Central European Media Enterprises Joins Russell and Receives Good News In The Czech Republic

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Central European Media Enterprises (CETV) rose to a new all-time high on Friday. The shares have been unusually strong over the last few weeks even as the market has pulled back. I suspect that much of the strength is related to the fact that CETV is being added to the Russell indices on this year’s rebalancing. But something else may be at work.
I’ve also noticed strength each morning in Prague where the stock has a secondary listing. CETV’s largest TV station is in the Czech Republic and should generate about one-third of revenues and half of EBITDA for the entire company this year. Two factors could be fueling buying by Czech and Central European investors. First, TV Nova has sustained strong ratings this year. Second, and probably more importantly, a compromise has been reached on the awarding of digital TV licenses in the Czech Republic. Late last week a bill cleared a parliamentary committee that will grant three new licenses to CETV and its primary commercial competitor while also allowing six licenses previously awarded to new entrants to escape legal limbo. Additionally, the scheduled elimination of advertising on the state-owned TV has been adjusted but in a manner that should still cut state TV advertising revenue by at least 75%. The only downside for CETV is that the new digital license holders can launch services as soon as they want. I’d be surprised if the new stations were able to gain much market share as initial reach will be only 30% of the population and the analog signals won’t be turned until 2012 lessening urgency for households to upgrade to digital….

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Barron’s Discovers Rogers Communications

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Barron’s Online gave Rogers Communications (RCI) a nice write-up yesterday, succinctly outlining the bull case. Barron’s noted the positive dynamics of the Canadian wireless market which has just 60% penetration and therefore promises several more years of well above average growth (unless Canadians end up being a lot less fond of mobile phones than the rest of the world). Remember wireless service was launched in Canada about three years after the US and if you overlay the penetration curves from the launch date they look remarkably similar. The US saw double digit growth throughout the period that Canada is entering. RCI also benefits because Canada presently has just three national wireless operators vs. six in the US. As a result, the market is less competitive and supports higher margins. Last quarter, RCI and Telus (TU) each had margins over 50%. In the US, only Verizon enjoys a similar level of profitability….

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Stable Pricing Bullish For Comcast

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One of the reasons I remain bullish on Comcast (CMCSA/CMCSK) is that the much feared price war over the components of the triple play – cable TV, high speed internet, and telephony – has not come to pass. In fact, what has long been feared to be a fight to the death is looking a little more like oligopoly with rational competition. If evidence continues to mount that pricing will be firm over the next eighteen months, recently soured sentiment toward cable should improve dramatically. Add that to quarterly reports showing low to mid teens growth in revenue and operating income from Comcast and the other major cable companies and a sharp rebound in CMCSA shares is setting up. I own a small position in CMCSA and CMSK today and have an itchy trigger figure to build it out to a full position.
Last week two separate research reports came out that noted the benign pricing environment. Cable analyst Jessica Reif of Merrill Lynch and her telecom counterpart David Janazzo noted that that cable companies and their satellite counterparts each increased pricing on TV services by 1-5% this spring. Verizon (VZ) and AT&T (T) are just getting started in TV but thus far they are not competing on price. Merrill Lynch also noted that high speed internet pricing is stable with cable holding pricing and VZ and T eliminating most of their super discounted, entry level DSL packages. Telephony pricing has also been stable with cable using the triple play bundle and VZ and T responding through bundles of their own rather than discounting their cash cow….

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Scripps Onlne Competitor Gets Bought Out

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Over the weekend, the Wall Street Journal reported that Providence Equity was taking a control position in shopping comparison website Nextag.com. Nextag is the #2 shopping comparison website, trailing, Shopping.com. The #3 shopping comparison site is Shopzilla.com, owned by E.W. Scripps (SSP).
SSP shares have rallied on takeover speculation due to similarities with Dow Jones (DJ). On a purely private market valuation, ignoring the fact that several of SSP’s business segments are struggling (including Shopzilla), I can calculate a takeover price north of $60 driven by the value in HGTV and Food Network….

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News On Northlake Stocks

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Several stocks in the Northlake portfolio have had newsworthy items over the past week. Here is a recap of the latest news, all of which I think is positive.
Disney (DIS) completed the sale of almost all of its radio operations to Citadel Broadcasting (CDL). DIS shareholders received .0768 shares of CDL for each share of DIS they owned. DIS received $1.35 billion in cash from CDL. I plan to hold CDL and will look to add to the small positions if the shares come under pressure as DIS shareholders sell their small holdings. The profile of a DIS and CDL shareholder would seem to have little in common which could lead to lots of selling. Given that the DIS deal about doubles CDL shares outstanding, I think supply-demand imbalances could put some downward pressure on CDL. That was not the case yesterday when CDL rallied on the first day of post-closing trading. CDL has a current yield of over 5% which should limit downside….

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Advertising Growth Remains Below Par

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According to AdAge.com, advertising spending in the first quarter fell by 0.3% excluding paid search. The data is from a study by TNS Media Intelligence. With GDP growth in the low to mid single digits, historical correlations would suggest that advertising growth should have been closer to 3-5%. Part of the problem was a tough comparison to 1Q06 when Winter Olympics spending added to the total. TNS thinks that adjusting for the Olympics ad spending grew just over 2%, still a weak performance that indicates traditional advertising is losing market share to online advertising. TNS believes that major advertisers have also been spending cautiously given slower economic growth and concerns about the health of consumer spending. An interesting aspect of the study is that for the first time in several years growth in advertising outside of the top 100 advertisers was flat. These smaller advertisers had been picking up the slack and driving overall growth above the rate of major advertisers.
TNS also tracks spending by media and by advertiser industry. There are 19 categories of measured media advertising and in 1Q only 6 were up year over year. Outdoor and Spanish TV were up 2-4%, cable TV and consumer magazines rose 6-7%, Spanish magazines were up 14%, and internet ex-paid search was up 17%. Among industries, domestic auto continues to be a major laggard, falling almost 11%. This is especially negative for newspaper which are losing the most market share in auto advertising to the internet. Other industries with notable declines include telecom, foreign auto, and travel and tourism. The only industry mentioned in the Ad Age article that showed an increase was direct response companies…..

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Summer Box Office Update

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The big three summer movies have now each been in theatres for more than two weeks. Together they are on track to gross about $900 million domestically, a huge number by any means (only 23 movies have ever grossed $300 million), but one that is a modest disappointment to many observers including myself.
Spiderman 3 looks like it is headed to $330 million with Shrek The Third heading towards the low $300 million range and Pirates of the Caribbean: At World’s End probably finishing between the other two. I think Spiderman and Shrek will wind up about $40 million below where many expected and Pirates may finish $60 million short. These shortfalls are irrelevant to the financial performance of the studios involved (Sony (SNE), Dreamworks Animation (DWA), and Disney (DIS) but they do dampen enthusiasm toward the box office slightly. I think optimism will pick up over the next 8 weeks as comparisons remain pretty favorable.
In an interesting twist, foreign box office for Spiderman and Pirates is running well ahead of the previous films in those franchises even as domestic performance is running 15-20% behind (Shrek will be released in international markets this weekend). In fact, Spiderman 3 will likely end up the highest grossing of the three films on a global basis. This bodes well for ancillary revenue streams from these films and is reminder that international theatrical exhibition is a growth industry for U.S. studios…

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Regal Entertainment Competitor Completes IPO

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Yesterday several brokerage firms initiated coverage on recent IPO Cinemark Holdings (CNK), the third largest operator of movie theatres. Not surprisingly, the underwriters are providing favorable coverage including new buy recommendations. A few brokers expressed their preference for CNK over Regal Entertainment (RGC), the largest theatre operator and one of my long positions. The analysts argue that CNK is cheaper than RGC and due its geography it offers more upside potential though organic growth of new theatres. Additionally, CNK has more room for upside in its dividend than RGC given the 51% payout ratio. CNK has a current yield of 3.7% vs. 5.3% for RGC.
These are valid points as CNK trades at under 8 times 2008 estimated EBITDA while RGC trades closer to 9 times. Additionally, most models have no screen growth for RGC while CNK is expected to increase its screen count by about 4% per year taking advantage of population growth in its largest markets of Texas and California, while adding theatres in major metropolitan areas where its is underrepresented. Finally, a little over 20% of CNK’s screens are in Latin America where long-term growth opportunities could be substantial. The organic growth is clearly seen in 2008 estimates (box office comparisons will be extremely tough) where most analysts have RGC’s EBITDA flat to down vs. a 2-4% gain for CNK. It does seem inconsistent for CNK to trade at a discount given the higher internal growth, especially in an industry where everyone pretty much offers the exact same product.
Nevertheless, while I need to do further work on CNK, my initial thought is that I still prefer RGC….

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June 2007 Models

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There were no changes to Northlake’s Market Cap and Style models for June. The signals remain large cap and value. The large cap signal remains very strong, while the value signal remains weak. As a result of the updated signals, there are no changes to the holdings in the portion of the portfolios I manage using these models. Clients continue to own the S&P 500 (SPY) and the Russell 1000 Value (IWD).
This is the fifth consecutive month that the market cap model has flashed a large cap signal. The average holding period for this model based on data since 1980 is four to six months. For the last several months, the signal has been very strong favoring relative outperformance of large caps over small caps. In fact, there have only been 13 months with stronger signals in favor of large caps out of the 339 months that I have data on the model. All ten indicators in the market cap model are flashing a large cap signal. The model is picking up a moderately growing and slowing economy, rising interest rates and the recent technical deterioration of the Russell 2000 versus the S&P 500.
This is also the fifth consecutive month that the style model has flashed a value signal. The average holding period in the style model is five to seven months based on data since 1981. The value signal remains a weak one with just five of the nine indicators in the model flashing a value signal. Flipping of just one indicator or changes in the strength of one or two underlying indicators would be enough to change the model to a growth signal….

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