Northlake Media Talk

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May 14, 2012

Liberty Global: Sunshine in Stormy Weather

Liberty Global (LBYTK) reported another solid quarter despite having virtually all of its cable operations in Europe. The company operates primarily in the stronger Northern European countries of Germany, Netherlands, Belgium, and Switzerland. However, the real secret to another quarter of solid growth is the well-timed acquisition in German over the past few years. For many years, German household adoption of digital cable TV and high speed internet severely lagged other European countries and other wealthy industrialized countries. Liberty saw the shift toward more rapid adoption by Germans coming and astutely shifted its asset based toward German with the acquisitions of Unity Media and KBW. Liberty also sold its Japanese and Australian businesses.

The shift is working. In the latest quarter, Liberty had rebased revenue growth of 6% and rebased EBITDA growth of 3.5%. For the second consecutive quarter, new customer additions soared past estimates. Liberty has added about 900,000 new revenue generating units ( a subscription to cable TV, high speed internet, or telephony). This is about double the pace Wall Street expected and quite remarkable considering the economic situation in Europe.

The new subscribers come at a cost which explains the slower EBITDA growth relative to revenue gains. Marketing and customer premised equipment and setup pressures margins. However, in subsequent quarters as subscribers additions moderate, Liberty has locked in future growth in revenue, operating, and free cash flow.

With the free cash flow, Liberty will continue to aggressively buyback its shares and keep the balance sheet in shape should another acquisition opportunity arise. Recent business trends, top notch operating management, and a shareholder friendly management team and Board of Directors should let Liberty shareholders see 20-25% upside in the next six to twelve months.

Disclosure: LBTYK is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. LBTYK is a new long position in the Entermedia Funds. Entermedia are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia's investment management company, and has personal monies invested in the Funds.

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.

May 01, 2012

Sticking with Mid Cap and Growth

There were no changes to the April signals from Northlake's Market Cap and Style models. The Market Cap model continues to recommend Mid Cap (MDY) and the Style model still prefers Growth (IWF). As a result, client positions in MDY and IWF will be held for at least another month.

There was minimal movement in the underlying indicators for both models. The growth signal did get a little weaker but remains solidly in growth mode. The model's stability reflects a flattish stock market performance in March with little disparity among the returns for the S&P 500, the S&P 400 Mid Cap, and the Russell 2000 or the major growth and value indices. It also reflects relatively stable economic data with the US and global economies recovering and growing but at a below average pace for an economic recovery. What all that really means is that little new data hit the models that varied with data accumulated over the prior few months. We are still in a sluggish economic recovery with easy money. It is a good environment for publicly traded corporations but a difficult environment for many individuals. The primary risk to stocks remains that corporations can only grow profits and cash flow so far without help from end demand.

Performance from the models last month was pretty good but did not add a lot of value. Both models produced returns just barely in negative territory while the S&P 500 lost about three quarters of one percent. MDY fell about one quarter of one percent, SPY lost three quarters of one percent, and IWM fell 1.6%. On the Style side, growth was barely negative and finished ahead of not only the S&P 500 but also the value index.

Disclosure: MDY and IWF are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Northlake is registered investment advisor with the State of Illinois. Filings can be found at www.sec.gov.

April 26, 2012

Another Apple Blowout

Apple reported another quarter of stunning results. Not quite as good as the December quarter but still something to behold. Revenues of $39.2 billion exceeded consensus by about $5 billion. EPS of $12.30 compared to a consensus estimate of $10.04. These results also exceeded the "whisper" numbers which were 10-15% above consensus.

Apple's great numbers came against a backdrop of sudden worries about the stock and the business outlook. Those worries were likely exacerbated by the 50% up move in the shares into the early April peak. Including the day of the report Apple had fallen 12% in ten days with only one up day in the last ten.

Concern arose around the number of iPhones sold due to slightly worse than expected iPhone sales at Verizon and AT&T which reported before Apple (as they do every quarter). An equal worry was whether AT&T and Verizon would subsidize iPhone purchases to a lesser amount and tighten upgrade policies. Apple gets over $600 per iPhone from the carriers which sell them to consumers for $200 along with a 2 year contract guaranteeing 24 months of expensive monthly data plans. Verizon and AT&T have tightened upgrade policies which could slow demand for iPhones as many users upgrade every new generation. Any reduction in the subsidy could further reduce iPhone sales by raising the price to consumers.

At least for this quarter, these issues proved meaningless. iPhone sales soared past estimates driven by Chinese and other Asian demand. Apple's growth story is increasingly overseas, something analysts over focused on the US had forgotten. iPad demand met expectations, while Macs were a little light. The mix shift toward iPhones, falling commodity costs, and some one-time benefits sent gross margin surging to all-time record.

The shares bounced back strongly after the report, regaining about 2/3rd's of the recent losses. I think this quarter justifies Apple trading as high as $750-800 later this year based on 12 times calendar 2012 EPS of about $50 plus what will be around $140 in cash by year end. However, after the big run in the shares this year and with no obvious new catalyst until the fall launch of iPhone 5 (and possibly a smaller iPad and TV), I think the shares could stall in $600-$640 range for awhile. The Street is going to be concerned about slowing earnings momentum and a pause in iPhone sales ahead of iPhone 5 similar to early last fall ahead of the 4s launch. I suspect iPads will beat expectations over the next few quarters driven by education demand and broader geographic distribution. A refresh of the Mac line early this summer also could provide some upside.

The bottom line is the Apple story is not over yet although the stock could stall for a few months or even until fall. Let's not forget how far it has come this year. I long thought the market was significantly undervaluing Apple. The move this year leaves the stock just normally undervalued. This situation requires fresh catalysts. I expect them later this year.

Disclosure: Apple is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Northlake is an Illinois registered investment advisor. Filings can be found at www.sec.gov. Apple is a net long position in the Entermedia Funds. Steve is co-portfolio manager of Entermedia, owns a stake inthe Funds' investment management company, and has personal monies invested in the Funds.

April 19, 2012

EMC: Mostly In Line But Lacking Pizzazz

I alwasy have viewed EMC as a core holding. I am not expecting Apple or Google or Facebook or Qualcomm. Just nice steady growth with very high visibility and consistency. EMC's storage products and solutions are absolutely critical to the world of internet based computing, communication, and entertainment. Storage is a high priority, mission critical purchase for EMC's customers, gaining share of IT budgets and outgrowing spending on most core technology products and services.

EMC's latest quarter supported this view. EPS of 37 cents was a penny better than expected while revenues of $4.04 billion fell about $50 million short of consensus. Margins were better than expected. Management stated it would "meet or exceed" prior EPS guidance for 2012. Wall Street greeted these results with a sell-off. The stock is down about 4%. The stock has done very well this year after a weak finish in 2011. Recent street research was expecting a stronger report based on channel checks and apparent business momentum.

Despite the Street's disappointment, nothing in the report, guidance, or management commentary suggests any meaningful change in the outlook. Revenues grew 11% and EPS were up 19%. The balance remains extremely strong and free cash flow in 2012 should approach $5 billion. Backing out the public stock market value of EMC's majority interest in high flying VMWare (revenue up 25% last quarter) and the company's $6 billion of cash and the stock trades about 10 times earnings. I think that is way too cheap for a company targeting at least 13% annual growth in revenue and EPS from 2010 through 2014. Furthermore, as previously noted, EMC's outlook seems quite secure giving the importance of storage to current information and communications technology trends.

Disclosure: EMC is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor.

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