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September 24, 2005
Updating Individual Stock Positions
In the extended entry, please find an update on individual stock positions currently broadly held across client accounts. Click the "Continue Reading" link immediately below to see the updates on Apple Computer, Central European Media Enterprises, Lions Gate Entertainment, Motorola, Sears Holding, SBS Broadcasting, and Walt Disney....
Northlake remains long Apple Computer (AAPL) after reducing the position in the upper $40s when it reached the initial target I established when shares were initially purchased early in 2005. With AAPL shares making new highs, the expectations for the company's upcoming quarterly earnings release have been raised. The street is expecting results above the conservative guidance offered by management on the last conference call. From surveys conducted by sell-side analysts it appears that AAPL is maintaining momentum in iPods and computer sales. I think this will lead to an optimistic Christmas selling season forecast from management and the Street leading to further gains in the shares between now and year end.
Central European Media Enterprises (CETV) shares have moved up and stabilized in the mid-$50s following on the heels of the buyout of SBS Broadcasting (SBTV). The buyout multiple on SBTV supports CETV shares in the low to mid-$50s. CETV faces a seasonally weak third quarter followed by what I expect will be a very strong finish to the year. I think investors will be focused on management guidance for the fourth quarter. If the street is satisfied with the fourth quarter outlook, I think CETV shares can head into the $60s.
I've been wrong on Walt Disney (DIS) shares since establishing a position in the spring at $26. Since the purchase, DIS has suffered two strikes but I still think the key catalysts are ahead so I'll wait to see if DIS can fight off strike three. First, DIS reported June quarter earnings that failed to beat expectations as I had anticipated. The fault laid primarily in home video due to the suddenly weakening growth rates in DVD sales. The second strike again from the studio business. This time the culprit was a multi-hundred million dollar write-off from a series of flops coming out the Miramax studio at the end of the Weinstein Brothers tenure. The Street anticipated weak results form these films but nothing of this magnitude. Hurricane Katrina also has pressured DIS shares due to fears of reduced discretionary spending on the part of the consumers. I am going to hang on to DIS shares through the next quarterly earnings report because I think the turnaround at ABC and a strong upcoming slate of films sets up 2006 (starts October1) as a big year. The street has low expectations now which means the bar has been reset to a level that should be easy to hurdle.
It appears as though SBS Broadcasting (SBTV) will not be receiving a better buyout offer than the 46 euros from Premira and KKR. The shareholder vote is coming up on October 3rd and with the offering circular having been out for more than two weeks time seems to have run out. Each one cent move in the euro versus the dollar is worth 45 cents. The deal was assumed to be worth $56 based on a $1.21 exchange rate. The exchange rate remains close to that level. I plan to tender client shares and expect the deal to close in late October. If clients are short on cash for a new position, SBTV shares could be sold ahead of the tender offer.
Lions Gate Entertainment (LGF) has been in the news recently following its attempted hostile acquisition of Image Entertainment (DISK) and the launch of its latest film, Lord of War, featuring Nicholas Cage. Image is a small distributor of DVDs which would fit in well with LGF and provide lots of cost savings opportunities. If the deal is struck at a reasonable price, it should provide a boost for LGF's earnings in the years ahead. Image is one-tenth the size of LGF so this is not a make or break deal for LGF. Lord of War has had a moderately disappointing box office run so far. LGF is only the distributor of the film and did not pay for the high production cost of the film. I am not sure what the economics are of the distribution deal but with the film headed to a total box office in the $25 million range I don’t think the below expectations box office is likely to hurt LGF's earnings. Upcoming catalysts for LGF shares are the ongoing superb sales and rentals of the Crash DVD and the sequel to the company's horror hit Saw which is due in theatres this Halloween. LGF shares should rebound from recent weakness.
Things have been quiet at Motorola (MOT) since half of client positions were sold at my initial target price in the low $20s. MOT shares have continued to rise as the outlook for continued market share gains against a better than expected global handset market has excited investors. It does not appear the introduction of the iTunes enabled ROKR phone will be a major catalyst for the shares. Analyst estimates for 2006 have been rising steadily with consensus now at $1.24. Several analyst are well above consensus with many the mid $1.30s range. I think MOT shares will continue to rise as consensus moves closer to the bullish analysts. A target of 20 times possible 2006 earnings of $1.35 is my goal for exiting my position.
Sears Holding (SHLD) shares remain under pressure since the company reported mixed second quarter earnings. Besides fears about the ability of the two struggling retailers to produce shareholder friendly financial results, SHLD is also under pressure due to fears about consumer spending in light of high gas prices and expected elevated home heating costs this coming winter. The shares did rebound sharply last Thursday when there was major purchase by an insider between $115 and $120. I am looking to buy back positions that were sold in client accounts above $160 if the shares get near the $115 level again in the near future.
Posted by Steve Birenberg at September 24, 2005 02:28 PM
