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December 10, 2007

UBS Media Conference Recap

I'm back in Chicago and have had some time to digest the UBS Media and Communications Conference. Below are brief comments from every presentation I attended. As you read, keep in mind that I found the general background of the conference to be cautious. This impression is based mostly on the uncertain advertising environment and the decelerating growth in the cable sector. Don’t confuse my comments with a bearish view, however. Media companies are in pretty good shape to weather the storm due to strength in margins and cash flow, and new growth initiatives. The group as a whole may not work well for a few more quarters but there is enough good for individual ideas to be money makers.

The following comments are meant to provide my immediate impression of the presentations with an emphasis on stock price performance in 2008 weighted to the first half of the year. I am trying to find the best media stocks to own not necessarily big absolute price gainers. The comments are listed in the order of the presentations I attended....

....Rogers Communications (RCI): This presentation was the company's first chance to respond to newly announced spectrum auction rules in Canada. Management was calm and confident. The stock should continue to bounce back toward the mid $40s but a move back to recent highs will be difficult given the shift in investor sentiment toward skepticism about the sustainability of growth.

Time Warner Cable (TWC): CEO Glenn Britt was reassuring about seeing real progress in the troubled Dallas and LA systems in 2008. However, this presentation was before Comcast lowered guidance and it is unlikely that TWC shares can perform well until sentiment improves for the entire cable sector. Don’t hold your breath but late spring might work for bulls.

Disney (DIS): This presentation was solely about ESPN. My main takeaway is how similarly ESPN and Disney use their brands. ESPN seems largely autonomous but definitely fits comfortably within the Disney corporate culture. ESPN will be a consistent driver of growth for Disney for at least several more years.

NBC Universal: NBCU is a division of General Electric so no investment insight here. I was a little surprised to learn that cable networks produce 50% of operating profits. Granted that figure is inflated because of the profit collapse at NBC Prime Time but the breadth of cable network exposure (USA, Sci-Fi Bravo, Oxygen, CNBC, MSNBC, and 57% of Sundance) is impressive. Now if Jeff Immelt would just spin NBU out or merge it into another media company.

Viacom (VIA): A turnaround appears in place due to improved ratings at MTV and a much tighter focus on operations including cost cutting. Margin expansion will be crucial to the stock price and may lag investor expectations as higher ratings come at the cost of increased programming investment.

Liberty Media: Presently two tracking stocks, Capital (LCAPA) and Interactive (LINTA), but shortly Capital will be split in two when the acquisition of News Corp's interest in DirecTV is completed. I still think it is all too complicated and Liberty lacks top tier assets with superior growth potential.

Fox Interactive Media: This presentation focused on how MySpace was being monetized away from the Google deal. The focus on targeted marketing to groups of MySpace users seemed very plausible to me. I like News Corp (NWS) and feel better about MySpace after seeing this presentation. With the help of MySpace, NWS should offer the best operating income growth in big media for the next few years.

Charter Communications (CHTR) debt to EBITDA ratio is over 9 times. With Comcast trading at 6 times EBITDA this means there is no value beyond an option in Charter shares. Investors will pay for the option, however, when cable stocks are performing well so if Comcast recovers and you want a leveraged play, Charter is your stock. The company is being much better managed since the new team came in a year or two ago. Still no way they can ever produce enough free cash flow to grow their way out of the debt. The bonds have gotten killed due to the credit crunch and may be a better play.

JC Decaux is the largest outdoor advertising company in the world. The stock is not listed in the US. I liked the story very much a year ago at this conference and nothing has changed. If I bought stocks listed outside the US for Northlake clients, I would be long. Growth should hold at double digit levels as JCD continues it s expansion in emerging markets.

Time Warner Telecom (TWTC)was a brand new idea for me. I have never heard them speak and barely knew what they did. It seems like a good growth story as they expand their network of buildings wired for enterprise voice and data services. Plenty of room left to penetrate in their markets and companies are always looking to move away from the administrative and customer nightmare that AT&T or Verizon often offer.

Discovery Communications (DISCA) has made quite a turnaround under David Zaslav who joined the company from NBCU just one year ago. Money losing units have been sold and widely distributed but undermanaged channels are being rebranded. I think some upside remains and if the company eliminates its tracking stock status in 2008 the shares would surge on takeover speculation.

Les Moonves was his usual optimistic self as he told attendees how everything is great with all of CBS's businesses. His schtick is getting old though as CBS (CBS) continues to offer no revenue growth in the near-term or long-term. And one more year of lousy ratings at the CBS Network and EBITDA will start to suffer as a few hundred million of downside exists if the network drops to third to fourth place. It's not a short anymore following the fall from $33 to $28 but no reason to be long.

I enjoyed myself at Lionsgate (LGF)by hassling Michael Burns about the company's growth rate. The stock has asset value near the current stock price based on recurring free cash flow of $100 million. However, the company is unable to explain when or how free cash flow will step up. Until it can, the stock won't get of its trading range so buy near $9 and sell near $11.

America Movil (AMX) is the largest wireless company throughout Central and South America. Growth will slow a little as new markets are not being opened but the benefit will be a boom in free cash flow. Competition is rising in Mexico which has pushed the stock down. Of all the presentations I saw AMX is closest to a new buy idea.

Grupo Televisa (TV) is a buy if growth picks up in 2008 and the company gains traction in its gaming business. Both things should happen but I am less confident now than I was in the summer.

Not much left for me to say about Comcast (CMCSA) so just read here and here for my comments following the company's reduced guidance and UBS presentation. I plan to take my loss before year end but expect to do so slightly above current prices.

nTelos (NTLS) is a regional telco serving parts of Virginia and West Virginia. I think the shares have upside in late 2008 and 2009 as the EVDO buildout of its wireless network begins to generate added data revenue due to the higher download speeds customers will receive. In the meantime you have a good current yield and asset value. Put it on your monitor.

Liberty Global (LBTYA) is a great story with lots of emerging markets exposure and triple play potential for its cable operations in Western and Central Europe and Chile. However, the shares won’t go up until US cable stocks begin to recover so no reason to get long now. I love the aggressive buyback and high leverage strategy. Comcast CEO Brian Roberts should pay attention.

Verizon (VZ) was boring like a telco usually is but offered a compelling case for a continuing acceleration in its growth rate. It frustrates me that investors prefer the much slower growing but accelerating VZ to the much faster growing but decelerating Comcast especially when Comcast is gaining 5-10 telephone customers for every cable subscriber it loses. Nevertheless, no reason to hold that against VZ shares which I think will remain a good investment.

Posted by Steve Birenberg at December 10, 2007 09:46 AM in Media