeMojo reports that domestic ticket sales rose 4% to $9.2 billion. Following the widely discussed weakness in 2005 when ticket sales fell almost 6%, the recovery suggests that the doom and gloom surrounding the theatrical movie business for much of the last two years was overdone. Internet downloads, home theatres, and alternative entertainment options all pose challenges but 2006 shows that depth of decent quality films will still bring customers to theatres....
December 29, 2006 - Positions Recap at The Turn of the Year:
As 2006 draws to a close and a new year begins, I thought it would be appropriate to provide a brief update on the positions held in almost all Northlake-managed accounts.
Model-Driven ETFs: I'll get a fresh update on the Market Cap and Style models over the New Year's weekend but I expect the signals favoring growth and mid caps to remain in place. The growth signal is strong, while the mid cap signal is weak. Current investments held as a result of these signals include the S&P 500 (SPY), the S&P 400 Mid Cap (MDY), and the Russell 100 Growth (IWF).
Japan: EWJ has underperformed this year but I am sticking with it as my theme is that Japan is emerging from a multi-decade period of underperformance for its economy and stock market. Nothing has occurred this year that challenges my assumption. I look for Japan to move back toward global leadership for stock market returns in 2007.
Apple Computer: Not much more to say here. I am bullish because I think Mac sales will continue to surprise on the upside as Apple reaps the benefits of orienting the company towards delivery and manipulation of digital content. I think upside of over 25% exits.
Central European Media Enterprises: CETV remains my favorite stock. I think it is headed north of $100 in 2007. CETV is the best play on the emerging and booming economies of Central and Eastern Europe. The fact that management has consistently met or beat their goals and delivered on their promises supports my bullishness.
Disney: DIS had a great 2006 with the shares rising more than 40%. I don’t expect a repeat performance but I believe estimates are too low and investor caution toward the 2007 growth rate is unwarranted. As these fears fade, I think the shares can trade to $38-40.
Endeavor Acquisition Corporation: The closing of EDA's acquisition of American Apparel will create a hot new specialty apparel stock that should attract analysts and investors. If American Apparel hits the numbers contained in Endeavor's latest SEC filing the shares are very cheap relative to other teen focused retailers. My target ranges from $10 all the way to $18 depending on how strong financial results turn out.
Regal Entertainment: It took awhile but RGC shares ended the year strongly and produced about a 12% total return after adding in 90 cents in dividends since my initial purchase in March. The worst box office comparisons are over and investors are likely to look ahead to a blowout 2Q when three of the biggest blockbusters of all-time will hit theatres (Pirates 3, Spiderman 3, and Shrek 3). RGC shares should also benefit from the IPO of National Cinemedia which will likely lead to a boost in shareholder value as RGC uses its share of the proceeds. RGC is set to provide another year of double digit total return.
Rogers Communications: RG is poised for another year of greater than 20% growth led by continued to rapid growth in the Canadian wireless market where RG is the market leader. Canada is running several years behind the U.S. in wireless penetration which sets up a repeat performance of recent growth trends. RG also will benefit from the rollout of the triple play in its cable business, the largest in Canada. I think the shares can trade to the low $70s, producing a return of over 20%.
That is a recap of what Northlake owns today on behalf of its clients. As always, these are several potential ideas in the pipeline and my favorable opinion of any stocks currently held could change. There is no way to predict the timing of those things but one thing you can count on is that I will post commentary on any changes right here as they occur.
Happy New Year!
December 29, 2006 - Apple Files 10-Q With Options Update:
In hindsight, it appears that some of December's weakenss in Apple shares (down about 10% prior to today's open) was due to speculation about developments in the options back dating scandal. It is likely that prior to the publication of articles in Law.com and the Financial Times some investors may have gotten wind of the gist of the content. This is purely speculation on my part but it fits the profile of the stock trading in which the decline from $93 to $81 went far beyond concerns about the current quarter or the iPhone.
Apple is rebounding strongly today following the release of the company's restated 10Q and Annual Report. The 10-Q has a lengthy discussion of the options issues including a thorough recap of the internal investigation. My conclusion is that Apple is not out of the woods on this issue but investor concerns should decline dramatically.
Apple admitted that it screwed up and even the lawerly language used in the 10-Q does not cover up that fact. Two things are clear. First, Apple conducted a very thorough investigation. Second, Apple is going to defend Steve Job's actions. I still expect the SEC to pursue a formal investigation but I doubt that they will find anything more damning than what Apple has now admitted.
I expect investor attention towards Apple shares to largely refocus on fundamentals. That means a very strong December quarter earnings report and new product introductions at January's MacWorld. But the options issue will hang in the background until the SEC wraps up its investigation. And reporters will still dig around for incriminating info about Jobs related to the options issues.
Apple is way overanalyzed and investors have very strong emotions about the company. This means trading is likely to remain even more volatile that usual. But I expect the upward trend to resume and a move to over $100 is very plausible if my expectations about the December quarter, MacWorld, and the 2007 outlook are met.
Not surprisingly, I am staying strong across the entire Northlake client base and in my personal accounts.
December 27, 2006 - Apple Shares Remain Unusually Weak:
The point of my post about the Forrester report on Apple's iTunes sales was not really to discuss AAPL. Instead, I was trying to point out how the type of analysis can impact the conclusions drawn. In other words, good inputs lead to useful outputs and vice versa.
When I posted this piece on StreetInsight.com, two contributors, Scott Rothbort and Jeff Bagley, responded to my post and reiterated their own bullish views on Apple. I am in total agreement and remain long as ever, including adding the stock to new accounts last week (Northlake owns pretty much the same portfolio for all individually managed accounts but client agreements usually allow ample flexibility as to the timing of the transition to Northlake's investment strategy.)
Similar to Scott and Jeff, the basis of my bullishness on Apple is Macs, not iPods or iPhones or iTV. I believe Apple's market share gains in Macs are just beginning and will go beyond most current estimates and be persistent and sustainable. Apple has bet the company on management of digital content. The operating system, the applications, and the hardware (Macs and iPods and the soon to be iPhone and iTV) are all built around the idea that PC use, particularly among consumers is being dominated by the need to manage the digital lifestyle. Apple is miles ahead of Microsoft on this front, providing a competitive advantage vs. all the windows-based PC manufacturers including Dell Computer (DELL) and Hewlett Packard (HPQ). Given the small share Apple has on a global basis, the rapid developments in digital content, and the increasing use of digital content in the business world, Apple has made the right bet and will reap the benefits for several years....
December 26, 2006 - iTunes Sales Are Not Collapsing:
Leaving aside the debate concerning why Apple Computer (AAPL) shares have been acting so poorly and whether it is deserved, I think it is fair to say that the Forrester report that said iTunes sales were plummeting was the start of the severe downward pressure. As you might recall, the Forrester report generated a huge amount of publicity and critics noted it was flawed and completely inaccurate.
Last week, the Wall Street Journal had an article discussing the report. It turns out that what Forrester measured was iTunes download activity comparing January 2006 to June 2006. This is a far different methodology than would be used on Wall Street, which deciphers growth trends by looking at year-over trends.
In this case, Wall Street's approach is correct as the Forrester methodology fails to address significant seasonality in digital music sales. January is a high point, especially for iTunes, because of the popularity of iPods and other MP3 players as holiday gifts. iTunes seasonality was probably greater than usual last January as the blowout iPod sales of 14 million units in 4Q05 arguably represented the peak of iPod mania. Add in the iTunes gift cards received in December 2005 and is it any real surprise that June 2006 iTunes sales were below January 2006?....
December 21, 2006 - Details in Endeavor's SEC Filing Support Bull Case:
Endeavor Acquisition Corporation (EDA) submitted an SEC filing yesterday with lots of details about its acquisition of American Apparel. Most importantly, the company provided historical and projected revenue and EBITDA figures. The data is better than I expected, particularly for 2007 and 2008, giving me greater faith in my buy recommendation and leading to more conviction in my $10-12 target. In fact, assuming the company hits the numbers in the filings, I think a stretch target of $14-18 is realistic.
Here is a copy of the investor presentation contained within the SEC filing. The presentation is designed to introduce Wall Street to American Apparel from a financial and operational perspective.
The news articles discussing the acquisition indicated that 2006 revenue and EBTDA would be $275 million and $30 million, respectively. I had initially assumed that EBITDA would grow to $40 million in 2007 and $50 million in 2008. However, one of the closing conditions contained in the filing is that American Apparel will submit its 2007 and 2008 projections following the completion of the 2006 audit and that the projections will show EBITDA of at least $50 million in 2007 and $70 million in 2008.
My stretch target assumes an EBITDA multiple of 12-15 times 2008 results. Given the growth rate, I think this multiple range is very realistic especially with American Eagle Outfitters (AEOS) and Urban Outfitters (URBN) presently trading at 14 times 2007 estimated EBITDA....
December 20, 2006 - Endeavor Aquisition Buys American Apparel and Northlake Buys Endeavour:
Following the news that American Apparel is being purchased by Endeavor Acquisition Corp. (EDA), I decided to take a small position in EDA for client accounts. EDA is a blank-check company that went public about one year ago by raising $130 million. Blank check companies go public and then look to make acquisitions. For EDA, American Apparel is the choice. And it's a good one.
My target on EDA is $10-12 based on my initial expectations for revenues to rise 30% in 2007 and EBITDA to grow by 35%. This target assumes EDA/American Apparel would trade at a similar multiple to other high growth specialty apparel retailers serving teens such as American Eagle (AEOS) and Urban Outfitters (URBN).
Background on American Apparel
American Apparel operates 140 stores in 11 countries and also sells through its Web site at AmericanApparel.net. The company sells basics, targeting a young demographic with a progressive message. American Apparel does not use sweatshops in the Far East. All of the company's products are made in Los Angeles. Wages are relatively high at $8-15 per hour and benefits are provided to workers including health care and English classes. American Apparel competes with Abercrombie & Fitch (ANF) and American Eagle Outfitters (AEOS) as well as other specialty apparel companies targeting teens, young adults, Generation X and baby boomers.....
December 15, 2006 - Rogers Communication: New Buy Targeting 25% Upside:
I have spent this week completing my follow-up work on Rogers Communications (RG), my second favorite presentation from last week's UBS Media and Communications conference (more on my favorite presentation, NII Holdings (NIHD) coming soon). I liked what I learned and pulled the trigger on an initial purchase of RG for Northlake client accounts, including my own. The stock is off its recent highs and the combination of valuation and operating momentum leaves me comfortable buying the shares as I think they will hold up well if this market ever rolls over (something I have incorrectly expected for several months).
RG is the largest wireless carrier and the largest cable company in Canada, with 6.5 million wireless subs and 2.3 million cable subs. The company also owns 51 radio stations, a home shopping channel, four regional sports networks, more than 70 magazine titles, and the Toronto Blue Jays and Rogers Centre. All of these media assets serve the Canadian market.
In the last twelve months, RG earned 51% of its revenue and 63% of its EBITDA from wireless. An additional 35% of revenue and 32% of EBITDA are from cable. Total revenues for the trailing twelve months were CDN$8.9 billion. Trailing twelve month EBITDA is CDN$2.3 billion. To translate to US dollars, you can shave about 15% off those figures at current exchange rates. Market Cap is $18.9 billion. In other words, RG may exclusively serve the Canadian market but it is a sizable company. Average daily volume for the past three months has been 166,000 shares for the NYSE listed shares. RG has a good balance sheet for a wireless and cable company with debt of about $6 billion, or 3 times EBITDA.
RG has been growing rapidly with revenues and EBITDA up 15% and 33% in the most recent quarter. Rising subscriber counts, new products, steady to higher ARPU, and operating leverage are driving the growth. Year to date revenues have risen 14% and EBITDA is up 25%. 2006 guidance was recently raised with the top end of revenue and EBTIDA growth matching year to date growth. Given current operating momentum, it seems that the possibility of the company exceeding guidance is high....
December 13, 2006 - Recent Apple News:
Lots of Apple Computer (AAPL) news today. UBS is out with a note claiming that Apple will enter the wireless via a mobile virtual network operator (MVNO). UBS Telecom analyst John Hodulik was discussing this in the hallways of their conference last week but went public with his thoughts today. Given a loyal Mac user base and the built-in distribution system of Apple Store's, I think that this MVNO stands a better chance of success than others that have generally underperformed expectations in the U.S. market. I think the parallel here is Virgin Mobile in the U.K., not ESPNMobile in the U.S. While this news, if accurate, will give a small boost to Apple due to recent concerns that the launch of the iPhone would be delayed, a greater impact might be on the major wireless operators in the U.S. Hodulik notes that Apple would be entering the high-end market with an unsubsidized handset, and he believes that Sprint Nextel (S) with its high data usage is most vulnerable....
December 09, 2006 - December 2006 Model Signals:
My attendance at the UBS Media Conference led to the delay in getting the latest model signals up on the website. Fortunately, the models did not signal change for this month. Here is some detailed commentary:
There were no changes to the signals from Northlake's Market Cap and Style models for December. The Market Cap model continues to send a mid-cap signal, while the Style model moved to a stronger growth signal. As a result of this month's update, I made no changes to client ETF holdings. The Market Cap allocation continues to be split evenly between the large-cap S&P 500 (SPY) and the mid-cap S&P 400 (MDY). The Style allocation remains 100% Russell 1000 Growth (IWF).....
December 08, 2006 - UBS Media Conference 2006:
Every year I attend the UBS Media Conference in NY to get a face-to-face update with many companies in the media industry. My goals are to find new ideas for client accounts, gain a better understanding of major industry trends, and connect with other money managers focused on the media sector. Below is a lengthy providing one paragraph summaries of all the presentations I saw during my four days in NY.
Overview and 2007 Advertising Forecasts
Sir Martin Sorrell, CEO of WPP Group noted is his keynote presentation at the 34th Annual UBS Global Media & Communications Conference that "if you compete on price, you create commodities, not brands." Usually we think of price competition on products and services purchased by end users. However, Sorrell made his comment in the context of a discussion of what is going on in the global economy for all things advertising related.
I think what Sorrell was getting at is that changes in media consumption due to digital technologies will be tricky to navigate. On the one hand, the digital technologies are opening new avenues for consumption of content supported by advertising. On the other hand, these same digital technologies could serve to depress profitability across all advertising-related industries because there is a major risk that the transition to digital/broadband delivery of content could depress pricing on the content, and in turn, the advertising.
The first day of the UBS conference was largely devoted to advertising forecasts and big picture, meta thinking about the future of the global media industries. I'd classify the news as mixed. 2007 advertising forecasts revealed by Universal McCann and Zenith Optimedia called for U.S. growth of 4.8% and 4.1%, respectively, and international growth of around 6%. International growth is boosted by continued double digit growth in many emerging markets with Central and Eastern Europe and Asia being the strongest geographies.
These growth rates overstate the outlook for traditional media as they include another year of 20% plus growth in internet advertising. Internet is contributing about 2% of the growth rate, leaving traditional media advertising growth at just 3-4%, or about inline with real GDP growth rates. Historically, advertising has been a considered a cyclical growth industry because it tracked nominal GDP growth. The loss of pricing power that Sir Martin noted in his comments reflects the new reality.
It is not pricing alone that is causing problems for traditional ad supported media. Newspapers, magazines, radio, and TV are all losing time spent using to alternative forms of entertainment including the internet. In fact, a study noted by Zenith Optimedia CEO Steve King concluded that the internet now represented 22% of our media consumption but just 7% of the total advertising pie. The cost to reach consumers on the internet is far lower than in traditional media so even if media companies can keep the lion's share of their users as the online transition continues, prices and profitability could compress.
Fortunately, this viewpoint is readily accepted by investors, analysts, and the companies themselves. Consequently, the upside is that most companies and industries are fighting back and are willing to risk new trying new distribution methods to reach consumers. Furthermore, when perception becomes reality and conventional wisdom, stock prices ought to reflect the news. In other words, whether it is the depressed stock prices of local media such as newspapers and radio or the outperforming prices of the big entertainment conglomerates and multichannel TV distributors, it is probably fair to say that the stocks reflect the tricky fundamental environment. This leaves it to investors to find opportunities where companies are meeting the challenges and thriving.
With that in mind, here are a few observations on other presentations I attended during the conference which ran from December 4th through December 7th.....
December 01, 2006 - Bud Latest Company To Shift Advertising Mix:
Advertising Age is reporting that Anhueser-Busch (BUD) "2007 media plans call for significant increases in marketing spending." However, not surprisingly, the company plans to shift its mix in favor of digital advertising. This is good news for internet advertising driven stocks, most likely those with strong positions in branded advertising such as Yahoo (YHOO). On the flip side, the losers appear to the broadcast television networks.
BUD's Chief Financial Officer, Randy Baker, told an investor meeting that the total advertising spend was going to rise significantly but the mix of media purchased would change "to reflect the viewing habits of our consumers." Baker noted two key mix shifts. First, more money will be spent on cable TV networks and less on broadcast TV networks. Since Baker noted that BUD's massive spending on sports would unaffected, this implies that prime time network TV would bear the brunt of the mix shift. ABC is owned by Disney (DIS), CBS is owned by CBS Corporation (CBS), FOX is owned by News Corp (NWSA), and NBC is owned by General Electric (GE). Fortunately, DIS, FOX, and GE also own a broad array of cable networks so the loss at the broadcast networks will be softened. CBS has extremely limited exposure to cable networks. The numbers here aren’t huge, BUD spent under $300 million on network TV in 2005, but given the high operating leverage in the network TV business, this is still a meaningful shift.....
November 30, 2006 - Technology Advances Assist Media Growth:
Rob Martorana, my editor at StreetInsight.com, and I had an email exchange the other day surrounding the advances in digital technology for media playback. Rob was discussing his new 30GB iPod with accessories, his new high def cable set top box, and his first experience watching a DVD in the new blu-ray format. The gist of our conversation was that new technology can drive the business for content producers, especially the ability to exploit a quality library of media.
Yesterday,I received another reminder of this when Bernstein Research put out a research report on Corning (GLW) discussing the high likelihood that 70 inch flat screen TVs will be on sale in the next few years. According to Bernstein, an 80 inch flat panel LCD TV would weight the same as a 36 inch CRT TV. Bernstein's pricing model indicates that by 2010 a 70-80 inch flat panel LCD TV might retail for $3,000, which would be "roughly the same percentage of US average disposable income as a PC in 1996." Furthermore in 1996, PCs had a "40% household penetration."
November 27, 2006 - Disney Radio Deal and Weekend Box Office:
Just before Thanksgiving, Disney (DIS) and Citadel Broadcasting (CDL) announced a restructuring of CDL's deal to buy DIS' radio assets. The total value of the deal has been reduced by $100 million and an additional $200 million of cash due to DIS will now come in the form of CDL shares. Essentially, DIS is trading $300 million in cash for $200 million in CDL shares. It was widely expected the deal was going to be renegotiated since the radio industry has suffered severely since the deal was struck, so this news isn’t much of a surprise. The loss of $100 million in value is minor compared to DIS' market cap of $68 billion. DIS now will temporarily own 57% of CDL instead of 52% but the plan all along has been to pass that ownership on to DIS shareholders. It is still not certain what form the distribution will take. I think this is an acceptable outcome for DIS shareholders and it now looks closing is a near certainty by 2Q07.
In other news, the weekend box office, performed admirably against another tough comparison.....
November 21, 2006 - Sold Sears Holdings:
I decided to step to the sidelines on Sears Holdings (SHLD). I sold all shares held by clients and personally last Thursday and Friday.
I don’t really see anything in the SHLD that has changed much as a result of last week's earnings report. However, I do think the falling gross margin and EBITDA at Kmart provides some useful ammunition to the bears that will linger through the holiday season. Pitching the line that Sears will similarly run out of margin expansion in the next year or two could prove an effective argument....
November 17, 2006 - Holiday Box Office Kicks Off This Weekend:
This weekend marks the start of Hollywood's biggest box office period besides the summer. Led by the wide releases of the latest James Bond film, Casino Royale, and Happy Feet, Warner Brothers latest attempt to break into the big time animation game, Hollywood hopes to add a finishing kick to 2006's rebounding box office performance.
So far this year, the box office up 5.7% against the weak 2005 performance that has had industry observers worried about the impact of home theatres, shorter DVD release windows, high ticket prices, movie downloads, and alternative entertainment options. While I think those worries are overdone, it will be tough for the box office to show growth between now and year end as this year's turnaround actually began this weekend last year when the latest Harry Potter film opened to over $100 million. That was followed by holiday hits King Kong and Chronicles of Narnia: the Lion, the Witch, and the Wardrobe, which grossed $218 million and $291 domestically, respectively....
November 17, 2006 - Sears Holdings Gives The Bears Some Ammo:
Below are two comments I wrote for StreetInsight.com in the hours following Sears Holdings (SHLD) earnings report. Overall, the quarter was OK but left some room for those bearish on the story due to the weak positioning of both Sears and KMart. THe pullback is understandable and reasonable in this context.
Initial Comment, 8:08AM Central
Sears Holdings (SHLD) reported 83 cents against consensus of 98 cents. The stock is down $8 on the news. Revenues were slightly above expectations and same store sales declines moderated to -3.8% with Sears providing all the improvement. The fact that sales are better than expected and EPS fell short implies that margins did not expand as much as expected. The press release lacks a full income statement but states that margins improved at Sears. Thus it appears that Kmart might be the source of the EPS shortfall. If so, this gives the bears something to chew on as they will state that Kmart shows there is a limited life to the ability to drive financial results based solely on margins.
I think this brief comment captures why the stock is trading off but I'd like to learn more and I wouldn't sell my long position or add to it based on what I know so far.
Follow-Up Comment, 8:32 AM Central
I found Sears Holdings' (SHLD) financial statements in the SEC filings. The figures at Sears look fine. Kmart saw a 90-basis-point decline in the gross margin vs. a year ago. Although SG&A leverage improved by 30 basis points, that was not enough to overcome the lower gross margins, and earnings before interest, taxes, depreciation and amortization fell from $85 million to $57 million.
Gary Balter is out with a comment. He says that the quarter was basically in line but notes that Kmart fell short as outlined above. He also says he thinks that investors were expecting slightly better same-store sales performance. He also noted another quarter of inventory investment. While this is to be expected with the holiday season just ahead, the increase was a little higher than he expected.
One positive noted in the press release is that apparel sales at Sears showed progress. This has long been a weak area for the company, offsetting the core strength in home-related hard and soft goods.
The stock has recovered a bit off its lows in pre-market trading. I still haven't decided what, if anything, to do with my long position.
November 15, 2006 - Sears Holdings 3Q06 Earnings Preview:
Sears Holdings (SHLD) reports before the open tomorrow. In fact, it will probably have reported by the time you read this. The company doesn’t host a conference call. All we get is the financials and a press release with some commentary. The limited information flow, the stocks high price and high volatility, and the ongoing controversy over the company's same store sales performance, will likely produce some fireworks in the stock. According to a note I read yesterday on theflyonthewall.com, SHLD options imply a potential move over $9. Big move for sure, but keep in mind that is just 5%.
After the company reported its last quarter, the shares fell sharply from $160 a few days before the report to $135 a week or two after the report. The stock has since recovered and is trading just under its 52 week high. The recovery is due to some signs that same store sales are trending OK (which means better than last quarter's -3.8%), less fears about Lampert making a big new acquisition, renewed share buyback activity in 3Q which was not evident in the 2Q report, and expansion of the share buyback by $500 million....
November 13, 2006 - Disney's Swing Factors for 2007:
4Q06 earnings from Disney (DIS) left open the debate over whether the company 's four year string of double digit operating income growth is about to come to and end. With DIS shares are a premium to other diversified media conglomerates, a premium earned by the company's outstanding performance the last few years, the FY07 growth rates is critical to the performance of DIS shares in the month end.
I have strongly advocated for ownership of DIS partially on the belief that skepticism toward the 2007 growth rate would give way to the realization that DIS would continue to drive industry leading growth. What follows is a rundown of the pluses and minuses at the margin for DIS in 2007. I still think the plusses win out but you can decided for yourself.
Positive Swing Factors
• ABC is off to a great start this TV season. The shift of Grey's Anatomy to Thursday nights, popular new shows, scatter market pricing firmly above upfront, and the elimination of losses on Monday Night Football all suggest upside to the ABC, which has significant operating leverage.
• ABC's owned and operated TV stations will benefit from political advertising in 1Q07 (this quarter).
• ESPN ratings are very strong this season. MNF ratings are above guarantees, likely providing upside in profitability (or reduced losses) on this expensive rights contract. Losses on the ESPN Mobile venture won’t be repeated.
• DVD sales for Pirates , Cars, and a slate of other successful films that were released in FY06 will hit in FY07, mostly in the current quarter. This is very high margin revenue.
• The divested Disney Stores will begin to receive licensing fees.
• Merchandising revenue, again a very high margin stream, will continue to be boosted by Cars and Pirates.
• Domestic theme park attendance has held up well with flat comparisons against very tough comparisons. Revenues are still climbing as per capita spending is rising mid-single digits.
• Margin expansion will continue at the domestic parks, helped along greatly by a sharp drop in pension costs. Admittedly this is a low quality earnings stream.
• EuroDisney and Hong Kong Disneyland will see reduced losses.
• A smaller film slate means incrementally lower marketing costs.
• Cost cutting at the movie studio could save $100 million.Negative Swing Factors
• DIS continues to invest in its video games unit. Incremental spending will be $30 million.
• Radio will ultimately be divested. Investors will probably look at pro forma growth but this division is worth -5 cents in annual EPS.
• Capital spending is going up due to theme park investment and further spending on digital content initiatives.
• Losses may be higher for the Disney branded mobile phone initiative.
• ESPN won NASCAR rights which will begin to be amortized in calendar 2007.
• Consumer products had minimum guaranteed revenue related to its sale that disappears in 2007.
• The tax rate is going up slightly.
• The Pixar acquisition will be dilutive for a full year.In my opinion, analyst estimates somewhat favor the negative factors, leaving room for upside if the positive factors come through. Additionally, DIS appears very close to renewing its deal with Comcast (CMCSA/K) for carriage of the ESPN family of cable networks and the Disney Channel.
The deal is rumored to include the sale of DIS' minority stake in E! for over $1 billion. The sale of E!, the divestiture of radio, the acquisition of Pixar, and the investment in video games and digital content, and the continued investment in international parks and distribution signal how DIS hopes to drive growth beyond 2007. Besides what I hope will be rising estimates in 2007, I think DIS has laid out the clearest path to long-term growth with the simplest capital structure among the major entertainment conglomerates. Put those two things together and it should be obvious why I remain bullish on DIS shares.
November 10, 2006 - Disney Numbers Are Good But Sell The News Wins Out:
Disney (DIS) reported strong 4Q06 earnings. EPS of 36 cents compared to a rising 33 cent consensus and revenues of $8.8 billion were ahead of the consensus estimate of $8.7 billion. Segment level results were as good as or better than expected across the board with particular strength in Studio Entertainment and Theme Parks.
Despite the better than expected results I think DIS shares may trade slightly lower for two reasons. First, given the strong run-up and rising estimates, a positive surprise was expected. Thus, a sell the news setup is in place. Second, on the conference call, I thought the companies comments on swing factors for FY07 (DIS does not provide guidance) will leave the debate open as to whether the company can extend its string of double digit growth in operating income. I think the commentary gave slightly more ammunition to those who think the streak will be snapped than those who think it will continue (I think it will continue)....
Don’t read that as unusually negative. DIS management was confident and spoke of many opportunities for growth in 2007. Furthermore, the current consensus calls for less than 10% growth.
Coming off this quarter, I still like DIS and think it is one the best positioned large cap media stocks. The stock just might be due for a rest while the growth I expect in 2007 is given a chance to reveal itself.
Cable Networks was a star again as ESPN continues to grind out growth and the Disney Channel continues to monetize its ratings success. Revenues rose 16% and operating income rose 2%. Margins expanded due to the recognition of deferred revenue and lower marketing expenses. Advertising revenue growth appeared to be satisfactory based on comments on the conference call. Looking ahead, the company said that growth would be "generally consitent" with their promise that ESPN would average double digit operating income growth. Tough comparisons await due to increased rights fees for NASCAR and Monday Night Football. Thus, I'd take this comment as being favorable relative to many analysts who fear 2007 will be a loser growth year for ESPN.
Broadcasting revenues rose just 1% with operating income declining 40% off a small base of just $48 million. Management said that ABC performed well but rising costs for the Disney mobile phone service held back margins. For 2007, ABC appears to be in very good shape due to strong ratings, a good upfront and very strong scatter market advertising in response to this year's ratings success. I think Broadcasting represents a positive swing factor relative to current estimates.
Theme Parks had another good quarter, especially in light of very tough attendance comparisons. Revenues rose 8%, while operating income rose 28%. The closely watched margin expansion continued at the domestic parks helped by higher guest spending that offset flat attendance growth at the domestic parks. Operating income also got a boost from a full quarter of operations at Hong Kong Disneyland vs. mostly pre-opening costs a year ago. December quarter attendance trends look flat but that is encouraging performance against record attendance a year ago. I sense that management is more optimistic than the street about Theme Park growth in 2007.
Studio Entertainment easily beat estimates with revenues of $2 billion and operating income of $214 million against estimates of $1.85 billion and $170 million, respectively. The positive surprise emanated from the big success for Pirates and Cars at the box office and better margins for home video due to a favorable mix of titles and reduced marketing expenses. The Studio should perform exceptionally well in 1Q07 when the December quarter gets the Pirates and Cars DVDs. Comparisons toughen starting 4Q07 but the timing of Pirates 3 will help comparisons in 3Q07. Management noted that TV syndication might be down in 2007 vs. a very strong 2006.
Consumer Products did very well in merchandising due to Cars and Pirates but higher spending on developing the video games unit held back margins. Revenues slightly exceeded expectations, rising 9% but operating income grew just 1%. In 2007, these trends should continue with an incremental $30 million in spending at the video games unit offset by Pirates 2, Pirates, Cars, and the next Pixar film, Ratatouille, which is due out next June.
I have a few follow-up questions concerning the swing factors in 2007. I'll post in Market Insight if the answers offer additional insights.
November 10, 2006 - Good Quarter For CETV But Someone is Unhappy:
Despite the extremely negative stock price action, I found Central European Media Enterprises (CETV) Q06 earnings report to be quite good. Good enough, in fact, to use the weakness to add CETV to some brand new accounts. I have spoken with company, several street analysts, and one of the major shareholders and all agree that there is nothing in the earnings that would account for the decline in the stock. I think it is just a "sell the news" reaction to a stock that has risen by 40% since the July lows.
CETV reported revenue growth of 14% and segment EBITDA growth of 23%. EPS were 15 cents, well ahead of consensus but boosted by favorable foreign exchange and a one0time gain. EBITDA margins expanded by 300 basis points to 23%, ahead of my expectations and alleviating one of my few concerns about the CETV story....
November 08, 2006 - Another Strong Quarter On Tap For Disney But 07 Is What Matters:
Disney (DIS) is expected to report strong 4Q06 earnings to wrap up its fourth consecutive year of double digit EPS growth. EPS are expected at 33 cents on revenues of $8.69 billion. The EPS comparison would represent growth of 43% against an easy comparison a year ago when $300 million in losses were recognized at Miramax.
The big debate over DIS shares concerns whether FY07, which started on 10/1/06, will continue the streak of double digit growth. Tougher comparisons at the movie studio, theme parks, ABC, and ESPN have many investors worried that growth at DIS will moderate. In fact, the current consensus EPS estimate of $1.70 for 2007 represents growth of just 7.6%. Consequently, on the conference call any comments about guidance or indications of how business is pacing for 2007 will be most likely to impact DIS shares in the near-term.
For the current quarter, growth should be broad based with each operating segment growing EBITDA by double digits. Growth at the studio will be strongest given the aforementioned easy comparison and the runaway success of the company's summer film slate led by Pirates of the Caribbean: Dead Man's Chest and Cars. ESPN is also expected to report a strong quarter as timing issues will shift about $85 million in revenues into the quarter. Consumer Products will benefit from spillover of merchandising from the box office success. Theme Parks will be driven by margin expansion as attendance was very strong a year ago in response to an effective marketing campaign built around the 50th Anniversary of Disneyland. Broadcasting should continue its turnaround led by good ratings performance and improved ad pricing at ABC. One thing that could distort results is the shift of Monday Night Football from ABC to ESPN....
November 08, 2006 - Looking For A Good Quarter and Optimistic Guidance from CETV:
Tomorrow, I expect Central European Media Enterprises (CETV) to report another strong quarter in its seasonally weak 3Q. Romania and Ukraine will again be the growth engines but the big story will be the turnaround at TV Nova in the Czech Republic. In 1H06, CETV reset expectations and initiated a new strategy at Nova designed to insure long-term growth by raising advertising prices and modernizing the advertising market in the Czech Republic. Prices are largely unchanged since 1999 despite massive growth in the Czech economy. The reset caused 1H06 revenue and profit to fall by 25% and 40%, respectively, in CETV's largest market. At its September analyst meeting, CETV raised guidance at Nova and the implied 3Q guidance would call for flat revenue growth and rising EBITDA. Since that meeting, Nova has continued with excellent ratings performance so I expect a good result in this crucial market. In fact, I think it is possible that 2006 guidance for Nova will be raised further. The company is already on record with solid double digit growth guidance for Nova in 2007 and 2008. I would expect that guidance to be maintained although the absolute revenue and EBITDA projections look conservative. It is just too early to increase out year numbers....
November 02, 2006 - November 2006 Model Signals:
Both Northlake's Market Cap and Style models sent new signals for November. The Market Cap model moved from large cap to mid cap and the Style Model went back to growth from value. The mid cap signal is fairly weak, while the growth signal is moderately strong. As a result of the new signal, I swapped all client and personal positions in the Russell 1000 Value (IWD) into the Russell 1000 Growth (IWF). Since the mid cap signal was weak I swapped only half of the positions in the S&P 500 (SPY) into the S&P 400 Mid Cap (MDY)....
October 26, 2006 - Good Quarter For Regal Offset By Share Issuance:
Regal Entertainment (RGC) reported better-than-expected third-quarter 2006 earnings. Revenue of $675 million rose 7.5% ahead of the consensus estimate of $650 million. Good performance on expenses allowed the incremental revenue to flow through the income statement as adjusted earnings before interest, tax, debt and amortization rose 14%. EPS came in at 20 cents, ahead of the 18-cent consensus.
These results normally would have pushed the shares higher, but simultaneously with the earnings release, the company announced that one of the private equity firms that is a significant shareholder is going to force a secondary of 7.7 million shares. RGC has about 150 million shares outstanding. According to Lehman Brothers, the firm, Oak Tree Capital Management, has been a regular size seller in the open market about twice per year. While a sizable secondary by an insider is never good news, the offset could be less supply in the year ahead.
Despite the better-than-expected results, due to the secondary, RGC's share price initially slid about 2%. I think it is a positive sign that by late afternoon the shares had fought back and ticked higher on day. Looking at the internals on the quarter it is easy to understand why buyers showed up....
October 22, 2006 - NBC's Strategic Changes: The Future of Network TV?:
I think the money quote from last Thursday's widely discussed article on steep cost cutting at NBC Universal came from Bob Wright: “As we reprioritize ourselves toward digital, we’ve got to be as efficient in our current business as possible.” The reality is that analog is under pressure due to continuing moderate viewership declines, alternative distribution channels like the internet and iPods, and ad-skipping friendly digital video recorders. The big TV networks have long been able to offset sliding ratings with prices increases but recent trends suggest that the additional challenges of digital technologies has finally restored balance to the pricing battle and CPM growth has stalled....
October 22, 2006 - Fourth Quarter Box Office Off To A Good Start:
The weekend box office for the top twelve movies was up 26% vs. last year according to BoxOfficeMojo.com. That makes it four for four so far in October, with the total box office running about 13% ahead of 2005 for the month. The Prestige, from Disney (DIS), led the way with a better than expected $14 million. Strong performance was also seen by The Departed, from the Warner Brothers studio owned by Time Warner (TWX). The Departed fell just 28% and continues to show great legs. Oscar prognosticators feel both of this weekend’s top films will get nominations for Best Picture. Expected to be on top but coming in 3rd with a disappointing $10 million was Flags of Our Fathers from the Dreamworks via the Paramount division of Viacom (VIA). Mixed reviews, lack of start power and possibly war fatigue might have contributed to the soft opening. Before it ever opened, Flags was considered a leading contender for Best Picture due to early buzz and the fact that it comes from Clint Eastwood. Now, many observers feel it might not even get nominated.
The strong start to the box office this quarter is crucial for theater owners as comparisons get really tough starting at Thanksgiving....
October 19, 2006 - Follow-Up Comments On Apple:
I have a few follow-up comments to my earnings call coverage of Apple Computer (AAPL). First, analyst commentary fell along the lines I expected. Estimates are going up, bullish analysts are reiterating their recommendations, and cautious analysts remain worried about valuation. So far I don’t see any upgrades or downgrades. Second, analysts are saying that the lower tax rate added 6 cents. My analysis indicated 4 cents. I assumed a slightly lower 30% tax rate was expected while analysts were at 32 cents.
My earnings commentary was lengthy so I left a few things out....
October 19, 2006 - Apple Reports Another Great Quarter:
Apple Computer (AAPL) reported another excellent quarter. There is absolutely no reason that anyone who was bullish prior to the quarter should change their opinion. And there is reason to believe bears might have to rethink their position. Estimates will rise by about the same 5% increase in the stock price after hours so the stock is no more expensive that it was prior to the report.
The quarter was very strong at 62 cents on revenues of $4.84 billion. Consensus was 51 cents on $4.64 billion in revenues. An unusually low tax rate helped significantly by a one-time credit helped EPS by about 4 cents but even at 58 cents it was a superb quarter from an earnings standpoint.
Revenue upside came from better than expected unit sales of Macs and iPods. For Macs, notebooks were the star at almost 1 million units. I found the ASP to be quite good as well. I had modeled it down by a $100-200 after watching the new Macbooks priced at $1099 fly out the door. I guess they sold plenty of black ones and MacBook Pros which sell at premium prices.. Desktops were actually not bad at up 4% considering the massive shift industrywide in favor of laptops. Desktops should pick up next Spring when Adobe releases new software that runs native on the Intel Macs.
iPods also were better than expected as unit sales of 8.7 million exceeded management guidance and were ahead of recent downwardly revised estimates. The $10 ASP decline was more or less expected. On the call, management characterized demand for the new nanos as “excellent” and said that there was a noticeable pickup in demand after the new nanos were announced.....
October 19, 2006 - Motorola: A Few Kinks:
Although all client holdings of MOT were sold a few months ago, I am posting the latest earnings summary on the main page as the latest quarter highlights some of the reason why I sold the stock
There was some good and bad in the Motorola (MOT) earnings report but the bottom line is that the company is back in the penalty box. A miss on the top line, 4Q revenue guidance below consensus, a 1.5-2 million miss on handset units, falling ASPs, a hiccup in iDEN shipments, and the return of restructuring charges will bring back fears that MOT is reverting to the inconsistent company it was for many years prior to Ed Zander’s arrival. I suspect that is too harsh a verdict as there is plenty of good stuff happening at MOT but for the stock price this battle for investor respect has been lost and the after hours whack in the shares is well deserved.
I’d be surprised if investor confidence in MOT was quickly rebuilt. There are some legitimate concerns about the competitive environment for handsets in 4Q and the sustainability of long-term growth as some markets like the US mature. Also, iDEN has always been viewed as risk since the Sprint-Nextel merger so the shortfall there will renew fears. MOT will have to report a clean quarter in a favorable environment for handsets to get the shares back on track. I think we’ve seen the highs for the year and I am not anxious to buy the shares prior to the next quarterly earnings report 90 days from now....
October 17, 2006 - Apple September Quarter Earnings Preview:
While Apple Computer (AAPL) shares are always volatile around earnings, I think the set up heading into this quarter is unusual. On the one hand, it is AAPL. The expectations are high and the company might receive more scrutiny than any other. The stock has rallied 50% from the summer lows following the excellent June quarter report that showed that Mac sales were finally taking off. So, based on history, AAPL probably needs to beat and raise to juice the stock.
On the other hand, the stock has largely sat out the recent rally as it is just barely higher than its early September level. Furthermore, there has been lots of cautious commentary about iPod shipments and the likely fourth quarter guidance. So, maybe just an inline report with as expected guidance will be good enough for the bulls.
For the September quarter, which is 4Q06 for AAPL, consensus calls for EPS of 51 cents and revenue of $4.66, up 34% and 27%, respectively. Growth will be driven largely by increased shipments of Macs, especially notebooks....
October 17, 2006 - Central European Media Enterprises In NY Times and Wall Street Journal:
Yesterday’s New York Times had a major article about Ronald Lauder’s investment in Central European Media Enterprises (CETV). In an odd coincidence, the Wall Street Journal had an article the same day about the attractive television markets in Central and Eastern Europe. My good friend and major CETV shareholder, Mark Riely, was mentioned in both articles. Kudos to Mark for hitting two such prestigious papers in the same day!
I suspect that the genesis of these articles may have been CETV’s September analyst meeting in New York City. In fact, I went up and introduced myself to Lauder at the meeting by interjecting myself into a conversation he was having with a woman who turned out to be the New York Times reporter who wrote the story, Geraldine Fabrikant.....
October 16, 2006 - Insider Buying at Sears Holdings:
On Friday, theflyonthewall.com, citing a report in Barron’s Online, noted that there was some meaningful insider buying at Sears Holding (SHLD) recently:
A director at Sears Holding (SHLD) recently bought $5.5M worth of the company's stock just as it was climbing to an all-time high. Richard C. Perry, the co-founder and president of Perry Capital, bought a total of 33,000 shares for his New York-based hedge fund on Oct. 9 and 10. The purchases, which were made for prices ranging from $165.02 to $168.95 a share, came as the stock was soaring to an all-time high of $171.96 on Thursday. The run-up began after Sears Holdings reported Q2 earnings on August 18 that handily beat the consensus estimate. Since then, reports have speculated that Edward Lampert, a superstar hedge-fund manager who doubles as chairman of Sears, may be targeting Anheuser-Busch (BUD), Gap Inc. (GPS) or Home Depot (HD) for a buyout. Perry Capital's transactions in Sears Holdings shares have accurately predicted the stock's movement in the past, says Ben Silverman, director of research at InsiderScore.com. According to SEC filings, Perry Capital sold about 857,400 of the company's shares in Q2 2005, bringing its total holdings down to 2M shares by June 30. During that period, the share price rose to a high of about $155. In 2H 2005, however, the stock price tumbled and was range-bound between about $115 and $125. Perry Capital took advantage of the lower prices to purchase 683,200 shares during Q3. With this week's purchase, Perry Capital now holds about 2.7M shares of Sears Holdings, or 1.7% of total outstanding shares.
You got to love that revisionist history about the run-up in SHLD that began after 2Q earnings “handily beat the consensus estimate....."
October 13, 2006 - Updated Advertising Forecast For 2007:
Yesterday, Merrill Lynch analyst Lauren Fine lowered her 2006 and 2007 forecasts for U.S. advertising. Lauren has been ahead of the curve this year with below consensus forecasts for advertising growth so this is a call worth paying attention to, particularly for 2007.
Based upon Merrill’s forecast for nominal GDP growth of 4.5% and real GDP growth of 1.8%, Lauren is now calling for 2007 U.S. advertising of $298 billion, a gain of 2.8% vs. her prior forecast for a gain of 3.5%. Lauren lowered her forecasted growth for all the major traditional media categories but slightly raised her estimate for internet advertising growth.
In fact, excluding the $3 billion, or 22% gain for internet advertising, Lauren’s estimate for 2007 U.S advertising growth would be just 1.8%. Internet advertising represents $3 billion of the projected $8 billion gain for total advertising, or 41% of the incremental growth....
October 12, 2006 - Volatility in NTL On Recent News:
NTL Incorporated (NTLI) shares have sold off the last few days, giving back most of the gains achieved after several management presentations at media conferences in the US during September.
Investors responded favorably to the presentations in which management indicated that 3Q06 results would be satisfactory. This was welcome news following published reports of the cooling of interest by private equity firms in an NTLI takeover.
The last few days NTLI sold off ahead of and in response to news out of its UK competitor, Carphone Warehouse (CW). CW initiated the latest broadband pricing war in the UK when it began an offer of “free broadband” if a customer was taking certain telephony products. The latest news out of CW is that it is buying AOL UK, an internet access business with about 2 million subs of which 1.6 million receive broadband via DSL. CW also announced that it added 150,000 broadband subscribers under its free offer in the latest quarter.....
October 03, 2006 - October 2006 Model Signals:
The weak growth signal given by Northlake’s Style model for September turned into a weak value signal for October. As a result, I swapped all client holdings of the Russell 1000 Growth (IWF) into the Russell 1000 Value (IWD) at the open yesterday.
The one month swap from IWD to IWF for September turned out to be an OK trade from an absolute and relative basis. During the month, IWF rose 1.8% vs. a gain of 1.1% for IWD.
The average holding period for Style model based on back tests going back to 1980 is about 5 months so the one month flip flop is a bit unusual. Usually the volatility occurs when the signals are weak or in transition. I remain of the belief that we are transitioning to an environment favoring growth despite the reversion back to a value signal this month. In general, an environment of moderating economic growth favors growth and that is exactly what I expect to be the dominant economic theme for the next several months.....
October 03, 2006 - Third Quarter Box Office Wrap:
Following three straight weekly declines, the box office rose 6.6% vs. a year ago this past weekend. The weekend is actually the first one of the fourth quarter. Consequently, I wanted to look back at the completed numbers for the third quarter.
Despite the weakness exhibited in the final three weeks, the third quarter still held onto a good gain, up 8.2% vs. a year ago. The strength was driven early in the quarter by the massive global success of Pirates of the Caribbean: Dead Man's Chest, while Talladega Nights: The Ballad of Rick Bobby picked up the baton in August (I guess all the Hollywood execs will be looking to greenlight films with semi-colons for next summer!)....
September 29, 2006 - Near-Term Good News For Disney:
Yesterday, in the post immediately below, I mentioned that Disney (DIS), News Corp (NWS, NWS.a), and Time Warner (TWX) were all trading at 52 week highs. Departing from the doom and gloom that Dominates most discussion of media stocks, I laid out some big picture thoughts that might be driving the bullish action in the stocks. However, there are actually some short-term developments that are helping each company. In particular, DIS continues to enjoy a string of good news that has driven the stock for the past couple of years.....
September 28, 2006 - Big Media Stocks Performing Surprisingly Well:
Wow! Time Warner (TWX), Disney (DIS), and News Corporation (NWS, NWS.A) all made 52 week highs yesterday.
On the one hand I shouldn’t be surprised because the Dow and S&P 500 are at multiyear highs. On the other hand, media stocks as a group have been pretty poor over the last few years with key sub sectors like radio and newspaper suffering severely eroding fundamentals. Granted, DIS, TWX, and NWS are underrepresented in these areas but they are still exposed to the internet challenge, general advertising trends, competitive pricing in TV distribution, and weakening trends in theatrical films and DVD sales.
I suppose the new highs in these stocks could just be a gift from trading gods since yesterday was my 46th birthday. However, something broader seems at work. If I had to guess I’d point to two factors that might account for the simultaneous strength. First, the big entertainment conglomerates are growth cyclicals in terms of their earnings and cash flow. This makes them beneficiaries of soft landing scenario that is being credited with the market’s current bullish phase. Advertising represents about 20% of revenue for DIS and TWX and 40% of revenue for NWS. DIS gets and other 30% of revenue from its theme parks. Improved investor confidence in future economic growth should be reflected in higher valuations for these economically sensitive revenues. Additionally, word out of Goldman Sachs Commuicopia conference last week was that current broadcast and cable network TV advertising trends were firming. DIS, NWS, and TWX have the bulk of their advertising exposure in these national categories.
Second....
September 27, 2006 - More Apple Cell Phone Rumors:
ThinkSecret.com is reporting that Apple Computer (AAPL) will be launching a cell phone through Cingular early in 2007. The report says that Cingular will have a six month exclusive. This report is just a rumor and based on my own perusal of the ThinkSecret website I wouldn’t put a lot of stock in it.
However, if it is true it raises a couple of interesting points. First, most analysts had assumed that AAPL would launch be a mobile virtual network operator (MVNO), leasing spectrum from someone like Sprint and then reselling it. Current MVNO’s in the US have not been very successful. If AAPL avoids MVNO, is that a positive for wireless operators? Second, the phone is supposedly to be tightly tied to iTunes. If so, that means users will expect iTunes pricing, meaning 99 cent over the ari downloads. After all, the phone will surely have a USB connection so you can hook up to your computer just like an iPod. Presently, mobile operators charge $1.99 or more for downloaded songs and ringtones. It seems like an Apple iPhone could collapse this pricing structure. Ringtones are already a big business so this could have negative ramifications for mobile operators. Then again, if Apple can upgrade the music phone experience (so far music phones have not received good reviews in the US), the market could grow much more rapidly offsetting any pricing compression and igniting another round of phone replacements....
September 26, 2006 - Zune Not A Near-Term Threat To iPods:
Apple Computer (AAPL) shares have continued to rise following the introduction of Microsoft's Zune music player. Apple has benefitted from growing recognition of the company's outstanind momentum in Mac sales, excitement over the previewed iTV device, and the introduction of updated iPods for the holiday selling season. Additionally, the Zune has been met with a yawn from previously worried observers. I think the momentum will hold and AAPL shares can make a new all-time high in the nex several months.
Given the recent focus, here are are some thoughts on the Zune player written from the perspective of the impact on Apple shares over the next three to six months. Obviously, Zunes and iPods will both develop their capabilities and ecosystems, so I am keeping my mind open on a long-term basis.
I see three differentiating factors for Zune vs. iPod. First, the wireless capability. Second, the subscription model. Third, the larger screen. For this holiday season, I see minimal value in wireless, potential value in the subscription model and real value in the larger screen....
September 25, 2006 - Debating Growth and Value:
Last week on Real Money, there was a debate on the growth vs. value question. It began when my colleague, Ed Stavetski asked, “As the economy slows and earnings growth tails off, does one want to own value or growth?” Ed asked the question after reviewing year-to-date returns for the Russell growth and value indices that show a big edge for value (this edge was captured by Northlake’s Style model which flashed a value signal from February through August). His conclusion appeared to be that the market had spoken and a slowing economy was rewarding value.
Another colleague, Gary Dvorchak, jumped into the debate the next day looking at valuation of growth vs. value. He showed some charts indicating that growth is close to an all-time low on a relative value basis vs. value. Obviously, his conclusion was that growth is now the place to be.
Northlake’s model, courtesy of Ned Davis Research, offers a similar split decision but did shift to a weak growth signal this month. The shift follows a summer that started with just three of the nine factors favoring growth. Entering fall, there are now five on nine factors favoring growth. That is barely enough to shift the signal, but it shifted nonetheless.....
September 22, 2006 - Central European Media Enterprises: Analyst Meeting Goes Well and Affirms Near-Term and Long-Term Upside:
I spent last Thursday at the annual analyst meeting for Central European Media Enterprises (CETV). The news was good as CETV slightly raised EBITDA guidance due to more rapid than expected improvement at TV Nova in the Czech Republic. Results at this station are the most critical aspect of the CETV story for the next several quarters, so the increased guidance is a strong positive. The company also reaffirmed guidance at its core four stations in Slovenia, Slovakia, Romania, and Ukraine. Romania and Ukraine remain the long-term growth engines so affirmation of guidance in these high growth markets is also good news for investors. Below is a detailed recap of the analyst meeting:
This year’s meeting was in NY. All the previous meetings had been in Europe, so this was my first time attending. CEO Michael Garin stated that with 82% of the shareholdings are in the US so it was time to hold the meeting here. There were about 100 people in attendance, an amount I found to be surprisingly high. CFO Wallace Macmillan told me that in the prior meetings in Europe attendance was generally around 40 people with a majority from European institutions.
The meeting agenda had Garin giving an overview followed by presentations from the operating managers in each individual country. Each presentation recapped general economic information on the country, its advertising market, and its political environment. Updated 2006 guidance was also provided for each country.
Overall, management maintained EBITDA guidance for the 2006. However, adjusting for a few items, EBITDA guidance actually went up by $5 million. All of the increase is due to TV Nova in the Czech Republic. This is by far the company’s largest business (about 40% of EBTIDA) and following the introduction of a new strategy that was one big step back (2006) followed by two huge steps forward (2007 and 2008), the guidance increase was very welcome. The key takeaway is that the new strategy appears to be working and previously provided detailed guidance for Nova for the next two years looks extremely realistic, if not low. Additionally, Nova’s ratings are off to a great for the fall TV season, while its primary competitor is not delivering its ratings guarantees. If those trends hold, the new guidance still has upside.
For the core four stations of Romania, Ukraine, Slovenia, and Slovakia, management maintained guidance for 2006 EBITDA of $130 million....
September 13, 2006 - Sears Ups Share Buyback:
Sears Holding (SHLD) announced that it is increasing its share repurchase authorization by $500 million. About $118 million remains on the prior $1.5 billion authorization. So far, the company has repurchased 11 million shares at an average price of $126.14. As of August 29, the company had 154 million shares outstanding. At current prices, the new authorization plus the remaining $118 million can buy almost 4 million additional shares.
SHLD sold off following the most recent quarterly earnings, partly because I and many others noted that share repurchases seemed to have slowed and that the press release contained language that could be interpreted as a signal they would remain slow. Apparently, we were all wrong.
I suspect the investors will like this news, and that the recent positive momentum in the shares will continue.
September 13, 2006 - Is Eddie Lampert Using Sears To Make A Run At Home Depot?:
Tuesday's rumor has it that Eddie Lampert is putting Sears Holding (SHLD) cash to work buying Home Depot (HD) shares.
SHLD traded up on the news, and the stock has now recovered pretty much all the losses immediately post earnings. Those losses were due to either fears that (1) the share buyback would slow and Eddie would invest in something new, or that (2) earnings were below expectations.
I never felt the earnings were a miss, although they were below the high estimate on the Street, which happened to be posted by a bearish analyst. The share buyback fears were put to rest when the 10Q indicated that August saw lots of new activity. Now we get a rumored target, and the Street seems accepting. This strikes me as all pretty bullish for further gains in SHLD.
September 13, 2006 - Impressions of Apple's Product Announcements:
Overall, the Apple Computer (AAPL) announcements were in line with my expectations. I almost got right the new wireless device that will get the video you download to iTunes over to your TV: It's not a MacMini; it's just half the size. This product, due in the first quarter of 2007, is probably the most important announcement on a long-term basis. But I wouldn't overlook those new iPods and the upgrade to iTunes. (I've already installed it in a Windows PC, and it has some nice enhancements in navigation and offers free album art for all the CDs you've ripped into iTunes previously.)
The iPods are basically double the capacity in slimmer, smaller and similar forms, with improved screens, all at the same or lower price points. There was not an introduction of a true video iPod, which I guess means even better resolution on a larger screen, with a movie-like aspect ratio.
The reason the iPod refresh is important is because one of the few blemishes in the near-term story for Apple is the incredibly difficult December quarter comparison against last year's 14 million unit quarter. I've long feared the screams of joy from bears when iPod sales this holiday season didn't grow or even fell short vs. 2005.
The refresh seems to offer a good reason to upgrade for current users, which, along with latent demand from those still looking for their first MP3 player, ought to give a nice push to unit sales. Even better, the refresh should set the stage for solid year-over-year growth as 2007 unfolds.....
September 12, 2006 - Thoughts on NTL Management Presentation:
NTL Incorporated (NTLI) CEO Stephen Burch made a presentation at Jefferies 4th Annual Communications Conference. The company made no comments and took no questions related to the status of negotiations with private equity firms over the possible takeover of NTLI. Based on press reports there is clearly something going on related to private equity. Whether a deal emerges is anyone’s guess but tope tier private equity firms are putting a lot of effort into structuring a deal which would seem t to place great pressure on the Board to provide something for shareholders if no deal is struck.
The presentation focused on business fundamentals including progress on merger synergies, improvements in NTL customer service, and rebranding to Virgin. Management comments on all fronts were constructive. One key
September 12, 2006 - New Products Due Today From Apple:
Sometime later today, Apple will unveil its long awaited new products and services. Consensus seems firmly to predict that new higher capacity iPod nanos with new outside covers will be introduced. Consensus has also coalesced around the launch of an iTunes movie store. The remaining question is what else might be coming. The invitation apparently uses the “and one more thing” language which in the past has been a tip that something big is coming. Speculation has surrounded a true video iPod, a cellphone or PDA, and a piece of hardware that enables videos, TV shows, and movies purchased from iTunes to be played on your TV.
The best informed speculation I read was on AppleInsider.com in an article which contained this nugget:
” Just as he asserted that consumers are more eager to own their music tracks for 99 cents a piece rather than rent them on a monthly basis, he realizes that few are willing to plunk down ten bucks for a two-hour movie that they'll have to watch with their neck cranked towards a miniature screen resting in the palm of their hand. As someone at the forefront of the motion picture industry, he knows films are designed for the big screen and later adapted for the home living-room theater.
For these reasons, Jobs many months ago commissioned an elite group of Apple engineers to get the ball rolling on an intuitive hardware solution that would more closely tie the company's digital media strategy to the living-room. And so AppleInsider has been told, Apple has been quietly developing a video streaming device that will interface with an updated version of its iTunes jukebox software.”
If such a product were introduced that COULD BE big but only if the solution is SIMPLE. I’ve been speculating for over a year that Jobs real goal was the living/family room.....
September 06, 2006 - September 2006 Model Signals:
After seven months signaling value, Northlake’s Style model shifted to growth for September. There were no changes in any of the underlying factors this month. Rather, the two month rolling average calculation shifted to growth when June’s value bias was dropped and August data confirmed the shift to growth first picked up in July. As a result of the new growth signal, I sold all client positions in the Russell 1000 Value Index (IWD) and the Russell 3000 Value (IWW) and swapped dollar for dollar into the Russell 1000 Growth Index (IWF).
There were no changes to Northlake’s Market Cap model for September, which for the third consecutive month is providing a large cap signal. The large cap signal remains strong and accounts for the use of the large cap Russell 1000 in the implementation of the new Style signal.....
August 30, 2006 - Cruise-Paramount Split, Part 2:
Here are some further thoughts on the Cruise-Paramount split (Part 1). This post takes to look at Tom Cruise as a business by comparing the profitability of his two most recent films.
Cruise's last film prior to Mission: Impossible 3, (MI3) was War of the Worlds (WOTW) which grossed $594 million worldwide. MI3 grossed $393 million. According to BoxOfficeMojo.com, WOTW had a production cost of $132 million and MI3 had a production cost of $150 million. It is probably safe to assume that marketing expenditures on both films were similar and recent press reports use a figure of $100 million for MI3. Press reports also indicate that Cruise's production company had a deal with Paramount giving it 10%-20% of the worldwide box office gross before theatre splits. A good rule of thumb for DVD revenue is 1 times the domestic box office. For WOTW, domestic box office was $234 million, while MI3 pulled in $132 million. Another good rule of thumb is that TV rights are sold for 35% of domestic box office.
Let's look at the theoretical profits on each film assuming Cruise gets a 15% cut of the gross:
On WOTW, Cruise's production company would have pulled in $90 million. Paramount's take of the box office would be 55% of $594 million, or $327 million. Steven Spielberg directed WOTW and it is probalby fair to assume that he had a similar gross participation deal to Crusie. Subtract Cruise adn Spielberg's takes, and Paramount is left with $146 million, leading to a loss of $85 million on the theatrical run against production and marketing costs of $232 million. DVD revenue of $234 million could have had an operating margin to Paramount as high as 60% (Paramount's DVD costs likely included a participation for Cruise adn Spielberg). That is $140 million in operating profits to Paramount from home video. TV rights including domestic network, domestic cable, domestic pay TV and all international is another $80 million to Paramount at a margin that could be as high 80%. Add another $65 million in operating profits to Paramount. So before merchandise sales, on WOTW, Paramount might have had an operating profit of $120 million against production and marketing investment of $232 million. Not too bad.
On MI3, the numbers aren't quite so good for Paramount but are still pretty darn good for Cruise. 15% of worldwide box office brings Cruise and his production company $59 million. Paramount's take of the $393 million box office is $216 million. Deduct Cruise's cut and Paramount is left with a loss of $93 million on the theatrical run after production and marketing costs of $250 million (I've read on a usually reliable blog it could be as high as $280 million). Since the DVD market has weakened considerably over the past year and MI3 wasn't a smash hit, let's say DVD revenue is 80% of domestic box office at a 50% margin reflecting higher marketing and distribution costs. That still leaves around $50 million in profits from the home video window for Paramount. Again, let's adjust TV rights downward to account for the lower popularity of MI3, say 25% of domestic box office still at an 80% margin. That is another $25 million in profits to Paramount. So all in, MI3 will probably lose $10 million or $20 million, maybe as much as $50 million if the production budget really was as high as $180 million.
Now let's turn to negotiations over Cruise's new deal....
August 30, 2006 - Ronald Lauder Sells Half Of His Control Position in CETV:
Apparently, Ronald Lauder has decided to pay for his $135 million acquisition of Gustav Klimt’s Adele Bloch-Bauer I by monetizing half of his 15.8% stake in Central European Media Enterprises (CETV). Last June, it was revealed that Lauder was buying the Klimt and paying the highest price ever for a painting, easily exceeding the $104 million purchase of Picasso at a Sotheby’s auction in 2004. OK, it might just be coincidence that Lauder is raising $190 million through the sale of half his CETV stake. Nevertheless, for us CETV collectors, I mean shareholders, this event could prove as significant as the Klimt was purchase was to the art world.
Lauder is forming a partnership with top tier private equity firm Apax Partners. Apax will pay Lauder $190 million for 49.72% of the partnership which will have a 15.7% economic interest and 64.8% voting control of CETV. Lauder is putting virtually all of his personal and family holdings of CETV into the partnership. The 13-D filing indicates that Apax is paying $60 per share, a slight premium to CETV’s prior close of $58.26....
August 28, 2006 - Cruise-Paramount Split, Part 1:
Given all the publicty created by the split between Tom Cruise and Paramount, I thought I'd offer some impressons from the perpsective of the stock market. The following post is my first impressions, while a second post due to go up later this week provides greater detail on the economics of Tom Cruise as a "subsidiary" of Paramount's owner, Viacom (VIA, VIA.b).
It is hard to say much that is relevant to stock prices as far as the Tom Cruise-Paramount split is concerned. I do think that this is much more about money than Tom Cruise's behavior. The two are linked, apparently tightly linked in the mind of Viacom (VIA, VIA-B) chairman and controlling shareholder Sumner Redstone. Redstone and many others think that Cruise's bad press led the latest Mission Impossible film to fall short of box office expectations. It is hard not to agree with that assumption. The bigger question is whether future Cruise films were likely to suffer the same fate. And that is important because despite his hefty paydays, prior to this film Cruise has been a huge money maker -- arguably the only huge money maker -- for Paramount.
Cruise appears to have had a very generous deal at Paramount, providing his production company funds for overhead and a percentage of the worldwide box office gross. Importantly, the gross points came whether Paramount made a profit on the film or not. Consequently, the real problem here is not Cruise's behavior but the fact that production and marketing costs have gotten completely out of control. Mission Impossible III grossed $400 million worldwide at the box office and is likely to bring another $150 million to $200 million plus in DVD revenue and TV rights. A project with up to $600 million in revenue likely won't make any money for Paramount because the studio allowed the production budget to go over $150 million and spent another $100 million on marketing....
August 28, 2006 - Disney Radio Deal In Jeopardy?:
Last week saw a flurry of acquisition and divestiture activity in the radio industry including news that the buyer of Disney's radio assets, Citadel Broadcasting, wants to renegotiate to lower the purchase price. News that Citadel wants to renegotiate the terms of its buyout of ABC's radio assets is not surprising and likely led to the 3% fall in DIS shares last week. Radio advertising has been weak since DIS agreed to the deal and valuation on M&A activity throughout media has fallen. Working against Citadel, however, is the fact that last week Entercom Communications agreed to buy 15 radio stations from CBS for same multiple of cash flow that Citadel is paying DIS.
I think most major DIS shareholders were previously aware of the possibility the deal could be renegotiated. As long as the deal does not fall apart, I don't see it as anything more than a near-term trading issue for DIS.
August 27, 2006 - Clarification On Sears Holdings:
Looking back at my recent posts on Sears Holdings (SHLD), I may have left the impression that improving same store sales trends are necessary to drive the stock higher. Just to be clear, Northlake's long position in (SHLD) has never been about sales. It has been about free cash flow generation over the 2006 and 2007 time frame. Over this period, sales merely need to be what they have been: terrible but with comps getting slightly less negative.
For 2006 and 2007, combined comps of negative low to mid-single digits should allow the company to produce the expected cash flow, and it is that cash flow will drive the stock price via share repurchases or acquisitions.
Sure, you have to trust Eddie Lampert to wisely spend the money. I am willing to do that given his stellar track record.
August 27, 2006 - Making Money In Media Despite Weak Ad Spending:
According to data from TNS Media Intelligence, advertising spending in the U.S., excluding paid search, fell by 0.3% in May 2006. According to TNS, this is the first comparable monthly decline since the advertising recovery began in May 2002. Network TV and newspapers suffered the biggest declines during May. Areas showing growth included non-search Internet advertising and Spanish language TV networks.
Even with May's decline, ad spending as measured by TNS is up 3.9% for January through May but compared to 1Q06 GDP growth of 5.6%, that is a poor performance. In fact, one notable facet of the current economic expansion is that advertising growth has lagged GDP growth. Historically, advertising expenditures rise faster than GDP when the economy is expanding, which is why the media is classified as a cyclical growth industry. This year's slower-than-GDP advertising growth is especially troubling given the fact that May's downturn coincided with 2Q06 GDP growth of just 2.5%. Plenty of forecasters think that even slower growth lies ahead for economy, possibly even a recession....
August 22, 2006 - I Am Famous. Sort Of.:
I Am Famous. Sort Of.
Back on August 1, 2006, Jim Cramer of CNBC and theStreet.com, did a segment on Comcast on his nightly Mad Money TV show. During the segment, Cramer tells viewers how for the past year everyone hated Comcast. Everyone that is except, yours truly. Cramer says “"Birenberg's the only guy to have gotten this right..When everyone else was running from it, he rushed to it!" Check out the whole segment by clicking below. I am mentioned about two minutes into the segment.
Now I am sure clients will want to know why I didn’t buy Comcast for all of their accounts. The answer is that I limit my holdings to just a half dozen or so stocks at any one time. So while I liked Comcast, I liked the stocks I held in client accounts even more. Of course, I don’t always get every stock pick right. In this case, I would have been better off if Comcast was in all of Northlake’s managed portfolios. Nevertheless, I am proud of my analysis and very pleased that it was recognized.
August 21, 2006 - Is Sears Cutting Its Advertisng Expenditures Too Much?:
I am no expert in retailing despite Northlake's long position in Sears Holding (SHLD) so when my colleague at StreetInsight.com, Jeff Bagley, wrote a scathing post noting that most of the earnings upside at SHLD over the past few quarters had come from large cuts in advertising expenditures, I was very interested in learning more. Jeff’s basic thesis is that SHLD has not hope to stabilize its same store sales if advertising expenditures continue to be cut and without further cuts, upside to earnings may be limited.
Jeff and I debated his post via instant messages after his post went up with me assuming that prior advertising budgets were too high. As I thought about it further, I realized that even if I was right, eventually those savings would run out and the company would be challenged to find another source of earnings growth.
Given this concern, to help me better understand the issue, I spoke with a street analyst who covers SHLD. I learned that last year SHLD spent about $2 billion on advertising, equal to around 4% of sales. This is similar to the range of spending at other department stores like JC Penney or Federated and substantially more than WalMart, which spends around 1% of sales. Breaking it down further, the analyst told me that $1.7 billion of the spending was at Sears, which put it over 5% of sales, while Kmart’s spending was more in line with WalMart.
Given these numbers, particularly at Sears, it seems that there was room to cut advertising. The question though is what is the right amount?....
August 21, 2006 - Sears Results Better Than Stock Price:
Sears Holdings (SHLD) earnings reports was largely in line. However, the stock traded sharply lower, giving up most of its gains so far in August. The decline can be attributed primarily to two things. First, SHLD is owned by a lot of aggressive investors and they wanted another big positive surprise like the company delivered the last two quarters. Second, as described further below, the press release indicates that investment of the company’s substantial cash balance in new ventures might be likely. The uncertainty related to what these investments might be concerns some people. I think that the retailing part of the story including the massive cash generation is on track and I like the idea of Eddie Lampert, one of the most successful investors in the last decade, investing that cash on behalf of shareholders. SHLD remains a unique investment and small positions fit nicely in the portfolios of most investors.
EPS of $1.74 exceeded consensus of $1.67 but given the lack of estimates and any guidance form the company, I’d call the number within the margin of error. Revenues of $12.8 billion were above expectations. Gross margins expanded by 120 basis points and EBITDA margins grew by 110 basis points. Same store sales fell by 3.8%, an improvement over the 1Q decline of 4.8%. Sears had a same store sales decline of 6.3%, while Kmart had a decline of 0.6%. Sears results improved from a 1Q decline of 8.4% and a 4Q decline of 12%. Kmart has been at plus or minus 1% for the last several quarters. Inventories rose slightly, which might be a concern on declining sales, but management explicitly noted that it was planned increase due to earlier deliveries of fall merchandise and a desire to add to merchandise displays in certain categories....
The shares were very strong in the few days leading up to the earnings report so it is hard to read too much into the initial sell-off following the results. If I had to guess why the shares might be trading lower on a generally good report it would be the inclusion in the press release of a section titled “Investment of Available Capital.” This section did not appear in the 1Q report. Management notes that the company has plenty of excess capital and indicates that it could be used to invest in the stores, buyback stock, invest in other public companies, or “fund investments that it believes offer the Company attractive return opportunities, whether or not related to its ongoing business activities.”
Combined with a low level of share repurchase activity in the quarter, less than 1 million shares, for just $91 million, at an average price of $137, this new section might have some investors concerned that Eddie Lampert may have something new up his sleeve. This is pure speculation on my part and I may be way overanalyzing and looking for conclusions where none exist.
I plan to hold all my SHLD, which I own across the Northlake client base. Regardless of the reaction to the earnings, this report largely leaves the long-term story intact. Little has changed based on the new information so my opinion remains unchanged and bullish.
August 16, 2006 - NTL Sees Renewed Interest From Private Equity Firms:
News broke yesterday in London that NTL Incorporated (NTLI) was again subject to takeover interest from private equity firms. Later in the day, Bloomberg reported that the company was in talks with a consortium of four private equity firms and the talks were beginning to focus on price.
I covered these developments in two posts that went up at StreetInsight.com during the day. I thought clients might be interested in seeing those posts in chronological order to see how the story and my thinking was developing.
At 9:29 Eastern, I posted:
The Times of London is reporting that private equity is approaching NTL Holdings (NTLI) again. This likely accounts for the recent strength in the shares following mixed second-quarter results. On the second-quarter conference call, the CEO was very clear that the company was open to any approaches that would enhance shareholder value. At the time, I wrote that this was the most explicit statement the company had made on the topic.
The reason that was important is because the company apparently rejected a $32 offer last winter. According to today's news reports, several large shareholders are submitting a letter to the company asking why that was done. This looks like a well orchestrated one-two punch to me.
Today's reports suggest a $19 billion value for NTLI. With $11 billion in debt, that works out to just $24-$25 per share. I suspect if the board would play ball, a negotiated deal could get done in the upper $20s or better. NTLI's outlook is not as good as it was last winter due to intense competition in the U.K. broadband market.
NTLI is a good candidate for private equity as merger synergies and a slightly growing top line lead to very significant free cash flow generation in 2007 and beyond. Some analysts have estimated that free cash flow could be around $800 million. NTLI also has content assets worth around $1.5 billion and NOLs valued at $1.7 billion.As a frustrated shareholder, I'd be fairly happy with a deal around $30.
At 2:45 Eastern I posted:
Bloomberg is now reporting that NTL Holdings (NTLI) is in talks with a consortium of private equity firms regarding a buyout. The report suggests the talks have advanced to the stage where discussions are focused on price.
Last winter, NTLI rejected what it called unofficial approaches from private equity which valued the shares at $32. It is possible, even likely, that a deal would now be struck at a price below that level given the increased competition in the U.K. broadband market this year and NTLI's mixed results so far in 2006.
Richard Branson is now the largest shareholder in NTLI due to the takeover of Virgin Mobile that closed at the beginning of July. I believe his holding is around 14%. Obviously, his views will be important.
I plan to sit on my NTLI and await further developments. I have been selling some NTLI warrants which are illiquid most days. My warrant position is tiny relative to my common stock position.
August 16, 2006 - Sears Holdings Earnings Preview:
While fireworks are likely in the shares of Sears Holdings (SHLD) after the company reports earnings before the open today, there has been a virtual blackout as far as research is concerned ahead of the report. There are only five EPS estimates creating the First Call consensus of $1.69. The estimates range from $1.46 to $1.90, with Gary Balter of Credit Suisse, the axe in the stock, sitting at $1.69. Only one of these estimates has been adjusted since mid-June and three were in place in May. Revenue estimates are also scarce, with First Call carrying just two, $12.4 billion and $12.6 billion. EBITDA estimates are also limited to two, $690 million and $760 million.
By the time you read this, SHLD will have reported and the shares are likely to have moved significantly from their Wednesday close of $150. Besides the headline numbers, investors will be very interested in same store sales results. The outlook here is not good but I think that is expected and accounts for the pullback in the shares over the last month. Investors jumped on indications from suppliers like Martha Stewart who indicated that sales at Kmart were not strong. Overall, the trend has been for Kmart to see flat to very low single digit declines in same store sales and Sears to see double digit declines. Most investors will not pay up for the cash flow produced by SHLD as long as same store sales remain under such severe pressure. That is understandable given it is hard to have confidence in future cash flows if sales are declining.
However, the real story at SHLD surrounds margins and working capital management....
August 15, 2006 - Another Good Weekend For The Box Office:
The weekend box office was up again, making it four straight weekends. Eight of the last nine weeks have also been up so the summer continues to shape well as it winds down.
This past weekend was up 5% from a year ago as lots of films did well. Talladega Nights held the top for the second straight weekend, edging up the surprise hit Step Up and World Trade Center. Barnyard and Pirates of the Caribbean: Dead Man’s Chest also contributed to positive comparisons as each held very well declining 38% and 34% from the prior weekend. Also performing reasonably well was the latest horror flick, Pulse.
I’ve strongly advocated that last year’s box office slump was largely the result of movies that did not resonate with the public rather than a sudden loss of interest in attending movies in favor of home video or digital downloads or alternative entertainment options. This summer’s results support my view, especially since the only real blockbuster has been Pirates. Rather than a few films carrying the day, we have seen lots of films performing reasonably well and appealing to all the key demographic segments of moviegoers. And you can’t claim rising ticket prices are the problem. It looks like price increases are only half of the year-to-date gain of 6% in the domestic box office. Attendance is up around 3%.
Unfortunately, this summer’s strength hasn’t helped my long position in Regal Entertainment (RGC). Hope is not lost though....
August 10, 2006 - August 2006 Model Signals:
This note was originally written and published on StreetInsight.com on August 2nd. With all the trauma from my the complete crash of my pirmary PC on July 30th, I forgot to post it here. I apologize for my oversight.
There were no changes to the signals from Northlake's market-cap and style models for August. Northlake clients continue to own large cap and value represented by the S&P 500 (SPY) and the iShares Russell 1000 or 3000 Value Index (IWD/IWW). There was some interesting underlying movement in the models, however.
A Decisive Shift in Favor of Large Caps in Market-Cap Model
The market-cap model made a more decisive shift in favor of large caps this month and now sits very firmly in large-cap territory. Not surprisingly, the cause of the further shift is that the trend indicator finally moved in favor of large caps. The lag for this indicator might surprise some folks, especially since small caps initially collapsed in May, but keep in mind that the models are designed to predict relative performance over a six- to 12-month time horizon. I am trying to capture the major trend, not all the wiggles. Consequently, the trend indicators look back six to 18 months.....
Small Caps Could Bounce
There was one contra-trend shift in the market cap model worth noting. The advisory service sentiment indicator moved in favor of small caps due to plunging bullish sentiment. Sentiment dropped far and is now so negative it suggests that bullish behavior will be rewarded. I am glad that the overall model is deeply in large-cap territory, but this indicator may suggest that a dead-cat bounce of relative performance favoring small caps is around the corner.
Style Model Moving Toward Growth
The more interesting results this month were in the style model, which made a fairly strong move toward a growth signal. The model is not at growth yet and might not reach growth, but this is the first move in favor of growth in many months.
Consumer/Cyclical Ratio and Coincident Indicators Shift Toward Growth
Two indicators shifted from value to growth this month: the consumer/cyclical ratio and the coincident indicators. The consumer/cyclical indicator measures the relative performance of the two infamous Morgan Stanley indices. Consumer stocks lifted their heads recently, and maybe a change in well-established, long-term trend favoring cyclicals is at hand. The coincident indicators shifted toward growth because the index is no longer growing on a year-over-year basis. Both of these indicators might be saying that slowing economic growth is the emerging market theme.
Trend Indicators Still Favor Value
These two indicators join relative P/Es, the weak U.S. dollar and tight credit spreads in favoring growth. The complete shift in favor of growth is being held back by the trend indicators, which still favor value.
Trends Favoring Capitalization or Style Persist
One of things I like about my models is that the trend indicators add a timing element that hopefully keeps me from being too early or too late. Again, I am looking for major trends, not monthly wiggles. A look back at market history shows that trends favoring capitalization or style tend to be persistent, often lasting years, and provide large variation in relative performance.
August 09, 2006 - Strong Quarter For Disney But 2007 Concerns Limit Upside - For Now:
Disney (DIS) reported much better than expected 3Q06 EPS. EPS of 53 cents easily beat consensus of 44 cents (3Q EPS were aided by 1-2 cent accounting benefit). Revenues were only slightly better than expected so it was operating profit performance that provided the upside. In particular, the Studio, Theme Parks, and Consumer Products provided the upside. Cable Networks also had strong profit performance. The only weak spot was Broadcasting which came in lighter thane expected on revenues and profits.
The shares should respond well to this report although I expect the debate over the 2007 growth rate to continue. Management did not provide any guidance for 2007 but did offer a list of swing factors. On the plus side, the 1-2 punch of Cars and Pirates of the Caribbean: Dead Man’s Chest should drive profits throughout the company through FY07 and FY08. Importantly, these two properties show how DIS is able to leverage successful content throughout all of its divisions. High School Musical on the Disney Channel is another example that is driving current results through TV ratings, album sales, and book sales. Also on the plus side for 2007 is a decent upfront for ABC. If ratings meet guarantees, ABC has plenty of scatter to sell and lots of digital tie-ins to sell.
Potentially holding back growth in 2007 are tough comps at the Theme Parks, the uncertainty of ratings at ABC and ESPN, slower affiliate fee growth at ESPN, the struggling overall ad market, and significant investments in distribution for consumer products. It is also unclear how much investment will occur in the ESPN and Disney mobile telephone ventures.
In the short-term, I think investors will give DIS the benefit of the doubt given the outstanding results the company has achieved over the past several years, especially recently during Bob Iger’s brief reign. DIS is playing offense with a strong lineup. Investors should continue to applaud.
Looking a little more closely at the quarter….
August 09, 2006 - Cheap Is Not A Reason To Own Media Stocks:
A new study by McKinsey & Co., highlighted at AdAge.com, does a good job of explaining why television advertising is facing such strong growth headwinds. The key pull quote from the AdAge article is that the study claims that "by 2010, traditional TV advertising will be one-third as effective as it was in 1990."
The article goes on to offer some statistics from the study, noting that it assumes a 15% decrease in buying power driven by cost-per-thousand rate increases; a 23% decline in ads viewed due to switching off; a 9% loss of attention to ads due to increased multitasking and a 37% decrease in message impact due to saturation....
August 08, 2006 - Disney 3Q06 Earnings Preview:
The real excitement surrounding 3Q06 earnings from Disney (DIS) will concern how it impacts the outlook for FY07. Despite strong fundamentals and consistent double-digit growth, DIS shares have stalled over concerns about 2007. Recently, estimates have been falling and now reflect just over 10% EPS growth. Concerns surround tough comps for the theme parks, slowing affiliate fee growth at ESPN, and a plateau for the turnaround at ABC. On the flip side, the Studio is performing very well which is setting up big home video profits, cost cutting at the Studio will be significant, and the outlook for ESPN and Theme Parks is just for modestly lower growth. I remain on the bull side of this debate and expect 3Q06 results and commentary to support my view.
For 3Q, DIS is expected to report EPS of 44 cents on revenues of $8.61 billion. EPS should grow over 10%, revenues over 11%, and operating income about 25%. Operating income is benefiting from favorable timing on revenue recognition at EPSN that has penalized results year-to-date and a huge turn at the Studio which posted a loss a year ago....
August 08, 2006 - NTL: Not Bad But Could Have Been Better:
I’d classify the 2Q06 earnings and conference call from NTL Incorporated as mixed. Mixed is not quite good enough for the short-term as that means there some issues. For NTLI shares to jump over the low expectations built into the stock, a clean quarter is required. I don’t think we will get that until 4Q06 and 1Q07 but management did a good job of explaining its strategy and setting expectations for 3Q so I think the shares will hold in their current range. I plan to hold my position.
Financial results were quite close to expectations with pro forma revenue of EBITDA of £884 million and £293 million. Revenues were about £10 million light as lower than expected customer counts were offset by higher than expected ARPU. EBITDA was also a little light but was within the lower end of the range of estimates. Any EBITDA shortfall was in the content and business segments which are much less important than the consumer/cable segment which accounts for over 75% of the company’s revenue.
The real problem which prevents me from classifying the quarter as “good enough” is lower subscriber counts than expected. NTLI lost 19,000 customers against expectations for a gain in 5,000 range. Management repeatedly called the loss “mechanical” referring to an internal plan to focus on more profitable, triple play subscribers. An unexpectedly large increase in ARPU appears to support management’s contention but given the intense competitive environment in the UK, investors are unlikely to believe management’s confident long-term projections until subscriber counts stabilize and grow.....
August 07, 2006 - Weekend Box Office Good For Regal:
I didn’t get a chance to do a formal review of 2Q06 earnings from Regal Entertainment (RGC) due to my PC crash. The shares had a well deserved sell-off following slightly disappointing earnings despite a strong fundamental backdrop formed by 8% growth in the domestic box office during the third quarter.
Fortunately, this past weekend’s box office should help refocus investors from lingering concerns about RGC’s earnings to the continued strong recovery in the domestic box office. Led by Talladega Nights: The Legend of Ricky Bobby (TN), the weekend was up 18% vs. a year ago, leaving the current quarter more than 13% ahead of last year. If the rest of the quarter is just even with 2005, the 3Q box office will rise 8%, which is ahead of the assumptions used to build RGC’s 3Q estimates. Flat box office the rest of the quarter seems like a good bet given that next week should see another big gain as weekend two of TN and the opening weekend of World Trade Center will both likely beat last year’s # 1 film, Four Brothers. Comparisons do toughen, especially in late September, but there is a good chance RGC will see rising estimates within the next 90 days which should allow the share to recover all of last week’s losses. If that is the case, RGC will be back on track as a successful trade since by the end of September, investors will have collected two 30 cent dividends since I first got long in late April....
August 07, 2006 - NTL 2Q06 Earnings Preview:
NTL Incorporated (NTLI) reports tomorrow morning. This stock has been my personal Waterloo but I think that investors are overly pessimistic especially in light of the significant free cash flow the company can generate in a no growth environment. The bar is set quite low for the quarter given the lousy action in the stock and all the competitive announcements coming out of the UK. An in line report should be enough to pop the stock but NTL has missed on more than one occasion in the past couple of years.
Analysts are looking for revenues of just over £890 with EBITA between £285 and £305. NTLI is adopting the customer acquisition strategy of its more successful merger partner, Telewest. This mean the emphasis is on growing revenue generating units per customers as opposed to growing customers.. Consequently, the key customer metrics to watch is RGU adds. Analysts are looking for 150,000 with total customer adds of around 5,000. NTLI is still tightening its credit standards which could have a negative effect on customer adds. The other important metric is average revenue per user. The UK might be the most competitive telecom market in the world with numerous offers of “free” broadband within larger bundles. Investors are very concerned that NTLI will lose customers and see significant pricing erosion. Management has been publicly confident that its bundling strategy and focus on customer retention will allow ARPU to remain stable or even rise slightly. For 2Q06, analysts are looking for a slight uptick in ARPU to £41.80....
August 04, 2006 - Taking Profits on Motorola:
After much gut-wrenching action and analysis, I decided to take profits on Motorola (MOT) after owning it in most client accounts for almost two years. The stock has rebounded from $19 to over $23 since the company reported its excellent second-quarter results and raised guidance. I still think that MOT is back, and the Street is finally giving the stock some respect, but I am concerned that some of the data points indicating a tougher second half for handset sales may prove true. Two colleagues at StreetInsight.com that I really respect, Tero Kuttinen and Bob Faulkner, have discussed this possibility. I suspect that MOT will continue to gain share and any modest handset market weakness won't impact it. In the end, MOT has been a tough stock to own, and now that it has moved up back up to a level more in line with its strong fundamentals, I don't feel I have an edge. Northlake’s ETF-driven strategy only leaves room for a limited number of individual stocks. Conseqeuntely, I try to only own stocks in which I feel I have an edge. That is no longer the case for MOT so it is time take the sizable profit and move on.
August 03, 2006 - Central European Media Enterprises: Good News From Czech Republic:
Central European Media Enterprises (CETV) reported solid 2Q06 results, comfortably matching my expectations. As usual, the composition of results was a little different than what I expected but the bottom line is that the quarter affirms my enthusiasm for CETV, especially relative to current expectations for 2007.
CETV shares are quite weak despite what I see a