Positions Recap at The Turn of the Year

/0 Comments/in /by

As 2006 draws to a close and a new year begins, I thought it would be appropriate to provide a brief update on the positions held in almost all Northlake-managed accounts.
Model-Driven ETFs: I’ll get a fresh update on the Market Cap and Style models over the New Year’s weekend but I expect the signals favoring growth and mid caps to remain in place. The growth signal is strong, while the mid cap signal is weak. Current investments held as a result of these signals include the S&P 500 (SPY), the S&P 400 Mid Cap (MDY), and the Russell 100 Growth (IWF).
Japan: EWJ has underperformed this year but I am sticking with it as my theme is that Japan is emerging from a multi-decade period of underperformance for its economy and stock market. Nothing has occurred this year that challenges my assumption. I look for Japan to move back toward global leadership for stock market returns in 2007.
Apple Computer: Not much more to say here. I am bullish because I think Mac sales will continue to surprise on the upside as Apple reaps the benefits of orienting the company towards delivery and manipulation of digital content. I think upside of over 25% exits.
Central European Media Enterprises: CETV remains my favorite stock. I think it is headed north of $100 in 2007. CETV is the best play on the emerging and booming economies of Central and Eastern Europe. The fact that management has consistently met or beat their goals and delivered on their promises supports my bullishness.
Disney: DIS had a great 2006 with the shares rising more than 40%. I don’t expect a repeat performance but I believe estimates are too low and investor caution toward the 2007 growth rate is unwarranted. As these fears fade, I think the shares can trade to $38-40.
Endeavor Acquisition Corporation: The closing of EDA’s acquisition of American Apparel will create a hot new specialty apparel stock that should attract analysts and investors. If American Apparel hits the numbers contained in Endeavor’s latest SEC filing the shares are very cheap relative to other teen focused retailers. My target ranges from $10 all the way to $18 depending on how strong financial results turn out.
Regal Entertainment: It took awhile but RGC shares ended the year strongly and produced about a 12% total return after adding in 90 cents in dividends since my initial purchase in March. The worst box office comparisons are over and investors are likely to look ahead to a blowout 2Q when three of the biggest blockbusters of all-time will hit theatres (Pirates 3, Spiderman 3, and Shrek 3). RGC shares should also benefit from the IPO of National Cinemedia which will likely lead to a boost in shareholder value as RGC uses its share of the proceeds. RGC is set to provide another year of double digit total return.
Rogers Communications: RG is poised for another year of greater than 20% growth led by continued to rapid growth in the Canadian wireless market where RG is the market leader. Canada is running several years behind the U.S. in wireless penetration which sets up a repeat performance of recent growth trends. RG also will benefit from the rollout of the triple play in its cable business, the largest in Canada. I think the shares can trade to the low $70s, producing a return of over 20%.
That is a recap of what Northlake owns today on behalf of its clients. As always, these are several potential ideas in the pipeline and my favorable opinion of any stocks currently held could change. There is no way to predict the timing of those things but one thing you can count on is that I will post commentary on any changes right here as they occur.
Happy New Year!

Apple Files 10-Q With Options Update

/0 Comments/in /by

In hindsight, it appears that some of December’s weakenss in Apple shares (down about 10% prior to today’s open) was due to speculation about developments in the options back dating scandal. It is likely that prior to the publication of articles in Law.com and the Financial Times some investors may have gotten wind of the gist of the content. This is purely speculation on my part but it fits the profile of the stock trading in which the decline from $93 to $81 went far beyond concerns about the current quarter or the iPhone.
Apple is rebounding strongly today following the release of the company’s restated 10Q and Annual Report. The 10-Q has a lengthy discussion of the options issues including a thorough recap of the internal investigation. My conclusion is that Apple is not out of the woods on this issue but investor concerns should decline dramatically.
Apple admitted that it screwed up and even the lawerly language used in the 10-Q does not cover up that fact. Two things are clear. First, Apple conducted a very thorough investigation. Second, Apple is going to defend Steve Job’s actions. I still expect the SEC to pursue a formal investigation but I doubt that they will find anything more damning than what Apple has now admitted.
I expect investor attention towards Apple shares to largely refocus on fundamentals. That means a very strong December quarter earnings report and new product introductions at January’s MacWorld. But the options issue will hang in the background until the SEC wraps up its investigation. And reporters will still dig around for incriminating info about Jobs related to the options issues.
Apple is way overanalyzed and investors have very strong emotions about the company. This means trading is likely to remain even more volatile that usual. But I expect the upward trend to resume and a move to over $100 is very plausible if my expectations about the December quarter, MacWorld, and the 2007 outlook are met.
Not surprisingly, I am staying strong across the entire Northlake client base and in my personal accounts.

McClatchy Sells Minneapolis Newspaper for Peanuts

/0 Comments/in /by

McClatchy (MNI) announced it was selling the Minneapolis Star Tribune to a private equity outfit for $530 million. MNI will also receive a $160 million tax benefit on the sale. The Star Tribune is the 14th largest daily newspaper in the country by circulation.
MNI is selling the paper as the final major step in realigning itself following the acquisition of Knight-Ridder earlier this year. Proceeds from the sale will be used to reduce debt. MNI is comfortable with its new financial profile and believes it has flexibility to invest its remaining newspaper, particularly to develop digital initiatives.
Based on the assumption that the Star Tribune earns an operating margin slightly below the corporate average (a decent assumption likely based on the unionized workforce in Minneapolis), Goldman Sachs calculates the $530 million purchase price equates to 7.4 times 2006 estimated EBITDA. Merrill Lynch assumes higher margins and an even lower multiple of under 7 times EBITDA. MNI would no doubt include the tax benefit of $160 million in its calculation of the multiple. Using Goldman’s assumptions, incorporating the tax benefit would raise the multiple to 9.6 times. For Merrill, the multiple rise to around 8.5 times….

Read more

Apple Shares Remain Unusually Weak

/0 Comments/in /by

The point of my post about the Forrester report on Apple’s iTunes sales was not really to discuss AAPL. Instead, I was trying to point out how the type of analysis can impact the conclusions drawn. In other words, good inputs lead to useful outputs and vice versa.
When I posted this piece on StreetInsight.com, two contributors, Scott Rothbort and Jeff Bagley, responded to my post and reiterated their own bullish views on Apple. I am in total agreement and remain long as ever, including adding the stock to new accounts last week (Northlake owns pretty much the same portfolio for all individually managed accounts but client agreements usually allow ample flexibility as to the timing of the transition to Northlake’s investment strategy.)
Similar to Scott and Jeff, the basis of my bullishness on Apple is Macs, not iPods or iPhones or iTV. I believe Apple’s market share gains in Macs are just beginning and will go beyond most current estimates and be persistent and sustainable. Apple has bet the company on management of digital content. The operating system, the applications, and the hardware (Macs and iPods and the soon to be iPhone and iTV) are all built around the idea that PC use, particularly among consumers is being dominated by the need to manage the digital lifestyle. Apple is miles ahead of Microsoft on this front, providing a competitive advantage vs. all the windows-based PC manufacturers including Dell Computer (DELL) and Hewlett Packard (HPQ). Given the small share Apple has on a global basis, the rapid developments in digital content, and the increasing use of digital content in the business world, Apple has made the right bet and will reap the benefits for several years….

Read more

iTunes Sales Are Not Collapsing

/0 Comments/in /by

Leaving aside the debate concerning why Apple Computer (AAPL) shares have been acting so poorly and whether it is deserved, I think it is fair to say that the Forrester report that said iTunes sales were plummeting was the start of the severe downward pressure. As you might recall, the Forrester report generated a huge amount of publicity and critics noted it was flawed and completely inaccurate.
Last week, the Wall Street Journal had an article discussing the report. It turns out that what Forrester measured was iTunes download activity comparing January 2006 to June 2006. This is a far different methodology than would be used on Wall Street, which deciphers growth trends by looking at year-over trends.
In this case, Wall Street’s approach is correct as the Forrester methodology fails to address significant seasonality in digital music sales. January is a high point, especially for iTunes, because of the popularity of iPods and other MP3 players as holiday gifts. iTunes seasonality was probably greater than usual last January as the blowout iPod sales of 14 million units in 4Q05 arguably represented the peak of iPod mania. Add in the iTunes gift cards received in December 2005 and is it any real surprise that June 2006 iTunes sales were below January 2006?….

Read more

Could The Market Be Too Bullish Regarding The Impact of Private Equity?

/0 Comments/in /by

There is no doubt that flood of money into private equity funds and the subsequent investment of these funds in buyouts of public corporations has contributed greatly to the 2006 bull market. Conventional wisdom is that private equity buyouts of public companies will continue at its recent pace, providing support to current public equity valuations despite the big increase in valuation multiples this year.
That is why I found this Reuters article so interesting. The theme is that private equity funds may run short of investor dollars because they are not exiting enough deals and returning funds to current investors. Reuters states that the value of private equity backed buyouts is over $600 billion this year but exits are only $177 billion. Furthermore, several major buyout firms including Carlyle, Warburg Pincus, and Blackstone are all trying to raise additional funds in the $5 to $10 billion range.
The article identifies two issues that could lead to a shortfall in funds raised by private equity, which means a shortfall in funds available for buyouts, at least relative to conventional wisdom. First, many large investors in private equity are at or close to their current allocation limits for private equity. Second, the lack of exits means that private equity firms are going to back potential investors without a track record when asking for more funds….

Read more

How Bad Are DVD Sales?

/0 Comments/in /by

I don’t want to pick a fight with Jim Cramer and Doug Kass, my fellow contributors at theStreet.com’s family of websites, but they are exaggerating the issues in DVD sales. The Pali report is correct in noting that consumer interest in DVDs is waning as evidenced by flat sales despite a huge increase in DVD households. But I have a few issues with the conclusions Jim and Doug are drawing from this report.
First, Circuit City and Best Buy are talking about low to mid-single digit comp store declines in this category. Just last quarter, both retailers reported positive comps for DVDs. I wouldn’t say that a low to mid-single decline “takes my breath away.” Second, the development of alternative digital distribution channels for recent theatrical releases is in its very early stages and not likely the cause of the well-documented slowdown in DVD sales. Recent theatrical releases that drive DVD sales at major retailers are not available on VOD through your set top box as studios have not yet collapsed that window and show no signs of doing so. Furthermore, recent theatrical releases are only available on a very limited basis through internet downloads such as iTunes and data available on downloads indicates hundreds of thousands of units, not enough to move the needle when a single title like Cars or Pirates of the Caribbean: Dead Man’s Chest is selling 15-20 million units just this quarter. And even if you think that digital downloads are about to explode, I wouldn’t bet on it. Current download speeds and the lack of an easy way to get the movies from your PC or Mac to your TV will prevent this channel from growing large any time soon. Apple’s iTV product, expected in 1Q07, will be a good start but its impact will be limited for the next couple of years….

Read more

Details in Endeavor’s SEC Filing Support Bull Case

/0 Comments/in /by

Endeavor Acquisition Corporation (EDA) submitted an SEC filing yesterday with lots of details about its acquisition of American Apparel. Most importantly, the company provided historical and projected revenue and EBITDA figures. The data is better than I expected, particularly for 2007 and 2008, giving me greater faith in my buy recommendation and leading to more conviction in my $10-12 target. In fact, assuming the company hits the numbers in the filings, I think a stretch target of $14-18 is realistic.
Here is a copy of the investor presentation contained within the SEC filing. The presentation is designed to introduce Wall Street to American Apparel from a financial and operational perspective.
The news articles discussing the acquisition indicated that 2006 revenue and EBTDA would be $275 million and $30 million, respectively. I had initially assumed that EBITDA would grow to $40 million in 2007 and $50 million in 2008. However, one of the closing conditions contained in the filing is that American Apparel will submit its 2007 and 2008 projections following the completion of the 2006 audit and that the projections will show EBITDA of at least $50 million in 2007 and $70 million in 2008.
My stretch target assumes an EBITDA multiple of 12-15 times 2008 results. Given the growth rate, I think this multiple range is very realistic especially with American Eagle Outfitters (AEOS) and Urban Outfitters (URBN) presently trading at 14 times 2007 estimated EBITDA….

Read more

Endeavor Aquisition Buys American Apparel and Northlake Buys Endeavour

/0 Comments/in /by

Following the news that American Apparel is being purchased by Endeavor Acquisition Corp. (EDA), I decided to take a small position in EDA for client accounts. EDA is a blank-check company that went public about one year ago by raising $130 million. Blank check companies go public and then look to make acquisitions. For EDA, American Apparel is the choice. And it’s a good one.

My target on EDA is $10-12 based on my initial expectations for revenues to rise 30% in 2007 and EBITDA to grow by 35%. This target assumes EDA/American Apparel would trade at a similar multiple to other high growth specialty apparel retailers serving teens such as American Eagle (AEOS) and Urban Outfitters (URBN).
Background on American Apparel
American Apparel operates 140 stores in 11 countries and also sells through its Web site at AmericanApparel.net. The company sells basics, targeting a young demographic with a progressive message. American Apparel does not use sweatshops in the Far East. All of the company’s products are made in Los Angeles. Wages are relatively high at $8-15 per hour and benefits are provided to workers including health care and English classes. American Apparel competes with Abercrombie & Fitch (ANF) and American Eagle Outfitters (AEOS) as well as other specialty apparel companies targeting teens, young adults, Generation X and baby boomers…..

Read more

Why Are Network TV Ads Selling Well When Ratings Are Poor?

/0 Comments/in /by

Bernstein Research was out yesterday with a really interesting piece of research noting the dichotomy between the poor ratings performance of the major broadcast television networks this season and the better than expected scatter advertising market. Scatter is jargon for TV ads purchased on the spot market as opposed to pre-bought last spring in the annual upfront market.
Their theory is that the combination of much lower than expected ratings and the lack of inventory purchased in the upfront market has left major advertisers well short of their goals for reaching consumers in the important holiday season. As a result, advertisers are bidding for more time, tightening the market and driving pricing of scatter inventory above upfront rates.
I have been cautious, especially toward CBS, because of poor ratings performance this year. Whether due to ABC and NBC’s scheduling and programming decisions of the heavy use of DVRs for watching CBS hits like Survivor and CSI, there is no denying that in key demos, some of CBS long-time hits, especially in the critical Thursday prime time block, are under heavy ratings pressure. A similar argument could be made for shows on NBC and ABC but those networks aren’t as critical to the financial performance of their parent as CBS….

Read more