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May 13, 2013

Media Earnings Look Good Overall and for Northlake

Media companies reported earnings over the last two weeks including Northlake positions’ CBS, Discovery Communications (DISCK), and Disney (DIS). In general, the news from Northlake’s holdings and other media companies was good. The two key takeaways are: (1) the national TV ad market is firming up a bit from its tepid growth late last year and early this year, and (2) retransmission and affiliate fees paid by cable, satellite, and telco TV companies continue to grow significantly. With these two important revenue generators in good shape and management teams keeping a close eye on costs, earnings estimates, media stock fundamentals appear to be in good shape.

There were a few negative points to come out of the conference calls that are worth monitoring. First, the threat to retransmission fees from Aereo. This likely to play out over a very long horizon if at all but so far the media companies are losing the public relations battle. Second, and more important, is that ratings at a large number of TV networks, are struggling. This is mainly an issue for broadcast networks (CBS, NBC, Fox, and ABC), however, there is wide variation in performance among cable networks as well. The threat from online video and over the top services like Netflix is the issue. Finally, as more and more networks are competing for viewers and subscription fees, the cost to produce programs is rising.

Overall, the positives should outweigh the negatives, particularly in the near-term if the economy continues to grow. This should support the big upward move in stock prices already completed and leaves room for further gains of 15-20% over the next six to twelve months.

Here are some comments specific to the media stocks held in Northlake client portfolios:

CBS had another good quarter relative to expectations showing growth of 6% in revenue and 14% in EBITDA. Revenues were a bit overstated by the CBS televising the Super Bowl. EPS grew 23% as the company continues to heavily repurchase its own shares. The company presented an optimistic outlook for the balance of 2013 and expects good upfront ad sales to set the stage for early 2014. Plans to monetize domestic outdoor assets remain on track. Retransmission revenues continue to rise rapidly and improve the revenue mix and in turn profit margins. Even after moving from $6 to $47 in less than four years, the shares still offer meaningful upside especially if outdoor asset monetization leads to accelerated share repurchase as I expect.

DISCK reported results in line with expectations with core revenue and EBITDA growth up 9% and 5%, respectively. Timing issues will make 2013 a back end loaded year with EBITDA accelerating to double digit growth for the year. EPS will rise over 30% due to share repurchases. DISCK shares old off on the report due to very high bar set by the company’s industry leading growth. DISCK needs to “beat and raise” to get an immediate pop in its stock off earnings. Despite the lack of near-term momentum relative to expectations, I think the shares work higher as the year progresses and growth picks up. A P-E of 20 on 2014 earnings estimates would take the shares up more than 20%. With best in class long-term growth prospects due its international TV networks, DISCK shares should sustain their premium valuation
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DIS slight beat estimates with 10% revenue growth and 26% EBITDA growth. Cable networks showed the beginning of upside from subscription fees that prompted me to buy DIS a few months ago. The big surprise came at theme parks, however, where margins spiked higher. DIS is now benefiting from passing through a heavy investment cycle at its parks and in ESPN programming rights. The upside form these investments is coming in as hoped and allowing DIS shares to regain their luster and premium multiple. The return on investment should extend through 2014 after which a favorable product cycle at its film division (Monsters University, Star Wars, Avengers 2, Finding Nemo 2, etc.) should propel earnings and cash flow. DIS should also accelerate its capital allocation strategy toward shareholders now that investment spending has peaked. I think the shares can reach $80, up another 20%, on a PE of 20 times 2014 earnings estimates.

CBS, Disney, and Discovery Communications are widely held by clients of Northlake Capital Management, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Filings can be found at www.sec.gov. CBS, Disney, and Discovery Communications are net long positions in the Entermedia Funds. Steve is the portfolio manager of the Entermedia Funds, owns a majority stake in the Funds investment management company, and has personal monies invested in the Funds.

Posted by Steve Birenberg at May 13, 2013 05:10 PM in CBS