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July 28, 2010
Selling DirecTV With Rising Fears of Price Competition in Mature Video Cable/Satellite Business
All Northlake client positions in DirecTV (DTV), including those in my personal accounts, were sold this morning. DTV proved to be a very successful investment having been sold for a gain of 84% and held for just short of 14 months. The original purchase was Liberty Media Entertainment, which restructured, merged with DTV, and ultimately DTV shares were spun off.
The reasoning behind the sale of DTV is twofold. First, I am nervous about the increasingly mature cable and satellite TV business. The last several quarters have seen sharp slowing in subscriber additions for all providers and I am fearful that DTV may miss on its subscriber numbers when it reports earnings next week. I also worry that price competition among providers will pick up offsetting gains from selling higher value added services like high definition and video on demand.
Second, I have been looking for sale candidates in order to build cash reserves given my more cautious view on the stock market upside in the second half of 2010. I am not outright bearish but I feel the risk-reward trade-off is only neutral and shocks to the market remain possible as long as the economic data continues to be sluggish. A larger cash reserve provides clients with downside protection and greater opportunity to take advantage of sharp market declines with new ideas.
There are several risks in selling DTV. The company is very strong financially and likely to buy back about 30% of its shares in the next 18 months. DTV is also a long rumored takeover candidate for AT&T or Verizon. On the fundamental side, I could be wrong about DTV's subscriber growth as satellite companies may be gaining share at the expense of cable and telco.
Disclosures: DirecTV is a hedged, net long position in the Entermedia Funds. Steve Birenberg is co-portfolio manager, partial owner the Funds' investment management company, and has personal monies invested in the Entermedia Funds.
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Posted by Steve Birenberg at 10:48 AM in DTV
July 21, 2010
Demand for Apple Products Supports Plenty of Upside for Apple Shares
Apple reported another great quarter. Below are the "tweets" I posted on Twitter as I as updating my spreadsheet model and listening to the conference call. For Apple, I continue to find that my first impressions are the most valuable so the Twitter comments capture my thinking well.
That said, after reading post call commentary from analysts and journalists, I feel more confident in the outlook and my call for the stock trade well north of $300. Apple needs a decent market to move up another 25-50% but if the market cooperates, I think the stock will make the move. Estimates already jumped over $17.00 for next year and given demand for iPads and iPhones, I think that will prove conservative once we see blowout back to school and especially Christmas sales.
The most important takeaway from this quarter is product demand. Mac laptops and iPhones are really strong and iPad is about to accelerate as supply constraints ease and new countries are rolled out. Apple sold 3 million iPads in the June quarter. It appears they are building to sell 3 million a month now! And iPads were supposed to cannibalize Macs, yet in the first quarter of iPad shipments when Apple fans rushed out to buy the product, Mac laptop sales soared above expectations. It wasn't that long ago when we were talking about the halo effect of iPods on Mac sales. Is it possible that iPads will have a halo effect rather than cannibalize other Apple products?
One final thought. The last few quarters, I find less and less to be surprised about as I input the reported numbers into my spreadsheet. I see this mostly as positive as the risk factors appear to be receding. Also, it reaffirms the still underappreciated operating execution by Apple's management team and employees. However, the Street is finally catching up to the upside potential and that reduces the positive surprise upside from the earnings figures. The shock factor is less. This slightly hurts the stock in the short-term though the next 6 months look great.
Here are my Tweets from yesterday afternoon:
• 1st Impressions off spreadsheets. Another Gr8 Q. Gross Mgn a bit less than I thought. iPads? Gross mgn guidance looks way low at 29%.
• So much for Macs being cannibalized. Macs very strong with laptops driving it.
• gross mgn guidance seems to be 34.4% vs. 39.1% last Q. Must assume lots of back to school iPads and new country iPads at lower mgn.
• FY10 heading to $14.50. At 20% growth FY11 goes to $17.40. Current consensus is 20% growth. Cash now $50 a share. $65 in one yr
• FY11 at $17.40. Cash in 1 year at $65. $260 - $65 is $195 or 11.2 P/E. Cheap. At 15 P/E plus cash, target of $325. Up 25% from here.
• 20% growth in FY11 is massive deceleration from current trailing 12 month growth of over 50%. Justifies $17 plus in FY11 EPS.
• Not getting much new info beyond initial impression on $AAPL conference call. One Q on iPad cannibalizing iPod touch hits home for me.
Disclosure: Apple is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve Birenberg is sole proprietor of Northlake Capital Management, an SEC registered investment adviser.
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Posted by Steve Birenberg at 08:58 AM in AAPL
July 19, 2010
Early 2Q Earnings: Stocks Being Sold But Hopeful Signs for Media
Earnings season is off to a rough start as far as stock prices go. Some stocks gap higher on good numbers but can’t hold the gains (Intel). Some stocks have mixed results and get smacked (GOOG and the big banks). Some stocks miss and get smoked (MAT) and others beat and get sold (HAS).
The broad message from the early reports is that business in 2Q was just fine relative to expectations and guidance so far indicates that fears of a slowing economy have yet to show up in demand beyond weak revenues for banks. Communications datapoints are quite limited and will kick into gear late this week when AT&T reports on Thursday and Verizon reports on Friday. The news so far in media looks good with advertising revenues in 2Q and guidance commentary constructive.
Despite a big sell-off in its stock, Google (GOOG) actually beat on revenues. The issues worrying the street are slowing growth and the heavy investment GOOG is making to sustain growth. Margins are under a little pressure but what really seems to worry investors is that Google's decision to invest suggests a much more competitive and mature search market. For media companies in general, the beat on Google's revenues is a positive. Advertisers are clearly spending on search (up over 20% globally and stronger in the US). Google does not provide guidance but the Q&A on the call did not reveal any worry about near-term demand trends.
Good news on advertising also came from NBC Universal, which reported as part of General Electric's report on Friday. Revenues rose 5%, operating profit gained 13%, and trend in advertising were at the high end of expectations. Cable nets were up high single digits and local TV stations reported ad gains in the mid to the upper 20% range. Given NBCU's broad reach, these ad growth rates speak well to what is to come from other cable and broadcast network companies.
Gannett also provided some good news even though the stock sold off 10% on the report. Gannett reported a 20% increase in 2Q TV station ad revenues and provided a forecast for even stronger growth in 3Q, up in the mid 20% range. Furthermore, according to the Wall Street Journal, Gannett indicated that ad rates are firming and "haven't seen" any pullback in advertising due to recent worries about the economy and financial market volatility.
This week won’t bring much more clarity or information on the advertising outlook. Yahoo reports Tuesday after the close and Street commentary and action in the stock price indicates the results could be decent. The only other media company of note to report is Netflix. The commentary could provide some read-through to DVD trends at the major movie and TV studios and maybe some insight into the re-basing of windows.
The big action for media earnings is the first week in August. I think there is reason to be optimistic about 2Q results and guidance commentary but until we get some better data on the US economy I think it will be hard to make money in the stocks. Expect the stocks to remain volatile, leading the market on up days and lagging on down days. Until we get firm data on the outlook in the second half of 2010 and 2011, the stocks remain hostage to investor sentiment toward the economy.
Disclosure: Google is widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts. Google and Hasbro are net long positions in the Entermedia Funds. Steve Birenberg is co-portfolio manager of the Entermedia Funds, partial owner of Entermedia's investment management company, and has personal monies invested in the Entermedia Funds.
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Posted by Steve Birenberg at 03:34 PM in Media
July 16, 2010
Mixed Quarter from Google Obscures Value and Growth Profile
Google (GOOG) is trading down over 5% in a weak market (S&P down 2.2%) after reporting mixed 2Q10 results. The stock has given up most its gains in the past two weeks since the company received a new license to operate in China.
GOOG reported EPS of $6.45 on revenues of $5.1 billion net of traffic acquisition costs. EPS missed the consensus estimate by 7 cents although revenues were more than $100 million ahead of estimates. Revenues grew 23% and were up 1% from the first quarter. For many companies these results would have been good enough but GOOG is a high expectations stock with recently negative sentiment so a clean beat was necessary to sustain and build on recent gains.
The stock is suffering mostly because operating expenses rose more than expected resulting in a drag on profitability despite better than expected revenue growth. The Street has been concerned for some time that GOOG is facing a tougher competitive environment in which slowing top line growth was going to be met by investment in the business.
Second quarter results again showed heavy investment as GOOG defends its market share in search and invests in display advertising, mobile advertising and search, and YouTube. However, this quarter at least, GOOG's investments seem to paying off as revenue growth beat expectations and accelerated.
The other issue for Wall Street is that while GOOG grew EPS 21% in the second quarter, growth in the second half is expected to moderate into the mid to upper teens. Wall Street hates growth deceleration, especially from a growth company.
Looking ahead to 2011, the big question is whether growth can be sustained closer to 20% or continues to decelerate to 15% as implied by consensus estimates. The stock is undoubtedly good value at less than 15 times 2010 estimates adjusted for the huge cash balance. On 2011 estimates, the multiple is less than 13 times.
I think GOOG's long-term growth will be sustained at least in the teens as search is still growing and new areas are beginning to gain traction. As a result, I think the stock should be owned at current prices. However, the Street is going to need a positive surprise or at least a sign that investment spending is leveling off before the shares respond strongly. Given current valuation and initial signs that growth investments are beginning to pay off, I think it is worth waiting.
Disclosure: GOOG is widely held by clients of Northlake Capital Management, LLC inlcuding in Steve Birenberg's personal accounts. GOOG is a long position in the Entermedia Funds. Steve Birenberg is co-portfolio manager, partial owner the Funds' investment management company, and has perosnal monies invested in the Entermedia Funds.
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Posted by Steve Birenberg at 11:21 AM in GOOG
July 01, 2010
Moving to Mid Cap for July
Northlake's Market Cap model shifted from small cap to mid cap for July, ending a five month run favoring the small company theme. As a result of the shift, all Northlake client assets invested in the Market Cap model have sold IWM and purchased the S&P 400 Mid Cap (MDY). There was no change to the Style model, which continues to flash a value signal as it has since July 2009.
The shift to mid cap is the result of the loss of momentum in the economic recovery and a couple of months of lagging performance for small caps relative to large caps. Simply put, recent economic statistics and stock market performance align with a lower exposure to the riskiest asset in the market cap basket. The fact that the economic recovery has stalled as opposed to reversed into recession supports above average risk exposure and mid caps over large caps. That said, the model works in a stair step fashion and it would take highly unusual circumstances to move from small cap to the least risk asset, large cap, in just one month. The current signal is actually closer to small cap than mid cap so even another month of weak economic data and poor stock market breadth is likely to leave the model in mid cap at least through August. Should the economic data and stock market environment improve, a shift back to small cap is very possible.
There were minimal changes in the underlying factors that drive the Market Cap model. In fact, the only factor to shift was bond market momentum which actually moved in favor of small caps due t rapidly falling interest rates. The larger shift to mid cap was driven by many of the other inputs moving toward a less risky posture in light of an apparent sudden slowing in the economic recovery.
There was also minimal change in the Style model inputs for July. The relative P-E measure did shift from value to growth but it was not enough to meaningful move the very strong value signal that has been emanating from the Style model over the past several months. The Style model is suggesting that the economic recovery remains intact despite the recent batch of worse than expected economic data. It is worth noting that many of the soft economic statistics remain in positive growth territory. They are just less growth-oriented than Wall Street had been expecting.
During the five months the Market Cap model recommended IWM, the small cap index outperformed the S&P 500 by more than 5%. IWM even held up well on a relative basis during the May/June market decline. This is somewhat of a surprise and I am more comfortable with the mid cap signal given the suddenly tricky market environment.
The Style model has also sent an accurate signal since the current signal went into place a year ago. Over this time frame, the Russell 1000 Value (IWD) has gained almost 14% vs. a gain of just under 12% for the Russell 1000 Growth (IWF). More recently, the value signal helped relative performance in early 2010 and held its own in the second quarter.
Disclosure: IWD and MDY are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. IWM is a core holding in select accounts managed by Northlake Capital Management. Steve Birenberg is sole proprietor of Northlake.
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Posted by Steve Birenberg at 02:38 PM in Models
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