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    Northlake Capital Management

    April 23, 2014

    Comcast Remains a Very Best Idea

    Comcast (CMCSK) reported better than expected 1Q14 earnings. The upside came from NBC Universal, a good thing given the magnitude of the financial upside in a successful turnaround,. However, Comcast financial performance and stock sentiment is driven more by the much larger cable business. On that side of the company, results were very slightly disappointing but nothing to worry about given seasonal factors, the timing of price increases, and possibly management’s desire to keep results in check with government scrutiny high ahead of the regulatory review of the proposed takeover of Time Warner Cable.

    Make no mistake. Comcast is powerful company with an excellent financial profile. Overall revenue grew 13.7% with operating cash flow up 10%. These figures were juiced by the big ad revenue from NBC’s telecast of the Winter Olympics and huge upside at the Universal movie studio (movie profits are had for analysts to model). The core cable business saw revenue and operating cash flow grow by 5.3% and 4.3%, respectively. Both figures were about 50 basis points below expectations driven primarily by Comcast putting in place lower and later price increases than expected. Video subscribers grew for a second consecutive quarter showing the power of the company’s scale and the success of its industry best X1 operating system. High speed data and voice subscriber additions were both below expectations, a possible concern given that broadband is the growth driver of the consumer cable business. Management expressed no concern, however, and attributed any disappointment to the normal course of business.

    After falling about 8% from its pre-Time Warner Cable merger announcement all-time highs, CMCSK shares have acted well since the report, rising about 3%. Beyond the generally solid reported numbers, investors were cheered by comments surrounding materially larger share buybacks using proceeds from any divested cable systems. The company expects to sell 3-4 million of the 11 million Time Warner Cable subs it is trying to acquire. Recent news reports suggest the sale process is going well. Investors may also be responding management comments indicating very high confidence in deal synergies and upside form the proposed merger.

    Comcast remains one of my very favorite stocks looking out over the next twelve months. Regulatory overhang surrounding the merger approval process may present a headwind but I see upside of 20-30% with the higher end assuming approval of the Time Warner Cable merger with strict conditions. Presently, Comcast trades at about 7.2 times 2014 EBITDA and 12 times free cash flow. I think this is a bargain in a growth starved world for large cap companies. My target assumes slight multiple expansion and does not consider full upside of what is looking like a very real turnaround at NBC. Share buybacks and a 1.8% dividend yield provide support as does the very stable financial model.

    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’s regulatory filings can be found at www.sec.gov. CMCSK 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 11:32 AM in Comcast/Cable TV

    Comcast Remains a Very Best Idea

    Comcast (CMCSK) reported better than expected 1Q14 earnings. The upside came from NBC Universal, a good thing given the magnitude of the financial upside in a successful turnaround,. However, Comcast financial performance and stock sentiment is driven more by the much larger cable business. On that side of the company, results were very slightly disappointing but nothing to worry about given seasonal factors, the timing of price increases, and possibly management’s desire to keep results in check with government scrutiny high ahead of the regulatory review of the proposed takeover of Time Warner Cable.

    Make no mistake. Comcast is powerful company with an excellent financial profile. Overall revenue grew 13.7% with operating cash flow up 10%. These figures were juiced by the big ad revenue from NBC’s telecast of the Winter Olympics and huge upside at the Universal movie studio (movie profits are had for analysts to model). The core cable business saw revenue and operating cash flow grow by 5.3% and 4.3%, respectively. Both figures were about 50 basis points below expectations driven primarily by Comcast putting in place lower and later price increases than expected. Video subscribers grew for a second consecutive quarter showing the power of the company’s scale and the success of its industry best X1 operating system. High speed data and voice subscriber additions were both below expectations, a possible concern given that broadband is the growth driver of the consumer cable business. Management expressed no concern, however, and attributed any disappointment to the normal course of business.

    After falling about 8% from its pre-Time Warner Cable merger announcement all-time highs, CMCSK shares have acted well since the report, rising about 3%. Beyond the generally solid reported numbers, investors were cheered by comments surrounding materially larger share buybacks using proceeds from any divested cable systems. The company expects to sell 3-4 million of the 11 million Time Warner Cable subs it is trying to acquire. Recent news reports suggest the sale process is going well. Investors may also be responding management comments indicating very high confidence in deal synergies and upside form the proposed merger.

    Comcast remains one of my very favorite stocks looking out over the next twelve months. Regulatory overhang surrounding the merger approval process may present a headwind but I see upside of 20-30% with the higher end assuming approval of the Time Warner Cable merger with strict conditions. Presently, Comcast trades at about 7.2 times 2014 EBITDA and 12 times free cash flow. I think this is a bargain in a growth starved world for large cap companies. My target assumes slight multiple expansion and does not consider full upside of what is looking like a very real turnaround at NBC. Share buybacks and a 1.8% dividend yield provide support as does the very stable financial model.

    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’s regulatory filings can be found at www.sec.gov. CMCSK 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 11:32 AM in Comcast/Cable TV

    April 22, 2014

    Sloppy Quarter After Stock Slide Keeps Pressure on Google

    Google (GOOG) reported earnings that slightly trailed Wall Street estimates. The stock has reacted poorly even though the company did a good job explaining the quarter and spoke very confidently about the business and long-term strategy on the quarterly conference call. It is worth noting that GOOG provides very little guidance to Wall Street analysts and its earnings reports have more variance with Wall Street estimate than most companies of similar size and investor interest. The immediately prior quarter was better than expected but more often than not over the last two years, GOOG has come in just short of analyst estimates.

    I see little impact on the long-term story from the volatility in short-term results and still believe GOOG shares have substantial upside over the next couple of years. Earnings estimates changed little with 2014 looking like $26 and 2015 looking like $31. Without adjusting for GOOG’s substantial cash reserves of about $80 per share, the P-E is 20x and 17X 0n 2014 and 2015 estimates, respectively. With sustained top line growth around 20% I think this is excellent value, particularly among really large cap companies where it is hard to find even 10% top line growth.

    Looking at the reported numbers, revenues rose 19%, falling less than 1% short of analyst estimates. Earnings per share of $6.27 compared to street estimates of $6.35, also about 1% short. GOOG did explain that the recent Nest acquisition and some other activities led to one-time expenses and excluding those items, expense growth remained on the same trajectory as recent quarters. The company provided no hard numbers but a couple of analysts believe EPS would have exceeded the consensus excluding these one-time items.

    This expense discussion goes to one legitimate concern for GOOG: as the company expands beyond search to display advertising, Android mobile operating systems, Chrome browsers and hardware, Google Glass, and cloud storage, operating profit margins will be pressured. For example compared to one year ago, GOOG’s cost and expenses rose from 66% of revenue to 68% revenue putting pressure on profit margins. For this quarter, this led to just a 4% gain in EPS despite the 19% rise in revenues. This same pattern has been evident in recent quarters going back over the past year.

    I take the view that GOOG is smart to invest in its business. The investments support maintaining the company’s competitive position and extending growth into different areas. YouTube is a drag on profit margins but it seems quite clear that the investment has created a potentially very large opportunity for a new profit center that keeps GOOG growing at a well above rate in the future. I think the same argument could be made about most of the investment mentioned above.

    One other concern raised by the latest quarter was that the volume growth of paid search clicks slowed to 26% form recent quarters when it was in the upper 20% to mid 30% range. Wall Street fears this could be a sign of growth deceleration in the core search business and Wall street hates deceleration when it comes to growth stocks. This is especially true after the recent shellacking of most growth stocks, including GOOG and all the internet stocks.

    The bottom line is that sentiment heading into the quarter was very nervous after GOOG shares had fallen more than 10% since mid-March. The quarter reported may not have impacted the long-term outlook for the shares but the issues with profit margins and paid click growth were unwelcome at a time of stress.

    I think it will pay to remain patient and possibly even add to positions. In my opinion, GOOG remains a core position for investors looking for large cap growth over a multiyear time horizon. That is what Northlake’s strategy is all about, so expect patience for client holdings or even small additions where positions may be underweighted.

    GOOG and GOOGL iare 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. GOOG and GOOGL 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 10:32 AM in

    April 01, 2014

    Back to Value After a False Start with Growth

    Northlake’s Style model shifted from growth to value for April. As a result, client positions in the Russell 1000 Growth index (IWF) have been sold with proceeds reinvested in the Russell 1000 Value index (IWD). There is no change in the recommendation from the Market Cap model which continues to recommend mid cap. Client positions in the S&P 400 Mid Cap index will be held for at least another month.

    The shift back to value in the Style model came after just one month. It was driven mostly by the trend indicators which moved from growth to value following material outperformance by value during March. From March 7th thru month end, growth stocks pulled back sharply as investors rotated to recently lagging industry sectors and booked profits in the big winners from 2013 and early 2014. Also supporting the shift to value was insider trading activity. This factor actually is picking remarkably low net insider buying, something that in the past has accompanied periods of large gains for value stocks and large losses for growth stocks. The overall model seems likely to stay in value mode for more than a month given a rather shift across the underlying factors.

    The Market Cap model saw a lot less movement in its underlying factors. The recommendation stayed at mid cap but the shift of the bond momentum factor from large cap to small cap leaves the overall model close to recommending small caps. Bond momentum measures the three month rate of change in long-term interest rates. Rates have been falling recently as fears surrounding tapering of the Federal Reserve’s quantitative easing policy have receded. Lower interest rates are very favorable for small cap stocks which generally do not have as easy access to capital as their larger counterparts.

    Last month’s signals were mixed. The one month stop at growth was ill-timed for the Style model, producing negative returns during a period in which the stock market rose slightly. The mid cap signal also lagged the market but did produce a positive return. So far this year, the Style model is trailing the overall market but this is offset by good performance for the Market Cap model.

    MDY and IWF 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.

    Posted by Steve Birenberg at 02:36 PM in Models

    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

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