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March 03, 2014
Liberty in Limbo
Liberty Media (LMCA) reported earnings last week. As usual, the numbers were meaningless as LMCA is a collection of assets including a majority stake in Sirius XM (SIRI) and meaningful minority stakes in Live Nation (LYV), Charter Communications (CHTR), and Barnes and Noble (BKS). Each of these companies had already reported their latest earnings leaving little fresh information for LMCA to disclose.
LMCA is trying to buy the 47% of SIRI they do not own. The goal is to get full control of SIRI's massive and rapidly growing free cash flow. LMCA would use the cash flow to (1) make more investments, and (2) buy back its own shares. One plan for the cash flow was to help finance CHTR's attempted takeover of Time Warner Cable. With Comcast now buying Time Warner Cable, that option appears off the table.
While LMCA waits for the independent directors of SIRI to respond to their offer, LMCA shares are caught in limbo. LMCA is controlled by John Malone, who can arguably be called the Warren Buffet of the media world. LMCA shares have struggled after a year of great performance given the uncertainty over the immediate future. Given his track record, I think "In Malone We Trust" is the best strategy for right now. Adding comfort during this period of uncertainty, LMCA shares are trading at about a 20% discount to underlying net asset value, the largest discount in over a year.
LMCA 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. Northlake’s regulatory filings can be found at www.sec.gov. LMCA is a net long position in the Entermedia Funds. Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.
Posted by Steve Birenberg at 12:26 PM in LCAPA
Style Model Shifts to Growth
Northlake’s Style model is now recommending Growth. As a result, client positions in the Russell 1000 Value (IWD) have been sold and proceeds reinvested in the Russell 1000 Growth (IWF). The Value signal had been in place since January 1st. During this time, IWD returned about 35 basis points vs. 171 basis points for IWF, so the latest call by the Style model was a little below average.
There was no change in the Mid Cap recommendation coming from the Market Cap model, so current client holdings in the S&P 400 Mid Cap will be held for at least another month. So far this year, the Mid Cap call has worked well. MDY is up 2.5% through February, comfortably ahead of the benchmark S&P 500 which has gained 60 basis points.
Two underlying factors influenced the shift from value to growth. First, as mentioned above growth has been performing well relative to value over the last few months. This has shifted the trend indicators in favor of growth. The trend indicators combine a look at performance over two, nine, and twelve month time frames. The second factor to shift in favor of growth is U.S. Dollar momentum. Recent weakness in the trade-weighted-dollar is favorable for growth companies. A weak dollar makes products and services sold abroad by U.S. technology, consumer, and health care companies more competitive. These industries are major components of growth indices making up
The new growth is just barely across the line from value based on the two-month smoothing used in the Style model. However, the one month reading for March is in pretty solidly in growth territory.
IWF 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. Northlake’s regulatory filings can be found at www.sec.gov.
Posted by Steve Birenberg at 12:13 PM in Models
February 18, 2014
Comcast Purchase of Time Warner Looks Good
Comcast’s (CMCSK) pending purchase of Time Warner Cable (TWC) improves upon an already positive story for CMCSK shares. Assuming approval effective 1/1/2015, analysts are estimating 5-10% accretion in free cash flow per share vs. Comcast continuing as a standalone entity. Accretion emanates from synergies in operating expenses and capital expenditures, estimated by management at $1.5 billion and $400 million once fully implemented over a 2 year period. Analysts are being a little more conservative in their forecasts assuming a three year implementation period. Management is not assuming any synergies on revenue. This strikes me as conservative, especially for the already rapidly growing business services at each company. With cable lines in 23 of the largest 25 markets in the U.S., the enlarged Comcast seems particularly well-positioned to accelerate focus and growth in business services.
My experience with Comcast management and large mergers generally is that management synergy estimates are usually conservative in terms of scope and time to achieve. Within the cable industry, synergies are relatively straightforward as the companies do not compete head-to-head so savings are mostly in overhead and scale purchasing economics.
Presently, combining the companies for 2014 and assuming no synergies, free cash flow per share is projected around $2.85 based on analyst estimates. With CMCSA/CMCSK shares trading at an average price of about $53 that puts the multiple around 18.5x and the free cash flow yield near 5.5%. Assuming a 1/1/15 deal close, analyst estimates (admittedly with a wide variation) show free cash flow growth of 16% in 2015, 20% in 2016, and 23% in 2017. Growth accelerates as synergies and share repurchases kick in.
Given this growth outlook, I think CMCSK shares can sustain their current free cash multiple, equating to a price target of $65 on 2015 estimates. This provides about 20% upside, plenty to justify owning CMCSK shares.
CMCSK shares traded a little lower on the deal announcement as arbitrageurs began positioning long TWC/short CMCSK. Given that I found CMCSK undervalued even before the merger announcement, I think downside is limited even if the government rejects the merger or imposes even stricter conditions than assumed. I think approval is likely with an extension of the consent decree CMCSK already operates under from its NBC Universal acquisition. The consent decree runs through 2017 and I would not be surprised to see it extended for a few years on the enlarged company.
CMCSK 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. Northlake regulatory filings can be found at www.sec.gov. CMCSK and TWC are net long positions in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies. Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.
Posted by Steve Birenberg at 08:54 AM in Comcast
February 17, 2014
Liberty Global Growth Set to Accelerate
Liberty Global (LBTYK) reported its slowest quarterly growth of 2013 in the December quarter, with low single digit gains in revenue and operating income. The numbers were not a surprise as a difficult competitive environment in the UK and Netherlands and initial dis-synergies form the acquisition of Virgin Media in the UK held back results. With synergies at Virgin Media starting to kick in, Netherlands beginning to stabilize, and German, Belgium and Switzerland continuing to perform well, LBTYK appears poised for accelerating growth in 2014. In fact, management forecast exactly this on its quarterly conference call. This should set the stage for continued good performance for LBTYK (up 43.5% in 2013).
Free cash flow is the key measure for LBYTK and the company appears on track for rapid growth over the next three to five years as capital spending declines as a percent of revenue while core operations grow in the 5-7% range. LBTYK runs a levered equity capitalization strategy with debt at 5X operating cash flow (smart balance sheet management has cost of debt under 7% and 85% of debt due in 2017 and beyond). As long as the numbers come through, this works to the great advantage of shareholders. Excellent management, a long history of success, and basic stability of the cable TV and broadband business provide investors with great confidence in LBTYK. Free cash flow per show should surge over $10 in the next few years, easily enough to justify the shares comfortably over $100 as time goes by.
Beyond operational and financial risk, the biggest issue for investors in LBYTK is the company’s aggressive acquisition strategy. Management clearly sees the low interest environment as an ideal time to build scale and reinforce its competitive person throughout Western Europe. This has led to purchase of Virgin Media and the buying control of Ziggo, LBTYK’s larger cable peers in the Netherlands. Given difficult conditions in these two markets, I believe the acquisitions have added some caution into the LBTYK investment story. This strikes me as a buying opportunity but it will be important for 2014 to show improved results in both countries.
One other thing to keep an eye on is the possible spin-off or sale of LBTYK’s operations in Chile and Puerto Rico. Management has announced a spin-off is under consideration and has taken concrete steps in that direction. This type of transaction could create some hidden value for LBTYK shareholders, especially as Chile is now growing rapidly following a period of intense investment in its mobile operations.
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. Northlake regulatory filings can be found at www.sec.gov. LBTYK is a net long position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies. Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.
Posted by Steve Birenberg at 11:39 AM in LBTYK
Discovery Communications: Bottoming Out After a Rough Stretch
Discovery Communications (DISCK) reported results roughly in line with Wall Street estimates and provided 2014 guidance just a little below expectations. Estimates for the December quarter and 2014 had been falling recently as DISCK’s leading U.S. networks, Discovery and TLC, had a rough patch of lower ratings. The stock has performed poorly during this period and traded off again after the earnings report. Encouragingly, the shares did not retreat to recent lows and bounced strongly the next day. Improved ratings accompanying new original programming so far in 2014 are a positive.
I think the worst is past for DISCK and with the expectations bar reset, the shares can again perform well. DISCK now trades at a modest premium to its peers on a P-E and price-to-EBITDA basis. Given the company’s well above average growth profile driven by its international exposure, low-cost model focused mostly on non-fiction programming, strong management, and steady share repurchases, I think the shares can trade toward $100 as 2014 progresses when investors find 2014 guidance was conservative and begin to look ahead to 2015 and EPS of at least $4.65.
In the December quarter, DISCK grew mid-single digits in the U.S., a slowdown from earlier in the year. Advertising only grew 4%, down from double digit gains, as ratings at the two leading networks were down more than 10% in the quarter. International growth continued briskly with advertising up over 20% and mid-teens growth in affiliate fees. DISCK not only grows fast abroad but has the highest proportion of revenue and operating profit earned internationally of any major media company. The company has double down on its international growth with acquisitions in Scandinavia and the Eurosport network. These acquisitions do add some risk and definitely complicate the analysis but management appears quite confident and the deals, while large compared to recent history, are mostly consistent with the company’s corporate strategy.
To reiterate, DISCK’s recent ratings and acquisition binge have pressured the shares but expectations appear reset and the company’s attractive competitive position globally and above long-term growth should get the stock moving again later this year.
DISCK 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. Northlake regulatory filings can be found at www.sec.gov. DISCK is a net long position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies. Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.
Posted by Steve Birenberg at 10:51 AM in DISCA
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