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April 07, 2006

Recap Of Midwest Media Day Conference

I spent Wednesday at Midwest Media Day sponsored by Prudential Securities. It was a unique conference. Pru took over one floor of the hotel and the beds were removed and replaced with tables so that each room could function as a small conference room. The company management representatives stayed in place while investors rotated through for 45 minute Q&A sessions with anywhere from one to four institutional investors. It was really a great format and I'd like to thank Michael Callahan at Pru for inviting me and media analysts Steve Barlow (newspapers), Kathy Styponias (entertainment and cable), and Susan Lynner (regulatory issues) for getting the companies to show up and adding their own insights.

Please click the "Continue Reading" link below to read brief comments on the meetings I attended:

CBS: Les Moonves and Fred Reynolds made a spirited defense of all things CBS. The story is 3-5% revenue growth, margin expansion, and free cash flow generation. A significant portion of the revenue growth will come from digital media initiatives and retransmission payments which carry unusually high margins. I prefer other media stocks but would put CBS close the top of my potential longs if I had a broader bull case on the sector.

Lee Enterprises (LEE): LEE is struggling with its acquisition of Pulitzer, particularly in its largest market of St. Louis. LEE has a long history of outperforming the industry on the top line but more recently growth has fallen off and is now inline with its struggling newspaper peers. The stock trades at a deserved premium to the group. A key takeaway was that LEE believes that 35-40% of industry ad revenue is facing cyclical or secular challenges. I tried to pin them down on when they thought that the cyclical issues would be lapped, possibly leading to the cessation of the endless estimate declines going back three years. No real answers but that is not a negative comment on LEE in particular. I still have minimal interest in newspapers from the long side.

E.W. Scripps (SSP): I recently wrote that I was getting more interested in SSP following the market's negative reaction to the uSwitch deal. Part of my these is that Shopzilla would surprise to the upside big-time in 2006. I now think that upside is more subdued as the CFO explained that margins would be down despite big revenue growth as Shopzilla rolls out in Europe. On the plus side, it sounds like Shop At Home will be resolved within 30 days either thorugh a buyout or shutdown of the network and sale of the five TV stations. Either is good news. The uSwitch slides looked pretty good. I suspect the numbers there will be fine and the street concerns will moderate. SSP did say they were willing to part with selected TV and newspaper properties. Turning this comment into reality would be good for the stock. I am still leaning bullishly but after being long for the better of ten years I can’t figure out exactly what is bothering me and keeping me on the sidelines. I suspect that will be a mistake.

DirecTV (DTV): I thought the most important news was that the company is getting close to revealing its broadband strategy. Management said that it couldbe announced within 30 days and would provide nationwide service at 3 to 5 MB speeds at a total investment of $1 billion. That seems awfully inexpensive to so paint me a skeptic. DTV believes it can grow about 1 million subs a year on the current base of 15 million for the next three years. This works out to a 5-7% annual growth rate. The company also believes that base price increases plus a richer mix of DVRs and HD will allow ARPU to grow 4-5% per year. If subscriber acquisition costs and marketing spending can be held in check the financial results of this forecast are quite favorable.

I've been a bull cable with an operating thesis that current valuations way overcompensate for the risk to financial performance in the next several years. This thesis applies to DTV as well. The street is freaked out by competition and seems to fear EBITDA and free cash flow declines. What they are missing is that over the next few years, the quality players like DTV and Comcast (CMCSA) will increase their EBITDA by more than 30% off the 2005 base before any competition might begin to bite financial performance.

In support of my thesis, DTV noted that their business, TV, has high fixed costs for network buildout and programming with lower variable costs. This is not a business that is conducive to aggressive pricing. On the other hand, telephony and high speed data are low fixed cost, high variable cost businesses making price competition a compelling weapon. I can’t argue with that but I do think there remains enough growth in new high speed subscribers for a few more years of the surprisingly stable ARPUs witnessed over the past year. On telephony, the pricing situation could be tougher but I "think/hope" that is early enough in the VOIP telephony cycle that pricing will hold for at least a year or two.

Liberty Media (L): I've sat in on a lot of presentations and webcast for L and I must say that for the first time in years I wasn't bored. New CEO Greg Maffei didn’t tell me much new but he did it with enthusiasm. The story is simple. QVC will produce around $15.5 billion in EBITDA this year. Netting debt against other assets leaves nothing. So what multiple is QVC worth. The company showed a broad range of comparable retailers from eBay to Costco to Amazon to slower growing names and noted the average multiple is 14. At 14, QVC represents over $7 per current L share, implying the entire entity is undervalued. Each multiple point is worth 54 cents per L share. You decide?

Harris Interactive (HPOL): As mentioned yesterday, this meeting was the one I came out of thinking I might want to buy the stock. HPOL is marketing research company that is focused on customer attitude surveys. Most surveys are internet based. The company participates in a $9 billion industry that it believes is growing in the upper single digits. The company thinks it ca comfortably outgrow its industry and raise margins from below 5% a year ago to over 7% in 2006 and over 10% in 2007. Analysts seem to believe. My first impression is that if the company hits those numbers there is another 30% plus upside in the stock. Nobody responded yesterday to my request for opinions on HPOL. I remain all ears.

Disney (DIS): The DIS Q&A recapped the bullish story with the four key businesses of ABC, ESPN, Theme Parks, and the Film Studio all in sync and driving double digit growth. I'm a believer and remain very long. One thing I have worried about came up in the meeting. The rollout of ESPN Mobile and Disney Mobile cellphone service will cost north of $130 million this year. The street knows this but I fear the costs will only escalate against an unclear chance of success. Over half of the money will be spent on the ESPN service. The company told us that they have lowered the price of the handset (i.e. increased the subsidy). I think this means sales were slow following the initial launch at the Super Bowl. Other DIS divisions are probably strong enough to cover ongoing and larger than expected losses but this is something to keep an eye on. In a contest, I predicted that Cars would earns $101.4 million on its June 9 opening weekend. Pru didn’t say what my prize would be.

Posted by Steve Birenberg at April 7, 2006 09:12 AM in Conference Summaries