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December 15, 2008

UBS Media Conference Part Two

As noted in Part One, the main message coming out of the conference that was that advertising continues to deteriorate and visibility into 2009 is minimal. This means that for most media companies the risk remains to the downside for earning estimates.

Part One contained a reasonable positive review of Time Warner and Discovery Communications, both of which I am long. Neither presentation was earth shattering and both companies indicated business has slowed further recently but the bigger picture driving the shares to the top of my media buy list was on display. I also reviewed Gannett which remains a very troubled situation due to the collapse of newspaper industry on a secular basis while cyclical headwinds are blowing at full force.

Today I'll recap presentations by Liberty Global and Scripps Interactive along with the analyst meeting for Dreamworks Animation which took place Thursday in NY, conveniently for everyone in town for the UBS Conference....

....Liberty Global is on the largest cable companies in the world. Operations are focused primarily on Europe with a large presence also in Japan, Chile, and Australia. The stock has gotten killed as the company has fairly high leverage, lots of exposure to the hated Europe, and is feeling competitive pressures on the subscriber front. I think it is a bit overdone partially because investors don’t see Liberty Global as a European Comcast with similar defensive characteristics. There is also a lack of appreciation for the company's exposure to the even more hated Central and Eastern Europe where a real growth opportunity exists. My biggest takeaway from the presentation was how management refused to comply with conventional wisdom. Instead they talked about not hoarding cash, continuing to buy back stock, and making tuck in and distressed acquisitions. This is par for the course for an always aggressive management team. It's a gamble if the economy stays down forever but if a recovery gets underway within a year or two the stock will be super leveraged for upside.

Scripps Interactive owns HGTV and Food Network, several other emerging cable networks, and a couple of decent online businesses in the comparison shopping area. I've always liked the company because of their great success at developing HGTV and Food but none of follow on businesses have been able to develop into major winners. That said, SNI is a solid growth stout with 40% of revenue coming from consistent growth areas like affiliate fees and referrals. The major networks have been rating challenged and thought it doesn't get enough discussion the exposure to home related advertising has got to be a problem given the collapse in residential real estate. This narrowly focused advertising base is why I prefer Discovery Communications to SNI. A couple of upcoming developments to keep your eye include the possibility of buying the minority interest in Food form Tribune out of bankruptcy at a good price, emerging materiality from a financial perspective for secondary networks DIY and Fine Living, most importantly trend is in ratings and advertising. SNI says 4Q ad trends are in line with guidance but that 1Q09 will be weaker.

Dreamworks Animation did not present at the UBS Conference but held their first ever analyst meeting the day after it ended. I bought DWA for the second time this year in early November anticipating positive catalysts from the debut of Madagascar 2, the DVD release of Kung Fu Panda, and the analyst meeting. So far it hasn’t worked out too well (-10%) but I think the analyst meeting is going to help in the near-term. The bad news is that DVD sales for Kung Fu Panda are good but not great and Madagascar 2 is going to come in slightly less than I expected at the US Box Office after quicker that expected start. The good news is that Madagascar 2 is kicking butt overseas, 2009 estimates have upside if the next film, Monsters vs. Aliens performs decently at the box office, and the company is developing a series of business line extensions to build earnings power and consistency.

These new businesses were the focus of the analyst meeting and include TV series, TV specials, Broadway, 3-D, online virtual worlds, theme parks, and live entertainment. There are also initiatives to raise profitability and quality by outsourcing to India and working with Intel. Broadway and TV have th most near-term potential. Shrek the Musical formerly opened yesterday. If it could become a hit similar to The Lion King or Wicked with a successful Broadway run and 2 to 3 national touring shows, management estimates upside of $30-50 million in operating income annually. We'll know soon enough if critics and audiences like the show but given the mammoth popularity of Shrek it may be somewhat critic proof. TV is less risky as DWA already has a commitment for series to be aired on Nickelodeon and holiday specials to air on the major broadcast networks. The specials will be based off Madagascar and Monsters vs. Aliens with the hope they will prove as successful as last year's premiere of Shrek the Halls on ABS.

DWA is trying to morph into a more Disney-like company with creative animation driving multiple revenue streams. Recently, the company has been on a creative role which sets up 2009 for upside surprise and 2010 for similar when three films will be released including Shrek 4. In an environment where media stocks are hated due to advertising exposure, DWA stands out as a pure content play. As a result, I think it is worth owning in a media stock portfolio. The nice pop in the stock (+4%) on Friday after positive reviews on the analyst meeting might be a sign that I will be gaining company in this view.

Posted by Steve Birenberg at December 15, 2008 08:59 AM in Media