The Steelers Are Bullish

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A good friend and client is a huge Steelers fan. Being a Buffalo Bills fan I don’t know how I can stand the guy as they are probably going to get their 6th championship and neither the Bills nor any other team from Buffalo has ever won anything, just lots of near misses.
I can’t vouch for the following but my friend forwarded me an article from the Pittsburgh Post Gazette written by Len Boselovic which stated:
Memo to U.S. Treasury Secretary Timothy Geithner: The Pittsburgh Steelers may be the only stimulus package you’ll need.
Wall Street has never had a losing year whenever the five-time Super Bowl champs have played in the big game, generating returns two times larger than average since the Super Bowl was first played in 1967.
Stocks also have outperformed in years a team appears in the Super Bowl for the first time, which is the case with the Arizona Cardinals. But the edge in those years is much smaller than the gargantuan gains that Steelers appearances have produced.

I’ll be cheering for the Steelers Sunday. Ben Roethlisberger and I share the same alma mater, Miami of Ohio. We don’t get too many stars in professional sports so I’ll be waving a terrible towel on Sunday. Hopefully, the market will cooperate again this year with Steeler success and I won’t have to use that towel to wipe away tears from another down year.

Apple Acting Better

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Apple is now up about 10% this year and almost 20% from just before it reported its December quarter. I think there a few things at work and that the stock still has “all clear” for another 60 days. That means I think AAPL can be a market leader and outperform the market over that time frame.
First, the good December quarter and more importantly the acceptably weak guidance reminded investors that AAPL is operating quite well in a tough environment. It also provided downside support for estimates eliminating the risk, for now, that numbers keep tumbling. Second, the great quarter on an operating level was evidence that for awhile at least AAPL can survive and thrive without Steve Jobs. I understand and respect the Jobs risk in the shares but I also think the focus on Jobs led many investors to ignore a talented bench that has been responsible to the incredibly consistent operating performance. With Apple in a product extension mode as opposed to a new product platform mode, the timing is as good as it can be for Jobs to be away.
As for Jobs, I stand by my earlier assertion that form a trading perspective the risk is now more balanced. Most people I talk to do not expect Jobs to be back. If he does come back in June or announces he is on schedule to do so it puts the shorts at risk. That is a change from where we were in 2H08.
The quarter had some blemishes. Most concerning is that iPhone sales were light. Desktops were weak but that is less of a problem given an old product line and market shift to laptops. The issue of margins also still overhangs the 2009 outlook. For now, however, I think the coast is clear. These issues will matter again as get deeper into current quarter and worries arise about current demand trends. I don’t think those worries happen for a couple of months so Apple goes higher.

Good Quarter But Confusing and Lower Gudiance Muddies the Water

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Immediately below are two comments on AT&T’s 4Q08 earnings report. The first one is my immediate reaction writtne prior to the conference call. The second one is my summary of the call. Overall, I would have liked better 2009 guidance but I think the stock offers upside while providing downside protection given the large dividend, stable cash flow, and good balance sheet.
T: Good Quarter, Confusing (Weak?) Guidance
1/28/2009 9:28 AM EST
AT&T’s 4Q looks fine. A bit light but key misses from VZ on sub growth and wireless margins were not repeated. the stock initially traded up but is now about 2% lower. Guidance seems to be the issue.
In 2008, T reported EPS of $2.16 but announced adjusted EPS of $2.81 excluding merger related costs of 49 cents, merger related trust investment losses of 9 cents, and severance charges of 11 cents.
The company states that in 2009 it will no longer report adjusted EPS as merger integration is largely complete. The company then states that 2009 “reported” consolidated earnings and margins are expected to be stable excluding 19 cents in pension expense (no additional pension funding).
If reported 2008 EPS were $2.16 and they will be stable less the 19 cents, that implies reported 2009 guidance of less than $2.00. This seems to be below consensus. Consensus is hard to understand because some of it includes severance, amortization, and pension and some does not.
Clarity on this issue on the conference call will dictate the stock. If EPS are $2.00 then the multiple is a couple of points higher than I thought. I still think T would have limited downside but for the short-term at least the stock would in the penalty box, especially after the mixed report from Verizon yesterday was taken as a negative.
Conference Call Summary
1/28/2009 1:25 PM EST
AT&T reported solid 4Q08 results. Headline numbers barely missed consensus but the underlying growth drivers met or exceeded estimates. EPS came in at 64 cents on revenues of $31.1 billion compared to consensus of 65 cents and $31.3 billion.
Based solely on the quarter, the stock would be trading up but 2009 guidance appears to be 10-20 cents below expectations. The numbers are confusing as T will no longer announce adjusted EPS. Guidance is for “stable earnings” less 19 cents in non-cash pension expense. Reported 2008 EPS were $2.16. Adjusted EPS in 2008 were $2.81 but exclude 50 cents in amortization of customer lists and other one-time items.
For 2009, amortization will be 40 cents and there will be other one-time items but management only classified them as “contingencies” without specifying a specific amount. If we assume it might be 10 cents then 2009 guidance looks like $2.47 (2.16-.19+50). This is the figure for comparison to analyst estimates.
Analyst estimates are $2.74 but I think some of them have yet to include the higher pension expense so let’s call it $2.65. If my $2.47 assumption is accurate, then the guidance is about 7% below consensus.
In the near-term this is clear negative for the stock but is possible that by resetting the EPS level T has cleared the books for 2009 and no longer faces risk of further estimates cuts….

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Negative Reaction to Verizon 4Q Raises Stakes for AT&T

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AT&T is projected to report EPS of 65 cents on revenues of $31.35 billion. A negative reaction to Verizon’s report and some negatives that cropped up took T shares down hard ahead of the report. This may take out risk as the bar is lowered but it also raises the stakes for the “resilience” theme as if T has a slight miss and negative stock price action, investors may decide to that telecom is no longer the place to hide.
Even before VZ reported, investors were going to be focused on slowing wireless growth and negative revenue in Enterprise. VZ’s subscriber growth miss and higher churn and larger than expected decline in Enterprise revenue raise the stakes. VZ also announce higher pension expense despite using smoothing while T will does not smooth and may take a larger than expected hit.
On the positive side, VZ had good wireless data growth, solid overall wireless ARPU, and better than expected growth in its advanced broadband and TV services. T should benefit from all these factors especially with iPhone adding millions of subs over the past two quarters. One interesting thing to watch will be whether VZ’s sub shortfall will be repeated or T did better in market share than expected.
Other key measures to watch are access lines (down sharply but possibly not getting worse), total broadband adds (213,000 estimated), U-Verse TV subs adds (250,000 estimated), and U-Verse Internet sub adds (225,000 estimated). Wireless churn is supposed to be flat at 1.6% with ARPU trending slightly lower near $50.24.
Wireline revenue and EBITDA is projected at $31.4 billion and $10.5 billion. The Wireline segment should be around $17.6 billion in revenues and $5.85 billion in EBITDA. Wireless consensus calls for $13 billion in revenue and 3.9 billion in EBITDA.
Overall, VZ’s report has increased worries that wireless growth will slow more than expected in 2009. T will either confirm that as fact or not. The question is whether the bloom is off for the major telcos. VZ suggests investors are saying yes even if results are decent. T will need to do better to reverse the wavering sentiment.

Sundance 2009

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I went to the Sundance Film Festival for the second year whereI saw eight films over two days. If I had a longer stay I would cut down to three films a day. One of the films was a series of shorts. Of the other seven, my son, a junior at NYU studying music composition and film scoring, and I agreed that six at least lived up to our expectations.
We agreed with the consensus that Push: Based on the novel by Sapphire, was the best of the fest. The film won both the jury award and audience award for U.S, Dramatic films. It is a tough but uplifting story of an overweight, illiterate 16 year old African-American girl growing up in Harlem. Rumor has it that Lionsgate (LGF) is in the pole position to buy the film which would make sense given its success with the black audiences and upscale white audiences with the Tyler Perry movies and 2005 Best Picture winner Crash.
The other film we really enjoyed was Peter and Vandy, a romantic comedy chronicling the relationship of a young couple. The story jumped around chronologically which worked well as you got to know the characters intimately and appreciate both the ups and downs of their relationship. I thought the acting and script were excellent and the depictions of the little things that make up a relationship were very realistic. I hope the right studio buys the film and markets it well as it deserves to be seen by a wider audience.
We also enjoyed, Dare, a teen drama/comedy, Moon, a science fiction story about cloning, and two foreign films, Bronson and Carmo. Moon was sold to Sony and features Sam Rockwell in the lead and Kevin Spacey in a supporting role voicing a robot. Bronson is an adaptation of the violent tale of Britain’s most notorious prisoner and has an incredible acting performance in the lead role by Thomas Hardy.
The only film we felt missed the mark was Toe to Toe, a teen drama about race relations in a Washington DC prep school.
If you love movies, I’d strongly encourage you to take a trip to the Festival. The films are generally quite good and the sense of community among those in attendance creates a very positive vibe.

Apple Comes Through

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I have to admit a sense of great relief following Apple’s December quarter earnings. The numbers were great and guidance for the March quarter was much better than feared. A lot of stocks I like, including Apple, are really struggling and it makes me question my analysis. In this case, I got it right and that increases my confidence in other stocks as well.
What follows immediately is live commentary I posted on Real Money.com prior to and during the company’s conference call on Wednesday after the close. If you click “continue reading” you will find a more formal summary of the quarter and the call. Apple shares should re-emerge as market leaders on rallies thanks to this quarter.
1/21/2009 4:40 PM EST
December Q looks like a clean beat. Macs in line. iPods way ahead and flat with last year. Gotta be the touch. iPhone at 4.363 is a little light.
But is all about guidance. $7.6-8.0 billion revenue and EPS of 90-$1.00. Both of those are below consensus but not nearly as low as many feared. This is good news and is why the stock is trading over $91 as I type.
More after I fill in my spreadsheet.
1/21/2009 4:59 PM EST
With help from my updated spreadsheet…
December quarter is excellent. A clean beat. Revs higher, gross margin way above guidance. I thought this could happen given favorable input costs but very solid ASPs on Macs and iPods also helped. Desktop units light but laptop units better than expected. Apple made its Mac units without giving on price in a brutal environment when everyone else cut prices. Shows the power of the brand. iPod units were a blowout but just up tiny yoy. ASP for iPod is flat. Given speculation on strong touch sales they must also have had good luck with shuffles. iPhone units could have been better but my spreadsheet got the revenue close which gives me more confidence in future predictions.
Om March quarter guidance. Using midpoint on revenue guidance, similar qoq trends from last year on operating expenses, and lifting interest income very slightly form December quarter, I back into gross margin guidance of 30%. there is no regular pattern of qoq gross margin but this will be viewed as conservative.
That last point is what matters. If you assume rev guidance is conservative and give them a boost in gross margins to 32% you are at or above current consensus. In other words, guidance in Apple terms is good. Thus the stock is up another $8-10 bucks as the call is about to start.
1/21/2009 5:21 PM EST
Guidance assumes 32.5% gross margin and a huge step down in interest income. Should have figured that given short-term interest rates. Also, some of gross margin upside comes from a catch up from prior periods. Maybe 100 basis points?
I still believe my comment that in Apple terms guidance is in line with street estimates and a lot better than the whisper or feared.
The rest of my comments will be in my earnings summary.

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Slow Sales at Sundance So Far

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While you are reading this I’ll be heading to O’Hare to hop a plane to Salt Lake City on my way to Park City and the Sundance Film Festival. The Festival started last weekend with many questions surrounding the market for films given the economy and major cutbacks at the Hollywood studios. As though the economy is not bad enough, over the past six months most of the major Hollywood studios have eliminated or folded in their specialty divisions that were focused on independent films. Over the past five years, these specialty studios (e.g. Warner Independent Pictures, Paramount Vantage) became dominant players in independent film as they took the lead in acquiring films at Sundance and other festivals.
Over they years, Sundance has become more and more of a buyers festival. As a result, heading into this year’s festival even more than the usual number of articles have appeared about the state of film buying market. Overall, expectations were low heading into the festival. After reading many fresh reports about the festival so far, it appears that film buying got off to a slow start and has picked up slightly. There have not been any big deals (greater than $10 million so far) with the highest deal in low to mid-millions for Brooklyn’s Finest, a cop drama.
I offer these comments as an insight into the economy and the thinking of companies with great exposure to consumers. Cautious spending is to be expected given the environment but it is also confirmation of what the major Hollywood studios and their parents (DIS, NWS, VIA, TWX, GE) think of the outlook.
If you are interested in following Sundance, both the films and the film buying, Movie City News is providing fantastic coverage at its 10 Days of Sundance section. Special thanks to David Poland for all his efforts on this project and at Movie City News.

Dreamworks Animation is Relative Safety in Media

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There seems to be no place in media to hide as estimates continue to fall and no signs of recovery in advertising or other key revenue drivers is apparent.
One stock that largely avoids the potholes in media is Dreamworks Animation. The company is vulnerable on DVD sales but has no advertising exposure. In the next eight weeks DWA has several potentially positive catalysts.
First, 4Q08 earnings will provide a platform for discussing what could be a decent 2009 with rising estimates possible. 4Q results themselves may not provide a catalyst with slightly below expectations North American box office for Madagascar 2 ($180 million vs. $200 million expected) and risk to holiday DVD sales for Kung Fu Panda. I believe both of these issues are factored into street expectations.
As to 2009 expectations, the first positive is that Madagascar 2 is performing very well overseas. The film is at $380 million and probably has legs to cross to $400 million. This is very impressive given Kung Fu Panda’s $415 million in a weaker dollar environment. 4Q08 international box office is reported in 1Q09 results. I think analysts may be underestimating international Madagascar 2 in their models.
The other catalyst is the March 27th release of Monsters vs. Aliens, the next film in DWA’s release schedule. It is too early to get a read but clips of the film that have been shown to analysts were well received. Their will be a lot of discussion of 3-D related to this film. It is already clear that the number of 3-D screens available will be far short of what was initially expected but I do not expect this to have a material financial impact. What is likely to be real is a pre-opening rally in the shares of DWA something that occurred regularly on past releases including Kung Fu Panda and Madagascar 2.

New FCC Chairman Presents Risk

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In big news for media and telecom, major media outlets are reporting that President-elect Obama will nominate Julius Genachowski to head the Federal Communications Commission (FCC). Genachowski was technology adviser to Obama during the campaign. According to the Wall Street Journal, he put together detailed plans for Obama “that expressed support for open Internet or “net neutrality” protections; media-ownership rules that encourage more diversity; and expansion of affordable broadband access across the country.”
Business interests may be concerned if early reaction from political and creative communities are an indication. Free Press, a media reform group, likes the appointment. So does The American Association of Independent Music, a group representing the interests of indie musicians.
Net neutrality is the big issue. Major networks owners including cable and telcos would are quietly against net neutrality because they want to price access to their networks based on usage. Google and other major online companies are leaders in the fight for net neutrality.
Media consolidation is another big issue. Media companies would prefer an FCC that is willing to allow consolidation. An Obama FCC is not going to go that route but Genachowski may be viewed as worse than average on this issue. Then again, credit markets remain closed and media companies have been penalized for acquisitions even when they were fundable.
Although, I am about as far politically as possible from Karl Rove, one quote of his I always liked was “elections have consequences.” A changing of the guard at the FCC leading to policies that are considered more consumer friendly is just one of the consequences that many business interests may not like.

January 2009 Model Signals

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Northlake’s monthly Market Cap and Style models favor Small Caps and Value for January. As a result, client and personal accounts have a position in the Russell 2000 (IWM or IJR) and the Russell 1000 Value (IWD or IVE). These positions are unchanged from December. In fact, the small cap signal has been in place since the beginning of September and the Value signal has been in place since the beginning of October.
The small cap signal is at its strongest reading since July 2003. Eight of the ten indicators covering a variety of economic, interest rate, sentiment, and technical factors favor small caps. The stronger reading from last month is due to small caps outperforming in December which shifted the technical indicators from neutral to small cap.
The value signal weakened this month and is now a weak signal. Only four of the nine factors favor value over growth but those that do are sending strong signals. One factor shifted from value to growth this month. Advisory service sentiment shifted after sentiment came off an extreme negative reading.
The models worked OK last month….

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