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December 12, 2005

Company Presentations at the UBS Media Conference

Here are some brief notes summarizing individual company meetings I attended at last week's UBS Media Conference in New York. Please make sure to read this post in conjunction with my initial overview comment which was posted last week...

Carmike Cinemas (CKEC) serves primarily rural markets in the South and Midwest, so family-oriented movies are more important to the company's results than for other theatre chains. Over the summer, this hurt the company. But in late October, when Saw II was supplanted by Harry Potter and the Goblet of Fire, things began to look up. With Chicken Little, The Chronicles of Narnia: The Lion, the Witch and the Wardrobe, King Kong and a Jim Carrey comedy also set to open in the December quarter, it seems like dramatically improved results could be on the way. I don't know the stock well, but the possibility of improved near-term momentum means that I'll be reading up on the company soon.

Liberty Media (L) is splitting into two companies via a tracking stock, with one company containing QVC and other commerce businesses and the other company containing Starz and all the investments Liberty has in other public and private companies. In theory, this will reduce the presumed valuation discount due to complexity. Despite some prior work indicating that Liberty might be cheap, I came away from the presentation, as I often do when I see these guys, wondering why they think they are so much smarter than everyone else.

Usually, the market gets it right. In this case, I think the valuation at which they assume QVC will trade is too high. Media folks who closely follow Liberty are some of the smartest investors I know; they can value Liberty fine as it is. If a huge value gap existed outside of the minds of company insiders, it would have resulted in a higher stock price years ago. Seems like tax attorneys, lawyers, accountants and investment bankers are the only ones making money off Liberty Media.

On the other hand, Liberty Global (LBTYA), an earlier spin-off from Liberty Media, has decent fundamentals and a simple story. LBTYA operates cable networks in Japan, Europe and South America, and is the largest cable operator outside of the United States. Organic growth and M&A potential is higher in these markets than in the U.S., making the economics superior on basically the same cable plant and product strategy. This makes LBTYA a superior investment idea compared to U.S. cable companies for basically the same valuation multiple.
Until recently, LBTYA traded at a premium to its U.S. peers, but now that the premium has dissipated, if you want to invest in cable, maybe because the investment community is so pessimistic, LBTYA seems like a good alternative. I have been long in my personal account for several years but don't own it for clients.

Surprisingly, I was impressed by the Warner Music (WMG) presentation. Edgar Bronfman had a tight presentation that revealed renewed top-line revenue growth as the absolute dollar decline in physical music sales is now smaller than the absolute dollar increase in digital sales. Digital sales will reach 6% of total sales in 2005, and Bronfman predicts they will rise to 20% in 2008. Separately, I have to believe that the incredibly strong iPod sales that everyone on the Street is noting will accelerate digital sales even more in 1H06. Maybe this could be set up an opportunity for profit if it drives better-than-expected top-line growth at WMG. In general, the Street dislikes WMG, which could also help create a bullish trade.

I was dissatisfied with the explanation that Lions Gate Entertainment (LGF) provided at its presentation for the latest quarterly shortfall. I can accept the argument that free cash flow is the more relevant metric, but the unusually large discrepancy between EBITDA and FCF doesn't make sense to me based on what I know now. A look at the December quarter balance sheet figures for film investment and amortization might help. I believe that 2006 FCF numbers (ending March 2007) have no margin for error. I am still long my small position as I believe the stock is getting a little too depressed in the short term, with movies coming up in January and February that should do OK and rebuild confidence.

Glenn Britt, CEO of Time Warner Cable (owned by Time Warner (TWX)), made a solid presentation during a fireside chat with UBS cable analyst Aryeh Bourkoff. What impressed me the most was Britt's respect for his satellite and RBOC competition. There was no spin, just a confidence that TWC could compete and continue the low-double-digit revenue and cash flow growth for the next several years.

Another refreshing presentation occurred on Wednesday morning when Jim Mooney and Neil Smith spoke on behalf of the soon-to-be-merged NTL (NTLI) and Telewest Global (TLWT). Mooney finally admitted the extent of NTLI's problems in billing and marketing. Even better, he and Smith (currently CFO of TLWT) made it quite clear that the best practices at TLWT that have driven satisfactory subscriber growth, significantly higher ARU and an overall higher quality customer base were going to be implemented at the new company. Even better, the operating team will be composed almost entirely of TLWT management or new hires, with NTLI senior management roles restricted more to finance and executive. Presumably, some of the new hires in strategy and marketing will come from Virgin Mobile as will a new brand.

As I suspected, the market has reacted well so far to the potential Virgin merger. If confidence continues to build, there is plenty of upside as 2008 synergy estimates from costs only could add over $300 million to EBITDA. At just a 5 multiple, that adds close to $15 to the share price. 2008 is far away, but $15 provides nice downside support while waiting.

I really have no capacity to add value on Google (GOOG) but the mere fact the company was a keynote speaker at a media conference is indicative of the disruption the company, and Internet advertising in general, are causing on traditional media. For example, every newspaper company at the conference talked about their Internet businesses and named GOOG as a competitor. I'd just reiterate that of the several billion dollars in incremental revenue put on each year by GOOG and Yahoo! (YHOO), a significant portion is being diverted from traditional media like newspapers, TV, radio and magazines.

I sat in on British Sky Broadcasting (SKY) to gain further insights into the competitive environment in the United Kingdom as it relates to NTL (NTLI). Given the very high likelihood that NTL will complete its merger with Virgin Mobile and rebrand itself and Telewest as Virgin, the competitive landscape is likely to intensify. SKY is the dominant multi-channel TV player with close to 8 million subs, almost one-third of the U.K. households. SKY's customer base has excellent demographics and takes lots of premium services. SKY is a storing competitor but NTLI-TLWT may be able to win football rights, which will hurt SKY's competitive position. SKY most likely will remain successful but I think they will have trouble reaching their growth goals because as the incumbent provider, competiton is taking dead aim at them in much the same way the RBOCs are losing wireline telephony to cable and cable is losing share to satellite in the United States.

I was impressed by the presentation by Grupo Televisa (TV). TV is the dominant media company in Mexico and participates in the U.S. Hispanic market by supplying much of Univsion's most popular programming for a royalty fee of over $100 million per year. TV is poised for a big 2006 due to World Cup soccer and a presidential election in Mexico. The upcoming launch of a new TV network in Spain also appears promising. I doubt that either of these things is new news, however. The company has a very strong balance sheet and has been paying a significant dividend. I definitely plan to complete additional research on TV.

ProSiebenSat.1 Media AG is the biggest TV broadcaster in Germany. The company is in the process of being acquired by Germany's largest publisher, Axel Springer. I attended the presentation to learn more about the German TV market and also to find out if ProSieben intended to expand in Central Europe as its top competitor in Germany, RTL, has done. The answer to the second question is "no." Germany has 35 million households. For comparisons, the U.S. has about 110 million and the U.K. has about 24 million. In Germany, 56% of the households receive cable TV with about 30 channels. Another 39% receive multi-channel TV via satellite and get about 40 channels. The remaining 5% receive their TV over the air through digital terrestrial and receive about 24 channels. Germany is the #2 ad market in Europe at nearly 20 billion euro with TV accounting for a 20% market share. The ad market has been depressed but recovered in the summer and fall on optimism about the German elections. Those elections produced an unexpected mixed result, which has put a damper on the recovery but PreSieben believes growth will remain positive. Pro Sieben expects German GDP to grow around 1%.

McClatchy (MNI) has been one of the top performing newspaper stocks in terms of fundamentals and trades a well deserved premium to the group. However, growth has slowed to at or below industry trends recently leaving MNI shares in a tough spot form an investment perspective. The company used its presentation to defend the industry by noting that newspaper reach is expanding due to the addition of popular websites that attract users unique from those who read the local papers. This may be the case but it does not help the financials yet due to the much lower pricing on the web that even at a higher margin produces less operating profit than the lost print advertising. MNI issued updated guidance that was mixed and slightly below analyst expectations for 4Q05 and 2006. I found MNI's online strategy to be the most well developed and conceptually well thought out relative to its peers excluding papers like the New York Times (NYT) that have a national strategy. Due to the quality of MNI's management and the above-average profile of its markets, it would be a top choice if I reinvested in the newspaper industry. The company is looking closely at Knight Ridder (KRI), but would not make any comments.

Comcast (CMCSK/CMCSA) concluded the conference with a keynote address. The key takeaway is that the telephony rollout has finally accelerated and the company will comfortably meet its longstanding target for over 200,000 new subs by year end. Management projected very strong confidence about meeting its 2006 target of 1 million new telephony subs. Based on prior announcements about telephony sub counts, it is clear there has been sharp acceleration in adds. My thesis on Comcast is that the VOIP rollout will boost basic TV and high speed sub counts as it apparently has at Cablevision (CVC) and Time Warner Cable. I still find Comcast shares very attractive as they are trading at less than seven times forward EBITDA, which should accelerate in 2006.

Posted by Steve Birenberg at December 12, 2005 10:13 AM in Conference Summaries