I was wrong on Lionsgate (LGF). Big time. The company missed its 3Q06 earnings badly with EBITDA, net income, and free cash flow all falling well short of estimates. The company lowered guidance for each of these items for its full year which ends on March 31. The lowered guidance implies that 4Q06 results should actually be fairly close to current estimates. However, with revenue performing in line to better than expected every quarter this year, it is clear that the business model is under pressure as operating margins are much weaker than expected. This makes it tough to have confidence in the FY07 outlook and will lead to a sharp compression in the multiple that is well deserved. I expect the shares to decline to 15-20% this morning….
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2006-02-10 12:59:292006-02-10 12:59:29Lionsgate Messes Up Again
Lionsgate (LGF) reports after the close on Thursday with a pre-open conference call on Friday. Quarterly results for LGF can be quite volatile due to the vagaries of film accounting and significance that a hit or miss at the box office can have on the numbers. Added volatility can occur relative to expectations as the financials are difficult to model and there are relatively few analysts from which to create consensus estimates. In other words, there can be a wide range of estimates around the consensus estimate. For this reason, LGF shares have tended to be volatile following the release of quarterly earnings with the most recent quarters exhibiting a decline in the shares as the headline figures missed estimates.
Despite some of the issues outlined below, I do not expect this quarter to disappoint investors. I also expect the company to maintain its full year guidance (EBITDA guidance was slashed in December while revenue and free cash flow were left unchanged). If LGF can make it by this quarter, I think the path is clear for rally in the shares to over $10 on the basis of what should be strong March and June quarters and a series of positive news items that began with the recent very successful release of the Lord of War DVD to be followed by the release of the Saw II DVD on February 14th and the theatrical release of Madea’s Family Reunion, the sequel to the hit Diary of a Mad Black Woman on the last weekend in February….
Despite being stalled for most of the last year, Disney (DIS) has generally trended up over the past three years, rising from the upper teens to the mid-$20s. Guess what? DIS is set to complete its fourth straight year of double-digit EBITDA growth. By contrast, Time Warner (TWX) is struggling to stay in the upper single digits. DIS responds to its earnings report and is trying to breakout. Icahn is right that TWX needs to grow faster to create shareholder value. Will splitting it apart do the trick? Does it need better management? DIS has studio plus cable networks plus broadcast TV plus theme parks. TWX has studio plus cable networks plus cable distribution plus AOL plus publishing. Theme parks and cable distribution are somewhat similar in that they are capital intensive. One big difference is that ESPN is stronger than TWX cable networks. AOL is obviously a big issue for TWX, but on EBITDA, its growth has been above the corporate average due to cost savings. Icahn would say Iger has a vision as he wants to monetize DIS content across all old and new technologies. That vision might be worth something in the multiple accorded DIS, but the multiples on 2006 estimates are close.
I like DIS now because its businesses are moving in the right direction together. Long term, the growth may shift back in TWX’s favor, but turning around AOL on the top line is a real challenge.
Point me to a scenario that gets TWX to multiyear double-digit EBITDA growth, and the stock gets a lot more interesting. I don’t see it right now, but I am all eyes.
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2006-02-08 16:25:062006-02-08 16:25:06I’ll Take Mickey Mouse Over Bugs Bunny
Breakup Time Warner! Univision for sale! Knight Ridder up for auction! Viacom splits in two! Clear Channel spins off its billboards and concert business! Cablevision is paying a special dividend – maybe not! Disney sells radio! Disney buys Pixar! Liberty Media splits off QVC! DirecTV is buying back $3 billion of its shares, Comcast is buying $5 billion, Disney is buying another $5 billion, Time Warner is buying $5 billion, Viacom is buying its shares, CBS is paying a decent dividend.
What the heck is going on? Obviously, big traditional media is under pressure and in some cases responding with asset sales, share buybacks, or dramatic corporate restructurings. I’ve been following media stocks for 20 years and one thing that has always been bullish has been merger and acquisition activity. Until recently, all the media M&A has been in Europe. Not coincidentally, European media stocks have performed much better than their U.S. peers.
So the question becomes will the flurry of M&A in the U.S. finally capture the attention of investors and lead to a rally in the shares or will overwhelming concern about future growth rates and the sustainability of free cash generation keep valuations depressed?
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2006-02-08 16:22:232006-02-08 16:22:23Positive Sentiment Change For Media Stocks?
I was talking with a good friend last week who runs a media-centric hedge fund. I was doing my usual rant regarding the mounds of analysis about Time Warner (TWX) coming from analysts, website commentators, and CNBC and noting that it had to be the most overanalyzed stock on the planet. My buddy noted it also hadn’t gone anywhere staying in a pretty narrow $2 range for the past twelve months. He then noted that TWX must have the highest “chatter to beta” ratio of any stock he followed.
Of course, today the chatter about TWX has heated up again thanks to the unveiling of the Icahn report. I have not read the report yet, just a few news stories about it, but from what I have read I stand by my analysis that the problem with all the analysis claiming that TWX is massively undervalued is that it just isn’t true. Break it apart or leave it together and you got the same businesses. The company is well enough analyzed to value those businesses efficiently and for the last year, or last three years, the market has valued them between $16 and $19.
The only way that value goes up significantly, is if Wall Street decides to value these businesses higher. That will happen in one of two ways. First, multiples on traditional media businesses rise as the Street gains confidence that growth rates of operating and free cash flow have stabilized. Second, growth rates of operating cash flow accelerate because fundamentals improve in the company’s business – ad growth picks up, cable capital spending declines, AOL makes headway as a portal or broadband distributor, home video picks up, etc…
DirecTV (DTV) shares are up about 3% in response to a solid quarterly earnings report. My key takeaway is that the street is beginning to respond favorably to the company’s transition to a controlled growth strategy where EBITDA and free cash flow growth is paramount and subscriber growth is secondary. The street is also pleased to see the announcement of a $3 billion share buyback. None of the buyback will come from the GM pension plan which is not a seller at this time.
The strategy transition is evident in the 4Q05 numbers. EBITDA was a big positive surprise while gross and new subscriber additions fell well short of estimates. The subscriber shortfall was mostly a self-inflicted wound as DTV has been trying to upgrade the quality of its subscribers. Thus far, that has been accomplished by an increase in involuntary churn as tighter credit policies have been maintained. This quarter the strategy was extend to include termination of certain distributors and a change in incentives for distributors. Churn came down a bit last quarter to 1.70% but that is still high. On a base of 15 million subs, that means each month 255,000 subs are lost, 765,000 a quarter, or over 3 million a year. DTV has said it wants to add 1 million subs a year and grow to 20 million subs. A strategy that deemphasizes sub growth and leads to greater EBITDA and free cash growth seems appropriate given the churn obstacle and the high cost of that churn….
AAPL shares are set to bounce at the open following some supportive analyst commentary and the introduction of a 1G iPod nano. The new nano will be priced at $149 while the shuffle line will continue with prices dropping to $69 for the 512K model and $99 for the 1G model. AAPL now has iPods prices at $69, $99, $149, $249, $299, and $399. The big jump in value comes with the 30G and 60G video iPods priced at $299 and $399 and holding 7,500 and 15,000 songs, respectively. The highest priced and capacity nano is $29 for 4G, storing 1,000 songs. This product lineup has something for everyone and seems to support upgrade and downgrade demand which helps margins.
It will be interesting to see if the early share gains hold. Lately, that has not been the case and every light has been met by heavy selling. One concern has been a sharper than expected seasonal downturn in iPod sales in the March quarter. I think the 1G nano will sell-through well and AAPL will ship a lot units. Availability is immediate.
My addition of AAPL shares in the mid to upper $70s has been wrong so far. I think it will prove correct later this year when confidence in the long-term growth story overwhelms near-term concerns about iPod seasonality and the Mac transition.
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2006-02-07 10:11:472006-02-07 10:11:47Apple Anounces New iPod nano
Motorola (MOT) shares are set to bounce at the open on an analyst upgrade. The gains look small so far, especially against the 16% decline in the stock since 4Q05 EPS were reported on January 19th. Earnings were greeted by a sharp sell-off as numbers merely matched consensus despite higher whispers and despite management noting that some shipments were delayed by component shortages, 1Q06 EPS guidance was not increased. The reaction showed that investors still don’t trust MOT and are concerned about the company’s ability to sustain its market share gains. These concerns may have been increased by worries that unexpectedly strong handset shipments in 2005 for the entire industry won’t repeat in 2006 making the competitive environment that much tougher for MOT. Finally, concerns continue that the RAZR is getting to be an old form factor whose appeal will wane….
Disney (DIS) reported better than expected earnings with EPS coing in at 35 cents against analyst estimates taht averaged 30 cents. Estimates will go up across the board with FY06 ending September heading toward $1.45-$1.50 from $1.41 presently. Furthermore, management spoke confidently about 2Q06 (the current quarter) and reiterated expectations for a strong back half of the fiscal year. Additionally, the forecast for double digit annual growth off the 2004 base through 2008 was reiterated. This forecast applies to the entire company. In Q&A, management was asked to confirm a similar forecast they have made about ESPN. They did so and noted that while they are promising “average annual growth” if there was going to a year where that was way off the trendline they would alert investors. This is comforting as it relates to ESPN next fiscal year where new sports contracts for NASCAR and Monday Night Football kick in. Analysts have been worried that this could lead to a flat or down year for ESPN. It is also comforting in that presumably the same theory about guidance applies to the entire company.
I still see DIS as the best large cap media stock. All of its divisions are moving in sync as the Studio should join broadcast television, cable networks, theme parks, and consumer products later this fiscal year. A multi-year forecast for double digit growth for a company with so many traditional media businesses is a strong endorsement of the outlook and should be rewarded with a higher stock price…
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2006-02-07 09:58:192006-02-07 09:58:19Disney Comes Through
For February, Northlake’s Market Cap model continued to flash a Mid Cap signal as has been the case for every month beginning in September 2005. As a reminder, this model measures ten factors which I group as economic, interest rate, and stock market indicators. Each indicator has historically had predictive value for the relative performance of small caps vs. big caps. The model uses a weight of the evidence approach so that if the indicators generally favor small or large caps that is the signal that will be flashed. A mid cap signal is flashed when the indicators are split as they are currently. One interesting observation from the current status of the underlying signals is that most of the economic and interest indicators favor large caps while the stock market indicators which include especially the trend and measures favor small caps. Decelerating economic growth and moderately rising interest rates historically have favored large caps but for now investors still are supporting small caps. A key question is when will investors rotate decisively toward large caps on a relative basis if fundamentals continue in their favor?
Northlake’s Style model shifted back to value for February after a one month sojourn in growth territory. This change led to the sale of all holdings in Russell Growth ETFs (IWF and IWO) and the purchase of Russell Value ETFs (IWD and IWN). Prior to January, this model had flashed a value signal for three consecutive months. The underlying factors in this model generally favor value across the economic, interest rate, and stock market indicators. However, most of the signals are weak which explains the monthly fluctuation in the overall signal. For February, three underlying indicators shifted. First, the valuation indicator moved in favor of growth. This indicator measures the relative P-E of the Russell 3000 Growth index vs. the Russell 3000 Value index. Historically, the growth P-E has average 1.45 times the value P-E. After three plus years where value looked cheap, recently, the relative P-E has normalized on a historical basis. Last month, growth moved very slightly into the cheap mode, thus the indicator switched….
