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May 15, 2013
Focus on M&A At Liberties
Liberty Media (LMCA) and Liberty Global (LBTYK) reported earnings last week, finishing off the latest quarterly reports for Northlake's portfolio of individual stocks. Both stocks reacted favorably to their results although the real focus of investor attention at both companies is on recent merger and acquisition activity.
LMCA recently announced it was taking a 25% stake in Charter Communications (CHTR), one of the largest cable companies in the US. CHTR previously was a successful investment for Northlake's clients. Clearly, I should have held on although the proceeds were put into Disney (DIS), which has also performed very well. LMCA is essentially a holding company for John Malone's domestic media investments. CHTR now represents about 17% of LMCA's net asset value. Sirius XM (SIRI) remains by far LMCA's biggest investment at 65% of net asset value. The major point of discussion related to LMCA's earnings was how the company would finance its purchase of CHTR. For now, the company plans to borrow but eventually some monetization of the SIRI stake could occur. Presently, LMCA does not want to sell any SIRI even as SIRI aggressively buys back its own shares. LMCA has some tax issues that prevent tax-effective liquidation of SIRI share prior to this summer. LMCA remains an investment in John Malone's expertise and deal-making capabilities. By using LMCA's balance sheet capacity, the CHTR investment makes the future path a bit more clear which I see as a positive for LMCA. Ultimately, the upside in SIRI and CHTR will drive LMCA shares. I am especially optimistic on SIRI and see upside ahead for LMCA to $150 or more.
LBTYK shares have lagged a bit recently as the company nears closing of its acquisition of Virgin Media (VMED). I think it is mostly arbitrage pressure that should clear up after the deal close in late June. In the meantime, both LBTYK and VMED continue to grow nicely. LBTYK reported 6% revenue growth and 4% EBITDA growth on an adjusted basis for the first quarter. Growth in Northern Europe, in particular, Germany, is driving the company, despite the troubles in Europe. Cable and broadband remain underpenetrated in Germany. In England, VMED faces competitive pressure but continues to produce low single digit organic growth that is leveraged to double digit free cash flow growth. This fits the LBTYK profile perfectly and explains the acquisition. LBYTK is also benefiting by refinancing its balance sheet at cheap interest rates and pushing the maturity profile out to the end of this decade and beyond. With the tailwind from cable's leading competitive position in Northern Europe likely to remain in place for many years, LBYTK is on track for rapid free cash flow growth. That is music to shareholders ears as the company aggressively buys its own stock. I think LBTYK shares can reach $100 by the end of 2014 when the company could be looking ahead to over $10 per share in free cash flow.
LMCA and LBTYK and DIS are widely held by clients of Northlake Capital Management, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Filings can be found at www.sec.gov. LMCA and LBTYK and DIS are net long positions in the Entermedia Funds. Steve is the portfolio manager of the Entermedia Funds, owns a majority stake in the Funds investment management company, and has personal monies invested in the Funds.
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Posted by Steve Birenberg at 09:11 AM in LCAPA
May 13, 2013
Media Earnings Look Good Overall and for Northlake
Media companies reported earnings over the last two weeks including Northlake positions’ CBS, Discovery Communications (DISCK), and Disney (DIS). In general, the news from Northlake’s holdings and other media companies was good. The two key takeaways are: (1) the national TV ad market is firming up a bit from its tepid growth late last year and early this year, and (2) retransmission and affiliate fees paid by cable, satellite, and telco TV companies continue to grow significantly. With these two important revenue generators in good shape and management teams keeping a close eye on costs, earnings estimates, media stock fundamentals appear to be in good shape.
There were a few negative points to come out of the conference calls that are worth monitoring. First, the threat to retransmission fees from Aereo. This likely to play out over a very long horizon if at all but so far the media companies are losing the public relations battle. Second, and more important, is that ratings at a large number of TV networks, are struggling. This is mainly an issue for broadcast networks (CBS, NBC, Fox, and ABC), however, there is wide variation in performance among cable networks as well. The threat from online video and over the top services like Netflix is the issue. Finally, as more and more networks are competing for viewers and subscription fees, the cost to produce programs is rising.
Overall, the positives should outweigh the negatives, particularly in the near-term if the economy continues to grow. This should support the big upward move in stock prices already completed and leaves room for further gains of 15-20% over the next six to twelve months.
Here are some comments specific to the media stocks held in Northlake client portfolios:
CBS had another good quarter relative to expectations showing growth of 6% in revenue and 14% in EBITDA. Revenues were a bit overstated by the CBS televising the Super Bowl. EPS grew 23% as the company continues to heavily repurchase its own shares. The company presented an optimistic outlook for the balance of 2013 and expects good upfront ad sales to set the stage for early 2014. Plans to monetize domestic outdoor assets remain on track. Retransmission revenues continue to rise rapidly and improve the revenue mix and in turn profit margins. Even after moving from $6 to $47 in less than four years, the shares still offer meaningful upside especially if outdoor asset monetization leads to accelerated share repurchase as I expect.
DISCK reported results in line with expectations with core revenue and EBITDA growth up 9% and 5%, respectively. Timing issues will make 2013 a back end loaded year with EBITDA accelerating to double digit growth for the year. EPS will rise over 30% due to share repurchases. DISCK shares old off on the report due to very high bar set by the company’s industry leading growth. DISCK needs to “beat and raise” to get an immediate pop in its stock off earnings. Despite the lack of near-term momentum relative to expectations, I think the shares work higher as the year progresses and growth picks up. A P-E of 20 on 2014 earnings estimates would take the shares up more than 20%. With best in class long-term growth prospects due its international TV networks, DISCK shares should sustain their premium valuation
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DIS slight beat estimates with 10% revenue growth and 26% EBITDA growth. Cable networks showed the beginning of upside from subscription fees that prompted me to buy DIS a few months ago. The big surprise came at theme parks, however, where margins spiked higher. DIS is now benefiting from passing through a heavy investment cycle at its parks and in ESPN programming rights. The upside form these investments is coming in as hoped and allowing DIS shares to regain their luster and premium multiple. The return on investment should extend through 2014 after which a favorable product cycle at its film division (Monsters University, Star Wars, Avengers 2, Finding Nemo 2, etc.) should propel earnings and cash flow. DIS should also accelerate its capital allocation strategy toward shareholders now that investment spending has peaked. I think the shares can reach $80, up another 20%, on a PE of 20 times 2014 earnings estimates.
CBS, Disney, and Discovery Communications are widely held by clients of Northlake Capital Management, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Filings can be found at www.sec.gov. CBS, Disney, and Discovery Communications are net long positions in the Entermedia Funds. Steve is the portfolio manager of the Entermedia Funds, owns a majority stake in the Funds investment management company, and has personal monies invested in the Funds.
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Posted by Steve Birenberg at 05:10 PM in CBS
May 05, 2013
Market Cap Model Volatility Continues with Mid Cap Back in Favor
Due primarily to trend and technical indicators, Northlake’s Market Cap model shifted from small cap to mid cap for May. As a result, all client positions following the model previously invested in the Russell 2000 (IWM) have been sold and proceeds reinvested in the S&P 400 Mid Cap (MDY).
This change continues an unusually volatile period for Northlake’s models which seem to be struggling with inconsistent data on the economy, abnormally low interest rates, and a stock market that continues steadily higher even when the news flow is mixed. The Style model has held its own this year, matching the market’s big gains, even with higher than normal rotation between growth and value. The Market Cap has not performed as well, especially last month when the IWM actually fell even as the rally continued and the S&P 500 gained almost 2%. Small caps are more volatile and usually lead the market in either direction. If you had told me the S&P 500 would be up 2% in April and the Market Cap model was signaling small cap, I would have been excited, expecting a big gain in small gains as the benefit of their added volatility kicked in. Instead, the caution on the part of investors reflected in lots of disbelief in the market’s rally was reflected with buying concentrated in the perceived safer large cap stocks. As a result of April’s misfire on small caps, the Market Cap model trails the S&P 500 by approximately 2% so far in 2013.
There were few changes in the underlying indicators of either model for May. The shift to mid cap emanated from the technical and trend indicators which are heavily influenced by the actual movement in the indices. Since small caps lagged in April, they became less attractive from a chart perspective and that was enough to move the model to mid cap. Over in the Style model, there was very slight movement toward growth as insider trading activity is now neutral between growth and value after previously favoring value. The Style model reading is still pretty strongly favoring value and I would expect June’s reading to again to be value.
IWD and MDY 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. Regulatory filings can be found at www.sec.gov..
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Posted by Steve Birenberg at 11:46 AM in Models
May 02, 2013
CBS Delivers Another Quarter, More Upside Lies Ahead
CBS reported another excellent quarter, showing solid growth even against tough comparisons and declining ratings at the flagship CBS Network. Revenues grew 6%, slightly ahead of expectations. Excellent cost controls and a positive mix shift led to a 15% gain in adjusted operating cash flow, the most important financial measure for media investors. Extremely aggressive share repurchase activity over the past year accelerated in the first quarter. With shares outstanding down about 5% year over year, EPS rose 23%. The company spoke confidently about the balance of 2013 and street estimates and price targets are inching higher. Even after massive gains in the stock price since 2009, I think CBS shares have more upside, at least to the mid $50s this year.
Looking ahead, CBS will benefit from positive revenue growth for the CBS Network in next fall’s TV season triggered by leadership in this month’s upfront ad sales market. More importantly to the story, the company appears on track to separate its Outdoor billboard business around year end. This transaction should allow another accelerated share repurchase program while also reducing the company’s exposure to cyclical advertising revenue. In turn, expansion in the stock’s multiple should follow. CBS shares still trade at a discount to other TV networks stocks even as the company’s financial and business model looks more and more like its peers. One final positive is the company’s leading position as a television producer. Demand for content around the globe and through new devices and delivery mechanisms are causing a renaissance in the TV production business. TV is better today that it has been in years and CBS is a leading supplier of content, second only to Time Warner’s Warner Brothers.
Strong management and a commitment to returning cash flow to shareholders makes CBS one of the best investments in media. With EPS heading toward $3.50 in 2014, a P-E of 16 would get the shares to $56, representing 20% upside. The stock also pays a dividend of $1.00 that should grow materially over the next several years.
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. Entermedia is a long/short equity hedge fund focused on media, entertainment, leisure, consumer retail, communications, and related technologies. Steve is portfolio manager of Entermedia, owns a controlling stake in Entermedia’s investment management company, and has personal monies invested in the funds.
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Posted by Steve Birenberg at 04:07 PM in CBS
Qualcomm Raises Concerns But Story Intact
Despite reporting results largely in line with estimates and slightly raising full year guidance, Qualcomm (QCOM) shares traded down sharply following its earnings report. Investors were disappointed with margins, especially looking ahead to next quarter when the company expects them to remain under modest pressure. The margin guidance led to June quarter EPS being forecast slightly below current analyst estimates. For a high growth stock like QCOM, there is no room for error, even when it is just shifting earnings from one quarter to the next. As a result, the shares headed lower.
The bear case on QCOM is that the high end smartphone market has matured and demand is shifting to emerging markets where the company offers lower priced semiconductors that produce lower profit margins. If this sounds familiar, it should, as the same issue is troubling Apple where there is great focus on whether the company will issue a low cost iPhone for emerging markets and if so whether it will be dilutive to profit margins.
On the conference call I thought Management explained well what was going on and the Street chose to ignore bullish comments beyond the June quarter. In addition, with a new iPhone likely launching in the fall and a big push by Samsung and HTC for their new phones happening right now, I think the street may be too conservative in their outlook for the June quarter. Despite my view that the long-term story is intact, I think QCOM will remain in the penalty box until a better earnings report is issued or timing on the next iPhone launch is confirmed.
While we wait, keep in mind that QCOM just reported 24% top line growth and 16% EPS growth. Next quarter, the one with lower than expected margins, is expected to show revenue growth of 30% and EPS growth of 23%. The stock is trading at a P-E of less than 14 times 2013 estimated earnings, despite this growth. Furthermore, QCOM has about $17 per share in cash on the balance sheet contributing very little to EPS. Earlier this year, the company recently sharply raised its dividend and share buyback, showing confidence in the long-term outlook. I believe next quarter will show that this is the winning position on QCOM, so I plan to hold the shares in client accounts.
Qualcomm and Apple 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. Qualcomm and Apple are net long positions in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, entertainment, leisure, consumer retail, communications, and related technologies. Steve is portfolio manager of Entermedia, owns a controlling stake in Entermedia’s investment management company, and has personal monies invested in the funds.
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Posted by Steve Birenberg at 09:28 AM in QCOM
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