The spectrum auction and build out rules in Canada are more favorable than expected for new entrants. As a result, Rogers Communications are trading down by 10% today. I have already seen two downgrades of the shares. Even with more favorable provisions for new entrants into the Canadian wireless market, I suspect that any impact on Rogers financial performance will be minimal for at least 2008 and 2009. However, the sharply negative tone of analyst and press coverage is likely to weigh heavily on sentiment toward the shares. It is also possible that Rogers will play it safe with its free cash flow and balance in order to protect its financial capacity against new competition. This could lead to a modest disappointment when the company announces its shareholder value plans next month. Rogers may also issue more conservative than expected 2008 subscriber and financial guidance in early 2008. Finally, even though quarterly earnings are likely to continue strong, the analysis will be more skeptical so even a minor issue will hurt sentiment toward the shares.
After saying all that, I am not ready to sell the shares, which even after today’s drubbing will be up 50% this year. I’ll be visiting with Rogers next week when they present at the UBS Media conference in NY. I’d like to hear their reaction and the tone of the Q&A portion of their presentation. I think it makes sense to let the dust clear before making a final decision…..
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2007-11-29 12:05:012007-11-29 12:05:01Rogers Hit Hard
A strong opening for Disney’s Enchanted, a surprisingly good opening for This Christmas, and decent showing for another 6 to 8 films led the box office to an up weekend following two straight negative weekend comparisons. The top 12 films pulled in 4.4% more than a year ago according to BoxOfficeMojo.com. The depth of films finding an audience is important given the poor box office performance so far this quarter with the total take down 10%. The next two weekends represent the easiest comparisons of the quarter so if the quarter is going to turn around the time is now. Besides the depth of films finding an audience this weekend, the release of The Golden Compass on December 7th should boost comparisons.
Enchanted is the first film opening on Thanksgiving weekend to win the holiday box office in five years. Hollywood has been opening anticipated Thanksgiving blockbusters on the weekend prior to the holiday over the past five years. Disney chose to buck the trend and used its brand and a well-reviewed film with appeal to a broad demographic to capture the to spot and bring in $50 million over the five day holiday weekend. Enchanted continues an amazing hot streak for Disney content whether it is films (Pirates of the Caribbean, Wild Hogs, Pixar films, The Game Plan) or Disney Channel Films and TV shows (Hannah Montana, High School Musical). Enchanted could prove particularly rewarding as it will transfer to theme parks, consumer products, Broadway, and sequels.
The other big story form the weekend is the performance of 3D and Digital screens showing Beowulf. FantasyMoguls.com is claiming that fully half of the $56 million gross for the film so far has been in non-traditional theaters. Theatre companies are currently upgrading many screens for 3D and several studios including Dreamworks Animation are planning 3D releases in the next few years. Theatres are able to charge a premium ticket price for 3D and analysts find the economics of upgrading screens attractive. In an industry lacking organic growth in ticket sales and facing secular challenges from digital downloads and home theatres, 3D is a potential positive. I am already seeing bullish comments on 3D from theatre company analysts and expect this to be a higher profile theme for the group in 2008.
Northlake remains long Disney, partially due to its content hot streak. Northlake also remains long Regal Entertainment, which currently yields a very safe 6.2%. The rally in the bond market makes this yield very attractive and could setup a trading opportunity if the box office recovers in the next two weeks.
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2007-11-25 17:34:212007-11-25 17:34:21Weekend Box Office Turns Up
Dow Jones ran a news story on Tuesday noting that Verizon was raising the price of its FiOS TV service purchased outside the bundle by 12% for 2008. This is the second consecutive year that Verizon has raised FiOS TV prices.
Wait a second. I thought that FiOS TV was going to set off a price war with cable. At least that is what you might think if you looked at a chart of Comcast’s stock price. The reality is that pricing for all parts of the triple play bundle has been very stable. Verizon is just facing its own reality – it can’t buy programming at the same price as Comcast, DirecTV, et al because it doesn’t qualify for subscriber discounts while it faces the same programming price hikes from cable network providers. And just in case he missed it, here’s a shout out to FCC Chairman Martin. It isn’t just the cable industry that is raising prices of multichannel video subscriptions. Lack of competition is not the issue. Multichannel video distributors are just passing through the annual increases charged to them by the likes of CNN, ESPN, and HGTV.
Cable still has serious issues with investors (though not nearly so serious with fundamentals) but after a summer and fall of discontent and bad news this is the first positive datapoint. Now if Brian Roberts would just step up his share buyback and show the same confidence with his actions that he expresses with his words.
A significant risk for fourth-quarter earnings for the major entertainment conglomerates is an extremely crowded DVD release schedule. The risk is heightened by generally weak DVD sales for the past 18 months.
Early indications from the launch of several blockbuster movie titles are not promising, so investors should keep an eye on Disney (DIS) , DreamWorks Animation (DWA) , News Corp. (NWS) , Time Warner (TWX) and Viacom (VIA) for possible trouble.
DVD sales are critically important to the major movie studios. I have seen several analyst models in which the operating margin on DVD revenue is projected at more than 40%. Even for companies the size of Disney or Time Warner, the numbers are meaningful.
For example, a title such as Ratatouille might sell 25 million DVDs worldwide in its first release. At a wholesale price of $15, total revenue could be $375 million, and operating income could be north of $150 million. During the December quarter alone, Disney might sell 18 million units, generating operating income of over $100 million, which represents over 5% of projected operating income for the quarter.
During this holiday season, there are 16 movie titles set for DVD release that grossed over $100 million at the domestic box office. Several mega hits are for sale, including Ratatouille, Pirates 3, Shrek 3, Transformers, Spiderman 3 and Harry Potter 5. Crowding out is a definite risk, but it would not be so worrisome if DVD sales as a category were not already weak. According to Jessica Reif of Merrill Lynch, year-to-date DVD sales are down midsingle digits, the second consecutive year of flat to negative growth.
DVD sales peaked in 2005-2006 as penetration of DVD players into U.S. households reached saturation. For many years, DVD sales boomed, riding the wave of more players in more homes and the building of personal DVD libraries. A huge number of releases, including TV shows and movie catalogues, also boosted consumer interest and demand.
Growth ground to a halt as penetration of DVD players rose and early adopters finished building their initial libraries. Late adopters of DVD players naturally bought fewer DVDs. Adding to current sluggish sales trends is confusion over next-generation DVD technology (HD or Blu-ray) and initial developments in digital downloads.
Several Web sites track DVD sales and releases, including the-numbers.com and BoxOfficeMojo.com. According to sales data from early holiday season releases, the outlook for the rest of the quarter looks mixed.
Transformers (Viacom) got things off to a good start, selling over 8 million units so far, including a debut week of more than 5 million. Sales were not nearly so strong for Spider-Man 3 (Sony) or Shrek 3 (DreamWorks Animation). Spider-Man sold 2.4 million in its opening week and is at 3.4 million after two weeks in release. Ratatouille was the next major release, and it sold over 3.8 million units in its first week, a level variously described in trade publications as “very strong” and “as expected.”
Shrek 3 was just released last week, so early sales have not been formally reported, but according to an article on VideoBusiness.com, sales are close to the Spider-Man level. This would translate to a disappointing quarter unless sales pick up considerably, given analyst estimates for 15 million to 20 million units.
Here is a brief look at the outlook for major studios this holiday season. Keep in mind that the holiday season is just starting, so it might be early to draw conclusions. Nonetheless, there is reason to be nervous based on early trends….
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2007-11-21 12:22:322007-11-21 12:22:32Holiday DVD Sales Could Disappoint Investors
With an AT&T acquisition of Echostar apparently imminent, I want to reiterate that while in the short-term investors will see the deal as negative for cable, in the long run the outcome may not be nearly as dire feared.
On its most recent conference call, Comcast specifically pointed to AT&T discounting using the satellite bundle (Dish or DirecTV + AT&T wireline + AT&T DSL) as a cause of lower than expected subscriber additions. In fact, Comcast said that the wireline TV offerings form AT&T (U-Verse) and Verizon (FiOS) had not had a material impact. If this is to be believed, then in the short-term an acquisition of Echostar by AT&T looks ominous for cable. AT&T has shown a willingness to discount aggressively and with Echostar in house will be able to more easily execute the strategy nationally. Cable stocks were down 2-3% yesterday and I suspect that this is the reasoning.
While I can’t argue with this near-term reaction, I think the long-term is a little trickier. By using Echostar as its primary multichannel TV offering, AT&T is foregoing massive cost synergies available to cable and Verizon which are able to offer the triple play across a single network. Maintenance, billing, and customer service will al be less efficient for AT&T than its peers. This should mean that AT&T’s discounting strategy has a limited life. The high cost producer can not maintain the lowest price for long.
An AT&T-Echostar tie-up will surely sour the mood of potential cable investors even further. But if it hastens the day when a stable oligopoly re-emerges it might not be as bad a thing as feared.
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2007-11-20 12:21:292007-11-20 12:21:29AT&T-Echostar Has Implications For Comcast
With all the chatter about Lululemon Athletica (LULU) following the New York Times expose’ on the seaweed or lack thereof in certain items the company sells, I thought it might be a good time to provide an overview of Northlake’s only long position that is not involved in media and telecom.
Endeavor Acquisition Corporation (EDA) is a blank-check company that went public in late 2005 by raising $130 million. Blank check companies go public and then look to make acquisitions. One year ago EDA announced that it had found its acquisition target. American Apparel is the choice. And it’s a good one. Recent SEC filings indicate the deal is on track to close in mid-December. At that time, EDA will change its name to American Apparel, Inc. I am not yet sure what the ticker symbol will be but with apologies to Alcoa, for the rest of this column I will refer to American Apparel as AA.
EDA/AA is not a widely followed stock. Nevertheless, I have read several research reports about the company. As discussed later, I think the lack of Wall Street sponsorship is a positive. The reason I mention this now is that I have recently gained a great deal of insight into EDA from a RealMoney.com subscriber. Special thanks to SG, a full-time investor who clearly knows his stuff.
I bought Northlake’s initial position in EDA immediately following the announcement of the AA acquisition last December. I added the stock to new accounts during 2007 but it was only in the last few days that I increased client positions across the board. The analysis presented in this column is something I have believed in all year but I was hesitant to add to Northlake’s position until I had a clear timeline for closure of the deal. That news was announced last week along with better than expected operating and financial results and guidance from AA.
My target on EDA/AA is a minimum of $15-20 based on my initial expectations for 2008, where I expect revenues to rise 30% and EBITDA to grow by 34%. This target assumes EDA/AA will trade at a similar multiple of sales, EBITDA, and/or EPS to other high growth specialty apparel retailers such as Urban Outfitters (URBN), Lululemon Athletica (LULU), Zumiez (ZUMZ), and Volcom (VLCM). I see URBN as the best comparable given a similar strategy of going to market as a progressive company that targets a broad demographic range….
Lionsgate reported another confusing quarter. Revenues blew away expectations but so did expenses. EBITDA was a big negative number but the company reported over $21 million in free cash flow. The press release was vague and the simultaneously issued 10-Q did not directly address the absolute figures but instead focused on percentages. All that said the numbers and their implication for the rest of LGF’s fiscal year ending March 2008 are positive. Guidance was not formally raised but management said the company is on track to exceed its revenue and free cash flow guidance by 10%. This forecast assumes that three films to be released in the March quarter perform to expectations, a not unreasonable view given the box office targets articulated on the call. Finally, management was able to provide an acceptable explanation for why free cash flow and operating cash flow will converge next year. This is an ongoing point of contention for LGF and will be a comfort to investors….
The winning streak at the weekend box office didn’t last long. After last weekend saw a string of six straight down weekends snapped, this weekend was back in negative territory. A disappointing opening for Fred Claus from Time Warner’s Warner Brothers studios was the primary culprit in an 11% year-over-year decline for the top 12 movies. Most observers had pegged Fred Claus in the $28-30 million range while the current estimate for the weekend is $19 million. This lagging performance offset good holds for last weeks top two films, American Gangster and Bee Movie. Dan In Real Life also had a good hold, dropping just 25%; however, this film is heading toward a $40-45 million gross, great relative to expectations but not big enough to drive overall box office results.
Bee Movie fell 32% and took the top ranking with $26 million. American Gangster dropped 44% and came in second with $34 million. Investors may look favorably on Dreamworks Animation (DWA) since the film was not expected to win the top spot this weekend. Certainly, the performance is good news for DWA but the second weekend 32% decline is actually slightly larger than Over The Hedge, Tarzan, and Chicken Little, three films with similar opening weekend grosses. In addition, these three films ended with a total domestic gross ranging from $135 million to $171 million. Barring unusually good legs, Bee Movie will be lucky to reach the top end of this range. Most analysts had built in a domestic gross of up to $200 million in their models. A $20-30 million shortfall may not seem like much but when you multiply through lower grosses in the international, home video, and TV rights windows it could lead to a meaningful shortfall for DWA relative to estimates in 2008. Unit volumes of the Shrek 3 this quarter are more important to DWA’s financial results and share price performance but the fact that Bee Movie looks like it will the end of expectations at best leaves little margin for error for DWA.
There are only a few other items of note in this weekend’s box office….
Disney reported 4Q07 EPS of 42 cents adjusted for a tax benefit compared to consensus of 41 cents. Revenues of $8.93 billion matched the $8.98 million consensus. Comparing the segment numbers to my spreadsheet shows a remarkable closeness. This is actually one the things I like about Disney: the company is very tightly managed and predictable (leaving aside the volatility in movie and TV production). Strong and consistent execution is especially valuable with concerns over consumer spending rising. It is also helpful to valuation of the shares. Disney trades inline with peers News Corporation and Viacom. I think the strength of management and the company’s franchises are deserving of a premium valuation.
The quarter and management commentary will not do much to quell the debate over how fast Disney will grow in FY08. In general, management sounded confident about the December quarter with theme park attendance and occupancy trends looking up mid-single digits and scatter market advertising up “strong” double digits at ABC – I’d interpret that as over 20% — and double digit at ESPN. The company has a good DVD lineup with Pirates 3, Ratatouille, and High School Musical 2.
The only issue I see in the 4Q report is the slight contraction in theme park margins….
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2007-11-09 13:29:322007-11-09 13:29:32Routinely Good Quarter for Disney
In the midst of the carnage yesterday, Northlake had one winner: Endeavor Acquisition Corporation (EDA). EDA is in the final stages of completing its acquisition of privately held American Apparel, a very hot teen retailer. The shares rose over 5% on heavy volume in response to a very positive press release.
EDA announced that that it will file the definitive proxy to complete the acquisition by the end of November. A shareholder vote is scheduled for December 12th. These items while routine are significant because EDA’s status as a blank check company means that it has to complete the deal by mid-December or return its assets to shareholders. Those assets are worth just $7 or $8.
More significantly for the long-term prospects of the company, EDA announced that AA’s 3Q same store sales rose 27%. This is on top of a 24% gain in 2Q. Furthermore, EDA stated that AA has already produced over $40 million in EBITDA through nine months and would significantly exceed previous full year EBITDA guidance of $40 million.
As a result of AA’s outstanding financial performance this year, the terms of the acquisition were amended to give AA’s founder and CEO, Dov Charney, more shares. Additional shares were also allocated for AA employees while Charney’s partner will now be bought for cash by EDA instead of Charney himself.
I believe that AA’s operating and financial momentum will prove sustainable through at least 2008. If so, there is substantial upside to the shares as the EBITDA multiple is just under 13 on my 2008 estimate. For the hot teen retailer of the moment this is a cheap valuation. Previous hot retailers have traded at 15-20 times EBITDA. 15 times my 2008 estimate gets EDA to $16, 25% higher. Personally, I think this target will prove conservative. To back up my optimism I was bidding for more stock all day yesterday but I didn’t buy any as I kept my bid too low given the crappy stock market action.
https://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gif00Steve Birenberghttps://dev.northlakecapital.com/wp-content/uploads/2026/02/nl_logo.gifSteve Birenberg2007-11-09 13:28:172007-11-09 13:28:17American Apparel/Endeavor Delivers Good News All Around
