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    Northlake Capital Management

    November 13, 2014

    Activision Blizzard: Attractive Play on Video Game Cycle

    Activision Blizzard, Inc. (ATVI) is a new buy for Northlake clients. Now is a good time to invest in ATVI following recently announced better than expected third quarter results. In addition, there have been concerns about growth at ATVI for 2015, but the worries seem to be easing due to the just reported better than expected sales and recent announcements about the pipeline of games in 2015. ATVI is trading at a meaningful discount to its peers. As growth expectations pick up, we believe ATVI could experience expansion in its P-E to match the industry average.

    An additional positive is that there could be upside to 2015 EPS estimates as Vivendi sells the last tranche of ATVI stock it received in the sale of Blizzard to Activision. Over the years, ATVI has been opportunistically buying back its own shares, and more share buybacks could drive 2015 EPS estimates higher.


    The bottom line is that Northlake has taken a new long position in ATVI at what we see as a low valuation on conservative earnings estimates. We believe that the P-E multiple could expand from 14x to 16x 2015 earnings of $1.50 per share, giving us an price target of $24, for a gain of 20%. At 16x earnings, ATVI would still trade at a discount to its closest peer, Electronic Arts, which trades at over 18x 2015 estimates presently. Should the story evolve as we expect, especially success in recently introduced games and the game releases in 2015, a secondary target in the upper $20s is achievable in the next 12 months.

    The video game industry as a whole is looking strong as a new generation of game consoles has been selling briskly and well ahead of initial expectations. Gamers should now shift their spending to software for their new consoles. ATVI has a strong pipeline of next generation games to drive growth during the hardware to software shift, starting this holiday season.


    Key titles include the recently released Destiny and Call of Duty: Advanced Warfare, and the upcoming expansions to World of Warcraft , Starcraft, and Skylanders. Additionally, the Blizzard unit announced their first new Intellectual property in 17 years, Overwatch. The initial beta of the game offered to attendees at last week’s Blizzcon convention has been met favorably. Another new title for 2015 that has received good buzz is Heroes of the Storm.

    Overall, we believe that ATVI is well positioned for a successful holiday season and for growth in 2015 and beyond. The shares are currently undervalued with positive catalysts lined up from now through 2015.

    ATVI 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. ATVI 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 03:56 PM in ATVI

    November 10, 2014

    Signs of Bottoming at CBS

    CBS Corporation (CBS) reported third quarter results in line with or very slightly ahead of recently lowered Wall Street estimates. CBS shares have performed quite poorly this year, down almost 20%, as earnings have steadily fallen due to weaker than expected advertising trends at the CBS Network and the company’s owned and operated TV stations. In addition, investors are worried about a collapse in the TV network business model if TV begins to be delivered via the internet (over the top or OTT) rather than through the cable or satellite set-top box. CBS shares have also probably been a victim of high expectations as the stock entered the year up about 10 times from the summer of 2009 when Northlake first began buying the shares.

    I had hoped that the current quarter would set a bottom for the shares if the quarter served to stabilize estimates. My hope was only partly rewarded. Earnings were pretty solid against lowered expectations, a good first step. However, TV advertising, particularly at the CBS Network was a little weaker than expected, especially considering the benefit of the broadcast of September’s Thursday night NFL games. Management did signal better ad trends in the current quarter but many other TV networks have stated that the TV ad market is still sluggish at best.

    One positive coming from the quarter is that for the first time ever advertising revenues as a percent of total company revenue fell below 50%. CBS is among the most exposed companies to ad trends since it does not own cable networks that get a large portion of their revenue from monthly affiliate fees paid by cable and satellite companies for the rights to provide the network signal to their customers. CBS is beginning to receive fees from cable and satellite companies for the rights to its main network and management reiterated the growth path of this revenue stream over the next five years. Another factor lowering ad exposure is the big success at Showtime and CBS selling its content to other networks in the U.S. and abroad and to OTT providers like Netflix. The potential to sell Showtime OTT, as HBO has announced, could be a positive spark to the shares.

    Overall, I think it pays to stick with CBS. Some signs that TV advertising growth has bottomed, a better advertising outlook on lower expectations for 2015, possible hidden value at Showtime, and continued strength in monetization of TV content should capture investor attention over the next few months and return CBS shares to favor. If earnings estimates have indeed bottomed and advertising growth picks up, CBS shares offer 20-30% upside over the next six months. Supporting the stock in the meantime is an aggressive share repurchase plan and one the best management teams I know of in any industry.

    CBS 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. CBS 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 10:30 AM in CBS

    November 08, 2014

    High Expectations and Timing Issues Should Not Hold Back Disney

    In a very tough year for media stocks, Disney (DIS) has been a standout performer. At recent highs, the shares were up over 20% for the year, more than twice the gain in the S&P 500. DIS was a victim of its own success after reporting its latest quarterly earnings. The results were slightly above expectations but not as big a surprise as the last few quarters. The company also reminded investors that higher sports rights costs at ESPN would slow earnings growth in the cable network segment in 2015 before it accelerates again in 2016. These two factors plus higher corporate wide pension costs and lack of detailed clarity on the company’s share buyback plans in 2016 led to a 2% decline in DIS shares following its latest earnings report.

    I believe the recent pullback will prove temporary as ESPN growth is locked in over the next several years as sports rights costs are known and higher affiliate fees paid by cable and satellite companies to cover the added expense have already been negotiated. In addition, sports should continue to prove attractive to advertisers and not vulnerable to loss of advertising dollars to online video.

    More importantly, DIS is an incredible roll with its films. Frozen drove much of the upside to earnings expectations over the past year. Guardians of the Galaxy far outperformed expectations and is now another franchise. The next year plus brings another Avengers film, the first Pixar film in two years, the first of the new Star Wars films, and the just opened hit Big Hero Six. In its recent history, DIS earnings and shares have outperformed expectations when the content is humming as the company has incomparable synergies throughout its operating divisions including TV networks, theme parks, consumer products, and video games. Growth will get a further boost in 2017 with the opening of Shanghai Disneyland. DIS shares trade at well deserved premium to the market and peers but remain an excellent core holding with upside of 15-20% over the next year. Showing patience against any of the temporary issues mentioned should prove rewarding.

    DIS 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. DIS 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 03:09 PM in DIS

    Liberty Media Splits in Two to Drive Value Creation

    The big news surrounding Liberty Media’s (LMCA/LMCK)) quarterly earnings was the split of LMCA into two companies as shareholders received one share of Liberty Broadband (LBRDA/LBRDK) for every four shares of LMCA/LMCK.

    LMCA/K now is dominated by its 57.5% ownership stake in Sirius XM Satellite Radio. Sirius now represents over 7% of LMCA/K net asset value. Another 10% is a 35% ownership stake in Live Nation Ticketmaster. Sirius and Live Nation had both reported good quarterly results prior to LMCA/K’s report so there was little new information in the latest earnings report from LMCA/K. The reasoning behind splitting Liberty into two companies is so that each new Liberty more closely tracks its underlying asset value. LMCA/K trades at about a 15% discount to its net asset value, an unwarranted large discount given the lack of complexity now that Sirius dominates the asset value. Closing of that discount and continued 20% growth in cash flow at Sirius should produce a superior return for LMCA/K shareholders over the next year. LMCA/K shares are unchanged this year and catch up move now that the split is complete should take place. Future plans for the stake in Sirius – a possible merger or spin-off could become clearer at Liberty’s analyst meeting later this month. We plan to attend.

    LBRDA/K holds a 27% stake in Charter Communications (CHTR) and a few other assets. CHTR represents 95% of the net asset value of LBRDA/K. CHTR has been leading cable industry growth this year and is poised for continued gains after it sells, swaps, and buys subscribers from Comcast post the completion of the Comcast-Time Warner Cable merger in the first half of 2015. LBRDA/K trade at a 9% discount to net asset value which I expect to grow nicely as CHTR continues to operate well and then benefits form the transactions with Comcast. Additional upside will come from a rights offering of LBRDA and LBRDK shares coming in December when shares holders will receive for every five LBRDA and LBRDK shares entitling purchase of additional shares at a 20% discount. Northlake intends to exercise those rights and increase ownership of LBRDA and LBRDK in client accounts.

    LMCA, LMCK, LDRBA, and LBRDK are 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, LMCK, LDRBA, and LBRDK are net long positions 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 02:55 PM in LCAPA

    Liberty Global Ready for Liftoff

    Liberty Global (LBTYK) had an eventful week. The company closed on its acquisition of Ziggo, giving it nationwide coverage in the Netherlands for its broadband and cable network, reported third quarter earnings, and restarted its share repurchase program. Each item is positive and complements the other which should set the stage for strong performance from LBTYK shares.

    Earnings were in line with Wall Street expectations and the company reaffirmed all of its growth guidance for 2014. Revenues grew 3% and operating cash flow growth gained 5%. The best performances were in Germany and the United Kingdom. After a slow start for LBTYK’s acquisition of Virgin Media in the U.K., growth has accelerated with revised promotions and bundles and cost synergies that are running ahead of expectations. Wall Street did not like the Virgin Media acquisition so this should relieve some pressure on the shares.

    Ziggo had been the larger cable company in the Netherlands with Liberty as #2. There was no geographic overlap. Netherlands has been a tough market for LBTYK for the past year with negative growth in revenue and cash flow as the national telco, KPN, has been very aggressive with pricing and promotions. The Ziggo acquisitions should yield unusually large synergies and put Liberty on better competitive footing in the Netherlands. Hopefully, in 2015 this should return this important country to growth.

    Ziggo was pending before European regulatory authorities for about six months. During this time, LBTYK was unable to repurchase any of its own shares. LBTYK is a prodigious buyer of its own shares, having repurchases $13 billion since 2005. With Ziggo closed, LBTYK has restarted its repurchase program and promised a catch up for the lost six months. This will lead to $2.6 billion in repurchases by year end 2015, representing over 7% of the current shares outstanding.

    LBTYK shares had lagged the market’s gains significantly this year until recently. Much of the news just discussed was expected so as closing of the Ziggo deal approached the stock began to firm up. Since earnings were reported the shares have continued to rise and are not up 7% this year. With merger synergies and solid organic growth driving slightly accelerated operating cash flow growth, stable capital spending, and a large share repurchase in place, free cash flow per share is set to explode higher through 2017. I think this can drive LBTYK shares north of $70 in next 18 months making it a very attractive investment.

    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’s regulatory filings can be found at www.sec.gov. LBTYK 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 02:38 PM in LBTYK

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