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August 10, 2014

June Quarter Media Earnings Recap

Every quarter most of the major companies and most of Northlake’s individual stock positions all report during the same week. This occurred during the week just ending. It is a crazy time of conference calls, research reports, volatile stocks, more conference calls, and even more conference calls! There is a benefit to all this as we get to hear from all the leading companies at the same time so we can compare and contrast and get a pretty good idea of what investors are concerned about. This quarter the intensity was upped a few notches as the week also saw the end of two major mergers, Fox/Time Warner and Sprint/TMobile. There was a newly announced merger in TV broadcasting and newspapers between E.W. Scripps and Journal Communications. Gannett also made a major acquisition of Cars.com and announced it was splitting off its newspaper operations.

Amid all this activity investors were focused on TV advertising trends, M&A activity, and the outlook for continued growth in TV production and content sales. Ad trends definitely disappointed even on lower expectations. There seems to some loss of dollars to online advertising as well as hesitancy of major advertisers due to uncertainty about the economy and geopolitical fears. The good news is that growth should pick up in the second half with the return of political ads and the NFL. The NFL draw most ad categories including autos and beverages. The takeaway on M&A is that it appears there may not be more big deals. Fox made it quite clear that it would not being dong any large deals after giving up on Time Warner. CBS massively increased it share repurchase program and indicated there would be no future deal that would be large enough to sidetrack the buybacks. TV production continues on fire as more and more outlets look for original programming. There is some fear of a bubble and that traditional markets for syndicated programming could be undercut.

Media stocks have performed poorly this year. Only Disney has clearly outperformed the market, while Comcast has about kept up. Most of the rest of the stocks are down from 1% to 5%. The worries mentioned above crystallized this quarter amid a clear slowing in TV advertising growth. I am hopeful that sentiment toward the3 stock and expectations of 2014 growth may have bottomed. I think this is especially the case for Northlake’s media holdings including CBS, Liberty Global (LBTYK), Liberty Media (LMCA), and Discovery Communications (DISCK). Below please find brief comments on the latest results from each company along with Disney (DIS) and Comcast (CMCSK).

LBTYK had its second consecutive quarter of accelerating growth in operating cash flow. I believe this is a start of good run of faster growth for LBTYK as the company begins to reap the rewards of its high level of acquisition activity in the European cable market. The company is awaiting approval of its acquisition of the leading cable company in the Netherlands which would be paired with LBTYK’s #2 entry. Think Comcast and Time Warner Cable. While the regulatory review is pending LBTYK’s massive buyback program is on hold and that is providing a headwind to the shares. A yearend rally should be in order after acquisition approval.

DIS had another great quarter driven by the incredible success of Frozen. There was also upside at theme parks, consumer products, the rest of the movie studio, and ABC. ESPN had some challenges due to timing of programming and license fee increases. One of my favorite analysts, Michael Nathanson at MoffettNathanson, points out the 2014-2016 is shaping up comparable to 2005-2007 when Disney last enjoyed an extended content winning streak. Back then Disney earnings and stock price consistently performed to the upside. I buy this thesis.

CMCSK reported the prior week and had another solid quarter on the financial and subscriber front. However, all eyes are on the regulatory review of the attempted acquisition of Time Warner Cable. Closing early next year is the current consensus. CMCSK has been a decent stock this year as investors recognize the power of company as in terms of free cash flow growth. Time Warner Cable makes the story even better.

LMCA has been in limbo this year as it aborted its purchase of the half of Sirius XM it doesn’t already own and then decided to split off its ownership stake in Charter Communications. Sirius had a good quarter putting some of the bearish sentiment about is competitive position to bed. The creation of Liberty Broadband (holding the 27% stake in Charter) could take place this quarter. I believe this will provide a catalyst for LMCA share as its discount to net asset value narrows and the next step to realize full value of the Sirius XM majority interest becomes clearer.

CBS reported results well below what was expected three months ago but in line with more recent estimates that had been lowered due to the weak TV advertising market. Management was extremely optimistic and confident that ad trends would improve markedly in the second half. The bigger news was an even larger than expected share buyback plan that could retire 20% of the share over the next 18 months. This should provide support for the shares and set up a sharp rebound if the ad market does improve as management expects.

DISCK completed a 2 for 1 split and reported one of the better advertising growth rates among cable TV network peers. The bull case is that the financial benefits of the acquisition binge in Europe will be revealed over the next few quarters amid a pickup in domestic advertising growth. DISCK shares have shed most of their premium valuation this year which should allow for a rebound if the company canhit its current guidance.

LBTYK, DIS, LMCK, DISCK, CBS, and CMCSK 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 regulatory filings can be found at www.sec.gov. LBTYK, DIS, LMCA, CBS, and CMCSK are net long positions in the Entermedia Funds purely as a hedge. Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies. Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.

Posted by Steve Birenberg at August 10, 2014 11:25 AM in Newspapers