« December Model Signals | Main | ETF Dividends »

December 15, 2004

Catching Up on Recent News

Sorry for the lack of posts recently but there has been lots of news on stocks of interest to Northlake clients that has occupied my time. Here's a brief recap:

NTL, Incorporated: Northlake clients own NTL Warrants that expire in 2011. A few clients also own NTL common shares. NTL recently announced the sale of its broadcast tower business for a better than expected price of $2.5 billion. The company has not yet announced how it will use the proceeds but I expect a significant portion to be returned to shareholders via a one-time dividend or share buyback. Debt reduction or financing for a merger with Telewest, the UK's other major cable company, could also consume cash. Any of those events is positive for the stock. NTLI shares are very inexpensive at just 10 times 2005 estimated free cash flow. If the company hits its earnings and subscriber targets the next several quarters, a price target of over $90 is quite realistic.

Central European Media Enterprises: CETV is a long-time Northlake favorite. CETV owns TV stations in Slovenia, Slovakia, Romania, and Ukraine. Northlake clients recently sold their CETV holdings for a small loss. The sale was completed because 20% of current business is in Ukraine which faces challenges in the current quarter due to the political turmoil. Unfortunately, the sale was completed before CETV announced on Monday that it was making a major acquisition of the leading TV station in the Czech Republic. The shares responded very positively, gaining almost $6. While I am disappointed to miss the gain, I am strongly considering repurchasing CETV as the acquisition increased the 2005 and 2006 upside. I think the $6 rise was a little too much and look to repurchase the shares in the $35 range all else equal. If CETV hits our expectations in 2005 and 2006, a realistic price target is in the $50s.

Motorola has been in the news recently due to the Sprint-Nextel merger. MOT is the sole supplier of phones and network infrastructure to Nextel. MOT shares fell sharply late last week on fears the business would be lost. Northlake took advantage of the weakness, adding MOT to new client portfolios or increasing positions in select client accounts. Northlake believes the turnaround at MOT is real. Furthermore, today Sprint and Nextel announced that MOT will be a significant supplier to the new company in the transition of Nextel's network to Sprint's technology. Additionally, Nextel announced it would be a long transition, which means that MOT will not lose the business in the near future. This should clear the way for MOT to meet our $22-24 price target assuming the company performs as expected in the important Christmas selling season.

SBS Broadcasting shares have been weak lately and have largely sat out the market rally. This is surprising given the solid third quarter earnings report issued in November and the significant financial benefit the company gains from strength in the Euro. Northlake's spreadsheet reveals that SBTV shares are valued at less than 7 times 2005 estimated cash flow, a sharp discount to comparable European and American TV and radio broadcasters. An expansion in the trading multiple to just 8 times 2005 estimated cash flow (still a large discount to its peers) would move the shares into the mid $40s. Northlake is using the weakness in SBTV shares to add positions for new clients and expand holdings for selected clients.

KMart was added to client accounts several weeks ago after the euphoric reaction to the Sears merger was reversed. While Northlake does not believe the long-term future of the new company is attractive, in the short-term the shares will be driven by restructuring actions and realignment of the company's vast real estate holdings. The investment horizon on KMRT is 3 to 6 months with a target in $120 range or higher. Announcements of restructuring and real estate actions are expected after the Christmas selling season is complete and should be the catalyst to move the shares higher. Initial client positions were small and undertaken with a willingness to purchase more shares if the stock fell toward its technical support at $92.

Posted by Steve Birenberg at December 15, 2004 11:35 AM in Market