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November 08, 2012
Mixed Media Earnings Better Than Stock Reactions
Most major media companies reported earnings this week including those in Northlake’s portfolio of individual stocks. As has been the case with the broader market, earnings reports and guidance from Northlake’s portfolio was mixed. CBS was the clear winner with a solid quarter amid tough circumstances and a confident outlook for the December quarter and 2013. Liberty Global was as expected although the market greeted the results with a sell-off in the shares. Charter Communications and Discovery Communications were a little light on reported numbers and guidance but a lot of the issues were one-time or unsurprising. Liberty Media is an asset value play where earnings mean little.
Here’s a closer look at the results for each company with some thoughts about where the stocks go from here.
CBS reported a slightly disappointing 2% rise in revenue but this was more than offset by a better than expected 7% increase in operating cash flow. Margins expanded again, a hallmark of CBS financial performance the last few years. The biggest takeaway though is the confidence management showed in future performance despite poor ratings so far this fall at the CBS Network. I think the long-term setup remain good and the shares can reach the low $40s but not until confidence in the economic outlook returns and ratings improve.
Liberty Global began to show the acceleration in revenue and cash flow that was predicted by rapid growth in subscribers over the past year. Honestly, I am not sure why the stock sold off 5% on this news. This acceleration is just beginning and 2013 is set up well. Another positive is that the company promised to pick up the pace of its share buyback in the fourth quarter. It seems farfetched but I can easily compile a target for LBTYK shares north of $100 in a few years given the pickup in growth, massive free cash flow that will follow as the cost of obtaining the new subscribers subsides, and the company continues to very aggressively buyback shares.
Charter Communications shares have been selling off for a few weeks as the company has announced its intention to accelerate capital investment and promotions in order to gain new subscribers. Charter has a real opportunity given that its penetration of homes passed severely trials its cable company peers. The new management team at Charter has instituted this strategy successfully before. The story is not unlike Liberty Global – subs first, financial payoff later – and the upside is similar. Charter is a few years behind, however. I think the shares may have a hard time regaining lost ground in the near-term but valuation at current levels provides support. Charter is on the watch list.
Discovery Communications reported a little worse than expected results for revenue and EPS but better than expected gains in operating income. This set up often suggests one-time items and that was the case. Advertising growth of 8% was a good print given Olympic competition. Guidance was the biggest issue for the stock, which sold off several percent on the report. Management forecast December quarter ad growth of 8%, no sequential improvement despite extremely strong ratings and positive seasonality. Discovery remains superbly positioned given its strong ratings, emerging networks (OWN and ID), and especially the growth opportunities abroad for its low cost, non-fiction programing. Discovery remains one of the few real growth stories in media.
Liberty Media is a collection of assets dominated by a t 49% stake in Sirius XM Satellite Radio. The second largest asset is the Starz Encore suite of pay TV channels. Liberty trades at 20% discount to the value of its assets. Those assets also have excellent growth prospects. This quarter management did indicate that Starz, due to be spun off before year end, would have a little less growth in 2013 as contracts with cable and satellite companies are renegotiated. The bigger question though is how the company will close the discount to its asset value while monetizing a portion of its ownership in Sirius. The conference call offered little fresh insight. John Malone, Liberty’s controlling shareholder, has a superb track record of realizing value form his investments. In Malone we trust. I see the shares between $130 and $150 in 2013 as long as business trends at Sirius remain firm. Fortunately, Sirius has been steadily adding more subscribers than expected in 2012, setting 2013 up favorably.
CBS, Charter Communications, Discovery Communications, Liberty Global, and Liberty Media are widely held by Northlake Capital Management LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a long only registered investment adviser. CBS, Charter Communications, Discovery Communications, Liberty Global, and Liberty Media are net long positions in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, entertainment, leisure, communications and related technologies. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in the funds' investment management company and has personal monies invested in the funds