May 09, 2012
Media Earnings - Good Numbers, Bad Stocks
The final batch of earnings this quarter for Northlake holdings comes from the media stocks. Much like with the earlier reports from the technology stocks, the results and guidance were good but the stocks went lower. The stock reactions are mostly a function of the market correction underway so far in May, a decline of 3-4% on top of a loss of 1-2% in April. In the short-term, market trend is a controlling factor. In the long run, the good results and positive outlooks will win out.
Let's take a quick look at the recent reports:
CBS continued its string of great earnings. Results exceeded expectations with operating margins expanding to all-time records yet again. Top line growth reflects a rebound in advertising growth at the CBS Network, slow and steady recovery in the local TV, radio, and outdoor segments. Cost controls have been excellent and programming expenses are under control thanks to many years of steady ratings at the CBS Network. Margins are also benefiting from sales of content to digital distributors like Netflix and Amazon. Retransmission fees paid by cable and satellite companies for the rights to carry the TV network are also growing quickly and highly profitable. Key for CBS shares is that the new, high margin revenue streams are very stable and predictable. This should allow the multiple investors pay for CBS shares to continue to rise. It remains below other entertainment stocks.
Discovery Communications reported better than expected results and increased guidance. The stock fell 6%. DISCK shares have been among the best performers in media as everyone has seen the great ratings for the US networks (Discovery, TLC, Animal Planet, ID) and continued expansion of the international reach with 20% advertising gains. The company forecast moderating advertising growth in the current quarter but still at industry leading levels. Management also reminded investors that timing of expenses meant that the next two quarters would see slower profit growth followed by a big spurt at year end. The only problem with DISCK is that expectations were so high. If ratings and ad growth hold, a period of pause should give way to continued gains in the stock to the upper $50s.
Charter Communications reported a surprising increase in cable TV subscribers. Since AT&T and Verizon launched TV and housing went into a severe recession, cable TV companies have been slowly losing customers. Investors worry that the losses are cord cutting as viewers give up cable to watch TV via Netflix or on the web. The trend across the industry over the past year has been for fewer lost subs. Charter turned the corner this quarter. This is not a big deal as Charter and other cable companies are driven now by high speed data and small and mid-size business accounts but it does relieve big picture worries which is good for the stocks. Charter also reported better than expected high speed data subscribers. The cost of signing up these new subs pressured margins but new subs lock in future growth. Charter shares are also benefiting as the company uses free cash flow to pay down debt, effectively transferring value from bondholders to stockholders. I think the stock can reach the mid to upper $70s.
Liberty Media's earnings don't matter as the company is effectively an investment vehicle for John Malone. The only meaningful operating business is Starz Encore. The numbers there were decent but don't drive the stock. Instead, management comments about what it will do with its 40% stake in Sirius XM is what investors hope to hear. This quarter there was big news on that front as Liberty indicated it would be increasing its stake in SIRI to 45.2% via purchase of a forward contract to buy 302 million shares of SIRI at $2.15. This is positive news for LMCA as the stock trades at a 25-30% discount to the value of its assets. The purchase or more SIRI indicates LMCA is working towards monetizing the SIRI stake sooner rather than later. The sooner the long-term relationship between the two companies is determined the lower the discount at which LMCA should trade. LMCA has multiple options for resolving the SIRI stake. Given value created in the past when LMCA faced a similar situation with big stakes in Discovery Communications, Liberty Global, and DirecTV, there is every reason to have confidence that management will do whatever makes the most money for LMCA shareholders. It is no coincidence that John Malone is LMCA's biggest shareholder and the management team is compensated mostly with LMCA stock. I think the stock would be trading at $110 today with no discount and if SIRI rises to $2.50-3.00 as I expect, LMCA would be worth closer to $125.
Disclosure: CBS, DISCK, CHTR and LMCA are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Northlake is a registered investment advisor. Filings can be found at www.sec.gov. CBS, DISCK, CHTR, and LMCA are net long positions in the Entermedia Funds. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia's investment management company, and has personal monies invested in the Funds.