Good Quarter, Good Outlook For Central European Media Enterprises

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Central European Media Enterprises (CETV) reported excellent 4Q07 results easily beating estimates on revenues, EBITDA, and EPS. Revenues and EBITDA grew 40% and 33%, respectively, with all six countries where the company owns TV stations or networks beating my estimate for revenue and five of the six countries beating my estimate for EBITDA. To gain some sense of the magnitude of the beat, my revenue estimate was $286 million and the company reported $301 million. For EBITDA, I was looking for $111 million and the company reported $129 million.
For the year, revenue and EBITDA grew 39% and 46%, respectively. For 2008, I am looking for 20% revenue growth and slightly expanding margins to drive 26% EBITDA growth. Free cash flow is beginning to be meaningful and could reach close to $100 million in 2008. In its conference call presentation, management said that it would to double revenues over the next five years with margin expansion leading to even faster EBITDA growth. Given the recent track record of consistent 20% plus annual growth and the rapidly growing ad markets throughout Central and Eastern Europe this is very reasonable expectation.
The shares trade at less than 11 times my 2008 EBITDA estimate ascribing no value to the company’s rapidly growing but not yet profitable operations in Croatia and the #2 or #3 position of its internet properties in most of the countries in which it operates. Doubling revenue in five years with margin expansion indicates that revenues will grow about 14% per year with EBITDA slightly above that rate. Given current forecasts for 2008 advertising growth in Central and Eastern Europe, higher growth seems likely at least in 2008.
With US media companies struggling to grow at 5-10% trading for 7-8 times EBITDA, I find the shares of CETV to be way too cheap. Assuming 18% growth in 2009, a 12 multiple on forward estimates would get the shares to $130. All it will take to get the shares moving again is a decent market that allows investors to start having confidence in the future and fewer worries about the stocks perceived as risky. I think it is a good bet that CETV shares and management team will continue to deliver for at least the next two years….

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Cablevision Dealling Well With Competition For Now

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Cablevision reported better than expected results driven by its core Cable operations and Madison Square Garden. Revenues grew 11% to $1.84 billion ahead of consensus of $1.78 billion. EBITDA grew 20% to $610 million, ahead of estimates for $560 million.
Financial and subscriber metrics at the Cable systems were better than expected. Revenues rose 8.6%, in line with expectations, while EBITDA rose 13.3% against consensus for 10% growth. The EBITDA beat provided about $15 million of the $50 million EBITDA surprise at the corporate level. Basic subs fell by 4,000 but analysts were expecting a fall of 8,000 to 10,0000. Digital subs grew by 43,000, in line with estimates. Data and Telephone subs beat estimates rising 62,000 and 102,000 respectively.
The rest of the beat in the quarter was at the MSG segment. “Lower provisions” for “tam personnel transactions” looks like it might have been a big positive swing factor. Also, the entertainment business grew nicely. On the call, management pointed out upside in entertainment at MSG including the acquisition of the Chicago Theatre. Recent speculation that Cablevision may invest more in this segment outside of New York seems plausible, especially the company finally pulls the trigger on a sale of Rainbow. Rainbow had 9% EBITDA growth, wrapping up a very good year.
The big message from these results is that for now, Cablevision is dealing well with the competition from Verizon….

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NII Holdings: Finally In The Clear?

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NII Holdings (NIHD) reported better than expected 4Q07 financial results yesterday but the shares sold off sharply anyhow. I can see three potential issues. First, EBITDA guidance is a bit low even after adding back the $30 million in unexpected expenses related to upgrading the company’s network in Peru to 3Q. Revenue guidance is in line so there is some evidence of margin pressure. Second, the Peru 3G build out is again raising fears of a big spike in capex for the rebuild in Mexico and Brazil. Third, 1Q08 net adds will be down sequentially. They were up sequentially in 2007 and flat in 2005. This serves to undermine the fragile confidence that guidance is good and the Mexico situation is stable.
By way of background, NIHD shares have been cut in half since last summer when competitive activity in the company’s largest market, Mexico, picked up. Sub growth in Mexico slowed, ARPU trends deteriorated, margin expansion stopped, and talk of the need for massive network upgrade moved front and center. Analysts lowered subscriber and financial estimates in response.
I think the shares are way oversold and that as time passes, maybe one or two quarters, the shares will move up considerably. Ultimately, 4Q07 sub and financial results beat the lowered estimates. These results show that management can handle the more competitive environment in Mexico and still “EXCEED” numbers. This makes me believe that the 2008 EBITDA guidance is likely low, especially given momentum in Brazil, which no represents 30% of subscribers and 25% of EBITDA….

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Selling Regal Entertainment

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I posted the following on Real Money before the open on February 27th explaining my decision to sell client holdings of Regal Entertainment. By way of background, Doug Kass is a major figure on Real Money and appears regularly on CNBC. He manages hedge funds that are dedicated to selling short. This means he bets on stocks going down. Over the time period that Northlake has been long Regal Entertainment, Doug was short most of the time.
I hope Doug Kass is sitting down when he reads this but I sold my position in Regal Entertainment yesterday. Doug and I have been back and forth on the merits of Regal for well over a year. For Doug it is a thematic short as he sees the movie theatre in long-term decline. For me it was a total return play in a stock that was too cheap because of what I believe to be the inaccurate myth that the box office is in long-term decline.
I think we both ended up right. I know at times Doug was short when the stock was moving between the upper teens and low $20s. I’ve been long since April 27th, 2006. I purchased the stock at $20.28 and sold it at $20.90 for a gain of just 3%. However, I have also collected 7 quarterly dividends of 30 cents and one special dividend of $2.00. Add that $4.10 to my side of the ledger and the total return is 23%. The S&P 500 is up less than 6% since then with dividends pushing the return to about 9%.
Regal turned out to be a pretty good investment for my clients but the reason I am quoting the returns is to remind subscribers that there are a lot of ways to make money on a stock. Total return investing is not as sexy as producing big capital gains but if you are going to make 23% who cares how you get there….

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Reviewing Rogers Communications

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I feel I have done a good job and a bad job with Northlake’s investment in Rogers Communications (RCI). On the one hand, I initially purchased RCI for clients in December 2006 around $29. With the stock at $39, up 34%, I should have no complaints. However, in early November the stock was in the low $50s, and it ended 2007 at $25.25. Unlike a lot of my big winners, I didn’t trim my RCI position on the way up. It is a loser on more recent new money or new client purchases and it has hurt clients’ absolute and relative performance meaningfully so far in 2008.
The company reported 4Q07 financial results on Friday. The numbers were pretty good but there was not that much suspense as the equally important year end subscriber statistics and 2008 guidance was issued in mid-January. The subscriber metrics and guidance were both disappointing, compounding the investment case for the shares following initial worries about the May spectrum auction which will bring new wireless competition to Canada. The official auction rules were viewed as more favorable to new entrants than expected and as the current market leader and sole GSM provider in Canada, investors worry that RCI has the most to lose.
With the 4Q07 results in the books, I thought it would be a good time to review the investment case for RCI. I plan to continue to hold the shares but don’t expect to make real good money until the second half of the year. Developments surrounding the May 27th spectrum auctions, including the announcement of bidders on March 4th, seem likely to weigh on investor sentiment especially with new worries about flat rate pricing pans in the US and the spillover effect of a US recession.
However, I expect the stock to do much better and head back to at least the mid-$40s by year end. There are five reasons for my optimism. First, the shares are cheap at 7.4 times 2007 estimated EBTIDA. Second, growth remains robust with guidance calling for EBITDA growth of around 13% this year. Third, management has a consistent record of beating guidance. Fourth, the 4Q07 results and the conference call commentary reinforce that guidance is conservative and that the company is well prepared with its eyes wide open as far as new wireless competition is concerned. Fifth, the shareholder friendly actions taken in January, including a doubling of the dividend and initiation of a share repurchase show that management is effectively balancing competing shareholder interests of return of free cash flow and reinvestment in the operating businesses.
Wireless is the key to the RCI investment story as it provides 70% of projected 2008 EBITDA. RCI is the industry leader with 40-50% of net adds in Canada. Wireless penetration in Canada is well below the US but on the same penetration curve. If Canada follows the US penetration for several more years, subscriber growth should remain robust, enough to provide RCI, current competitors BCE and Telus, and new entrants with double digit growth.
RCI has benefited from operating the only GSM network in Canada. This gives the company dominant share of highly profitable international roaming revenue and the cheapest and best selection of handsets. New entrants via the spectrum auction will cut into these competitive advantages but it will be years before they are able to build out their own networks. Until that point RCI will be paid for roaming and access to its towers by the new entrants….

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Stability At Comcast

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Comcast provided the stability and achievable guidance that is required to get a relief rally and improve sentiment toward the shares. The financial and subscriber results for 4Q07 were very close to guidance provided on December 4th. If anything the financial results for revenue, EBITDA, operating margins, and free cash flow were slightly better than expected. I am going to ignore the quarterly detail to focus on the big picture.
Guidance was also constructive. Consolidated revenue and EBITDA are projected to grow by 8-10%. Capital spending is projected at 18% of revenues, implying a flattish number for 2008. Put it together and you get 20% free cash flow growth. Some analysts may have had higher revenue and EBITDA growth but 8-10% will come as no surprise and many investors will be pleased that it was not worse. Another small issue is that the guidance is for consolidated results. Over 95% of EBITDA comes from cable but the rest is content that grew 20% last year suggesting that cable only guidance is more like 7-9%. I suspect that this is supposed to be an achievable number with no downside.
Also contributing to the relief rally and my view of stability of financial results and sentiment is the fact that Comcast initiated an annual dividend of 25 cents providing a yield of about 1.5%. The dividend is supposed to go up over time and will stay near the established rate of 1/3rd of free cash flow.
Comcast also announced that the share buyback has another $6.9 billion to be completed by the end of 2009. The recent pace of share buybacks has been high enough to make this realistic and shares outstanding are down by about 86 million over the past year. Even accounting for share creep from options, upon completion the share count should be down by an upper single digit percentage from the year end 2007 level.
One final note is that the new CFO revamped the presentation which had greater detail on capital spending and more clearly laid out the growth plans and the capital allocation strategy. This will also serve to increase confidence.
The bottom line is that the worst appears over Comcast shareholders. I do not expect a big recovery in the shares but upside to the low $20s is clearly achievable if the company can report the next few quarters in line with the new guidance. If Comcast can convince investors that for the next several years it can grow at 8-10% with 20% free cash flow growth the shares are undervalued. I think they will probably prove it but I think it will take time for investors to come around….

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News Corp Looking At Yahoo?

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News Corporation has sat out this week’s rally, falling about 2%. I think the problem is fear over a bid for Yahoo. These fears persist despite very strong denials of interest from Rupert Murdoch and Peter Chernin on the quarterly conference call just ten days ago. The latest rumor is some sort of joint bid whereby News Corp puts Fox Interactive and a pile of cash into a new company that also contains Yahoo and another pile of cash dumped in by a private equity firm. News Corp would own a piece of the new entity, maybe around 20%. The new Yahoo/MySpace entity would outsource search to Google which would provide an immediate bump to operating income given that Google search monetizes at a substantial premium to Yahoo search.
Assuming this is a real deal, an assumption I would not make, and that the Google search deal would pass regulatory muster, another assumption I would not make, I have mixed feelings….

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In Line Quarter and Positive Guidance Clears The Way for Regal

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Prior to its 4Q07 earnings report last Thursday, shares of Regal Entertainment had already recovered from the sharp sell-off driven by poor box office trends during the fourth quarter. A strong start to the box office in 2008 also was helping. The recovery gained steam following the report which was inline with expectations and a first view of 2008 guidance. Here is a brief recap:
Regal Entertainment guided to the high end of analysts estimates for 2008. In 4Q, operating trends were exactly as expected given the box office performance. 4QEPS came in 4 cents ahead of consensus on better than expected margin performance and lower than expected interest expense. The tax rate was down but still stood at a normal 37%. The conference call had a positive tone.
Based on the new guidance, I think the stock can trade to $21-22, up 16%, which along with a current yield of 6.5% makes this an interesting total return situation. The key near-term risk is the tough March comp at the box office due to the popularity of the movie 300 a year ago.
The upside should get a boost from rising analyst estimates for 2008 based on the new guidance and the strong start to the box office this year. I know of two analysts who are estimating 1Q box office to be down 9-10%. It is hard to see how anything short of a small gain will be the ultimate outcome with the box office up 19% through this past weekend.
Comps get particularly tough in late June so my current plan is to sell into strength I anticipate over the next few months.

Dreamworks: Good Quarter But No Catalyst For Awhile

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Dreamworks Animation reported better than expected 4Q07 results. EPS of 98 cents beat the 75 cent consensus even after backing out a tax benefit. Revenues of $290 million were ahead of the $285 million consensus and many recent estimates in the $265 million range. The upside came from higher than expected DVD sales of Shrek 4, which came in at 15.6 million versus expectations of 13 million. DVDs are very high margin so upside is good news for current results. It is worth noting that Shrek 4 DVD unit sales are well behind Shrek 3 which might negatively impact investor’s views of future tie ratios on DWA’s movie releases, especially sequels.
Shrek 4 produced $180 million of the $290 million in reported revenue. Madagascar produced $24 million and Over The Hedge $13 million, both benefiting form revenue in far out windows like pay TV and foreign TV. Bee Movie produced $12 million from merchandising but the box office revenue won’t be recognized until next quarter. Management did say that depending on DVD sales (due in stores later this quarter) Bee Movie would be profitable. No write down so far. Library titles produced about $64 million of revenue. Again for comparison, on its conference call Disney said that Toy Story merchandising was a $400 million business in 2007….

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Disney Proving Skeptics Wrong

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Disney reported an exceptional quarter. EPS of 63 cents and revenues of $10.45 billion crushed estimates of 52 cents and $10.04 billion. Revenue growth was 9% and operating income gained 15% vs. expectations of 3%. Non-recurring items contributed no more than 2 cents to the EPS number.
On the conference call, management indicated that so far they see no signs of the economy causing a slowdown. Management pointed specifically to the fact that room bookings for the March through September quarters are running modestly ahead of last year. Given the fair argument that families don’t usually cancel vacations once they are booked, it seems that the near-term worries about Disney’s theme parks are unwarranted.
In fact, I think a strong argument can be made that FY08 ending in September is pretty much in bag as a decent growth year well ahead of the outlook implied by recent estimate cuts. The debate is now going to shift to FY2009 where comparisons just got tougher and theme parks could come under pressure due to unwilling ness to book vacations based on current economic conditions and headlines.
Disney has incredible creative momentum. Hannah Montana, High School Musical, Cars, Pirates of the Caribbean, new hit shows on ABC, new sports rights at ESPN, the Jonas Brothers, Club Penguin, Enchanted. Each of these properties is driving current revenue. New properties are regularly created and old properties are revived and extended. For example, Toy Story did $400 million n retail merchandise sales in 2007. In 2009, the two original Toy Story films will be re-released in 3-D ahead of the 2010 release of Toy Story 3 and a whole new merchandising push.
Along with the revenue push from creative content, Disney is very tightly managed. Margins were very good in every segment except for the studio which faced an adverse mix shift from DVDs to box office.
Ultimately, the outlook for Disney comes down to a battle between the momentum of creative content and tight cost controls vs. a weakening economy. I think it is clear that at least for the next quarter or two Disney is very well positioned to weather the economic storm. On that basis the shares look modestly undervalued for the short-term and exceptionally undervalued for the long-term assuming the economy recovers in the second half of 2008.
Here are brief segment highlights….

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