CETV: Macro Outlook Takes Company and Stock Out of Management Control For Now

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Central European Media Enterprises (CETV) reported mixed 4Q08 results excluding impairment charges and currency impacts. Commentary on 2009 was much bleaker than the company had previously admitted but was more or less in line with recent analyst comments and estimates. In fact, Goldman this morning made virtually no changes to its model.
The story on the stock for the short-term is simple: If Eastern Europe continues to implode, the stock is going lower. However, any sign of stability will allow investors to see huge underlying value.
I sold stock for many Northlake clients yesterday as I realized much too late that the possibility exists that the stock could head to $2-3. I really do not believe that will happen but given the stock market and macroeconomic environment the possibility it does is much higher than I previously thought.
The stock is completely hostage to macroeconomic issues. The accelerating deterioration in Eastern European economies and the associated impact on their currencies leaves the company with no control over its revenues. Management has implemented its most draconian budget and will cut costs 20% in 2009 through a combination of headcount reductions and reduced programming purchases. Years of experience with the operating management gives me confidence that cost reduction goals will be met.
Losses in startup markets of Ukraine and Bulgaria obscure still highly profitable operations in other countries. Elimination of these losses, which is possible through shutdown or sale if conditions materially worsen, would enhance enterprise value by several hundred million dollars. Against 42 million outstanding shares, this could add $5-15 to the stock price. Furthermore, stability in Eastern Europe would allow growth to resume and currencies to strengthen. This would allow the multiple to expand again and estimates in out years to rise. This could add another $10-20 to the stock.
For now, the stock will remain pressured by the dire global economic outlook which right now has Eastern Europe at its epicenter. The stock could easily go lower. Assuming the company comes out the other side of this crisis within the 2009/10 time frame, the stock will be much, much higher. Unfortunately, for now, it is hard to assume conditions improving.

Discovery Communicaitons Provides Some Good News

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I finally got something right. Discovery Communications (DISCA) reported another positive surprise (EBITDA +23%, margins +700 basis points) and provided upbeat 2009 guidance. The stock responded by jumping 15%, leaving it within 10% of its mid-September, pre-crash level.
4Q08 benefited from continued strength in domestic and international advertising, ongoing growth in domestic and international distribution fees, and great cost control. Guidance for 2009 suggests these trends will continue with the macroeconomic headwinds taking growth rates to flat to up low single digits excluding investment in the start-up Oprah Winfrey Network. In this environment, especially for media stocks, the guidance is stellar.
DISCA management is doing a great job of managing the business and managing street expectations. If the company can hold on through the downturn it is poised to come out the other side in really good shape. A nice aspect to the DISCA story is that right now results are being driven on a global basis by the well established networks (Discovery, TLC, and Animal Planet) but the potential for phase 2 and phase 3 exists as new sets of networks are rebranded and monetized. DISCA is already having success with Science Channel and Investigation Discovery. Down the road similar value could be created from the Oprah Winfrey Network or currently morose nets like FitTV, Discovery Kids, and Military Channel.
DISCA’s results also bode well for other cable network heavy stocks including Time Warner (TWX), Viacom (VIA), and Scripps Interactive (SNI). DISCA is the best story but the cushion of distribution fee growth and relatively strong advertising spending makes cable networks one of the only investable themes in media.

Sold Dreamworks as Weak Quarter Raises Long-Term Issues

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Despite my hopes that Dreamworks Animation (DWA) had a good set up going into last night’s earnings reports, the stock is going to trade down sharply this morning. Adjusted for a one-time tax benefit, EPS missed estimates due to higher costs associated with new ventures to diversify revenue (TV, virtual worlds, Broadway) and an adjustment to reflect lower ultimate profitability for Kung Fu Panda related mostly to initial estimates for higher DVD sales. I think these trends will be very troubling for investors as they undercut near-term earnings potential with few signs yet that long-term earnings power is going to be enhanced.
CEO Jeffrey Katzenberg correctly noted on the call that not all the news is bad. Kung Fu Panda’s DVD sales exceeded early December guidance by more than 10%. Madagascar 2 DVD sales since the February 6th release date are running strongly. In addition, Coraline, a 3-D animated film from another studio recently released is performing well.
The hope for the stock now is that Monsters vs. Aliens has good buzz leading into its March 27th opening followed by an opening weekend of $60 million and decent legs. I think those things are possible but it is an all or nothing bet that I am not inclined to make. More importantly, the message form the 4Q and 2008 results is that the profit model for even huge box office successes now faces much lower margins.
As a result, I sold all Northlake long positions in DWA despite the additional weakness. In the near-term, I could see the shares slipping as low as 10 times 2009 estimates, which will fall from $1.56 to under $1.50. There is asset value support, especially in a takeover, and the 2010 outlook has several positive catalysts, so this should be a worst case scenario.

Dreamworks Animation Earnings Preview

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Several of Northlake’s long positions report this week beginning tonight with Dreamworks Animation (DWA). DWA has been very weak as the collapse in DVD sales has crushed estimates and compacted long-term valuation. However, the stock may be a good setup for a rebound. Getting past the earnings report could allow investors to look forward where the outlook is more hopeful.
Consensus is for 60 cents in EPS on $232 in revenue. DWA’s earnings are tough to predict due to limited revenue streams against mismatched timing of expenses. The revenue number looks a little high to me while the EPS number seems OK even on lower revenues. EPS estimates were 83 cents when the company last reported which tells me bias on tonight’s report should be for below consensus.
The optimistic case looking ahead is that the company has a movie coming on March 27th, Monsters vs. Aliens, profitable DVD sales on that film and Madagascar 2 later this year, and three films to be released in 2010 including Shrek 4. DWA shares usually perform better in anticipation of movies than in reaction to movies.
The trade is that we are moving into an anticipation period with the stock and estimates reflecting a lot of bad news and negative sentiment.

Monday Media Musings: February 23, 2009

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Here’s the morning after Oscar edition of Monday Media Musings.

The Bull Market Can Found at Your Local Theater

The good news at the box office continues. Based on data form BoxOfficeMojo.com, the top 12 films were 33% this weekend. This leaves the 2009 winning streak intact with every weekend up year-over-year. Year-to-date, the box office is up 19% vs. 2008, and 34-39% vs. 2004 thru 2007. We can never determine what exactly drives the box office (just like the stock market) but strength since early fall 2008 will forever support the thesis that the box office is recession resistant.
Theater stocks seem poised for a good 1Q although the last few quarters form Regal Entertainment (RGC) including last week’s report are a reminder that translating ticket sales to EPS is not as simple as it seems.
The #1 film this weekend was Tyler Perry’s Madea Goes to Jail. With $41 million, the film is easily the best opening for the series which now numbers six films. Madea Goes to Jail is a welcome piece of news for Lionsgate (LGF) following a big miss in its December quarter earnings that dragged the stock down 21% since reporting on February 9th.

Will Sports TV Rights Survive Global Recession?

The first major TV sports right contract awarded during the recession was won by BSkyB (BSY) when it added to its rights for English Premier League football for the next three years. BSY won of the 5 of the 6 game packages for $2.33 billion over 3 years. Setanta, a UK pay TV business, won the 6th package but under the current contract has two packages. Rumors were hot and heavy that ESPN would bid aggressively and win at least one package but the dominant US sports network was shut out. The six packages were broken into 23 games each. On a price per game package, the new deals are virtually identical to the current contracts, a surprising result given the global economic turmoil which has been particularly harsh on the UK. All together, the rights sold for $2.57 billion.
On the one hand, ESPN lost a chance to firmly establish its newly branded ESPN service throughout Europe. However, given the immense cyclical and secular pressures, losing the bidding is probably a positive for ESPN. ESPN’s participation is another reminder that Disney CEO Bob Iger was serious when he said that the company would continue to invest in its brands even as it looked to cut costs.

Domestic Sports Networks Seem to be Holding Value

Sticking with sports, Tribune recently announced it would sell its 25% stake in Comcast SportsNet for $75 million, placing a value of $300 million, or about $60 per subscriber on the entire network. This price matches the sales f similarly sized networks in the Pacific Northwest, Pittsburgh, and the Rocky Mountains in December 2006. Regional sports networks have always been valuable as they attract strong local ratings which attract advertisers. More importantly, the networks are able to get very high monthly affiliate fees providing a recession resistant revenue stream that is usually a solid majority of revenues. The value of regional sports networks can be seen by comparing the $60ish per subscriber values to recent cable networks sales such as Sundance Channel ($17 per sub, May 2008), The Weather Channel ($16 per sub, July 2008), and Oxygen ($12 per sub, September 2007). Thanks to SNL Kagan for all the subscriber data included in this comment.
There is no concentration of regional sports large enough to drive an investment story. The SportsNet sale does, however, provide support for one of the major non-DirecTV assets of Liberty Entertainment (LMDIA). The more secure those values the greater the investment case for closing LMDIA’s 30% plus valuation gap to DTV. A long LMDIA/short DTV investments seems particularly attractive in this bearish environment.

Time Warner Break Up Approved

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Back in late November when Time Warner was trading just over $9, I wrote a column for Real Money explaining Why You Should Own the shares. Today the stock stands at $7.56, down about 16%, a bit worse than the S&P 500 which is down almost 13%. During this time, Disney (DIS) and News Corporation (NWSA) are down 23%, while Viacom (VIA.B) is down 4% and CBS is down 20%.
Since I have been buying TWX for Northlake clients since last summer at prices up to $15, I thought you would be interested in latest update.
Last week, Time Warner received the final regulatory, IRS, and government approvals required to proceed with its separation from Time Warner Cable (TWC). The company followed up yesterday with an announcement that the separation would occur via a pro rata distribution of TWC to current TWX shareholders by the end of the first quarter. With the split set to go, I want to revisit the TWX investment thesis which all along has been based on ultimately owning the new TWX consisting solely of the content assets (cable networks, movie and TV studios, AOL, and magazines).
TWC will take about $12 billion of TWX’s $38 billion in debt and pay a one-time dividend of $9.3 billion to TWX. New TWX will have Net Debt of $12.6 billion upon completion of the deal, about 2 times EBITDA. The distribution of TWC shares will be about $2 per TWX share.
Upon completion of the spin/split, TWX shareholders have approved a 1-for-2 or 1-for-3 reverse split. As of yesterday’s close, TWX’s price adjusted for the separation is $5.74. The Board of Directors believes that a higher stock price makes the shares more attractive to a broader array of shareholders.
The investment case for new TWX shares revolves around two issues. First, how will the company use the $9.3 billion dividend payment? Second, what are the prospects for the remaining business units?
The only ting we know for sure about use of cash is that the company plans to retain the current dividend of 25 cents per share. This will no require the use of any incremental cash but the current yield will rise to 4.4%. Management has talked down acquisitions beyond small, bolt on deals and talked up the “consistent return of cash to shareholders.” I read “consistent return of cash” to mean a higher annual dividend but that does not seem likely in 2009 given the just mentioned commitment to maintaining the current dividend, an effective increase of over 20%. Most analysts are assuming a large share repurchase program covering the next couple of years once the economic and credit environments stabilize. In the long run, acquisitions to beef up the cable networks or video games might be an alternative. While explicit plans for use of cash would be nice, in the current environment, I think a cash heavy, underleveraged balance sheet is bullish….

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Monday Media Musings on a Wednesday: February 18, 2009

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Time for some Monday Media Musings on a Wednesday morning.

Box Office Remains Strong with Time Warner running 1 and 2

The weekend box office was up 36% for the top 12 films keeping alive this year’s winning streak. So far 2009 is up 15% vs. 2008, a truly impressive performance. Time Warner (TWX) got a nice boost from Friday the 13th which opened to a massive and much better than expected $42 million. The film is easily on track to be the best ever in the series. At a rumored production cost of just $19 million and with lots of old DVDs to revive, this is just the type of profitable hit every studio is after. TWX also got a nice hold for He’s Just Not That Into You, the weekend’s #2 film and down a modest 29% in its second weekend.
The sustained early strength in the box office this year is also good news to theater stocks including Regal Entertainment (RGC), Cinemark (CNK), and cinema advertising play National Cinemedia (NCMI).

Private Equity Invests in Bob Marley

A private equity firm is investing in Bob Marley’s legacy. According to the Wall Street Journal, Marley products generated about $600 million in sales annually with most of the products being produced without permission of the Marley family. The family has made a deal with a private equity firm to tighten up licensing. The economics will be a 5-10% royalty, potentially generating $30-60 million in annual revenue to be split among the family and investors. If I had money to invest in Marley I’d do it, the guy remains his massive popularity on a global scale almost 30 years after his death. The Marley legacy also foots nicely with today’s other huge merchandising opportunity, Barack Obama. The lesson here for investors is that major media companies have lots of content that generates extremely high margin licensing revenue if managed correctly. Disney is the runaway leader but look for other studios to do a better job as weakening DVD sales require new ways to generate profits.

Disney Tries Boys Channel

Disney (DIS) is rebranding Toon Disney as Disney CD in an attempt to create a network appealing to boys 8-14 and their Dad’s. DIS has had an incredible success on The Disney Channel with girls themed programming including Hannah Montana and the Jonas Brothers. XD hopes to do the same thing for boys. Pixar’s Cars has been a merchandising juggernaut proving that the boys market exists. According to SNL Kagan, CD reaches 72 million homes. Kagan estimates the network produced $185 million in revenue and $82million in EBITDA for a 44% margin in 2008. Monthly affiliate fees run 12 cents generating most of the revenue. Even if successful, XD will never match The Disney Channel which produces about $1.2 billion in revenue, $700 million in cash, and a 58% operating margin with almost $1 billion in revenue form an 86 cents per month affiliate fee. If XD can close the gap at all, the upside for DIS is real at both the network and through merchandising.

Local TV Stations in For Rough Year

Secular and cyclical challenges for local TV stations were front and center last week after a Wall Street Journal article highlighting the tough times for stations. The major broadcast network owners (DIS/ABC, NWSA/FOX, GE/NBC, CBS) own the largest stations in the major markets while many independent companies including some newspaper companies also own local TV stations. I think the very poor results at DIS and NWSA stations in 4Q08 and awful guidance is what put this issue front and center. Besides the huge challenges facing the auto industry, the largest advertiser for local TV, odd years are highly cyclical due to the lack of political advertising. The major networks envy cable networks which have a dual revenue stream from affiliate fees and advertising. In the next 5 to 10 years that is probably where ABC, CBS,, FOX, and NBC are headed, a transition which would leave the networks without a need for local presence. This whole process is very long-term and is reflected in station stocks via multiple contraction on top of the cyclical and secular pressure on earnings. CBS is most vulnerable due to lack of diversification. TV station groups not affiliated with the major networks include Hearst Argyle (HTV) and Sinclair Broadcasting (SBGI). Magazine publisher Meredith (MDP) owns a bunch of TV stations as does Gannett (GCI).

Monday Media Musings: February 9, 2009

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Monday Media Musings is back despite battling a major technology crash at Northlake. Servers are back and all the backup systems functioned well.

Box Office Booming in 2009

Americans continue to go to the movies. Whether it is a relatively cheap night, a desire to leave their troubles, or just a hot streak of good films from Hollywood, the theory that movie ticket sales are recession resistant continues to gain credibility.
After a good fourth quarter (+1.5%) against tough comparisons, 2009 is off to a great start. The latest weekend was up 47% for the top 12 films. Every weekend this year is up with the year-to-date gain at 18%.Studios have been trying harder to reduce seasonality which partially explains the strength. January and February used to be a dumping ground. This can be seen by the fact that vs. 2007 the box office is up 43%, vs. 2004 thru 2006 it is up 34-37%.
The most direct winners from sustained box office strength are the movie theaters. Regal Entertainment (RGC) has acted surprisingly well since it cuts is dividend and took the pressure off its balance sheet. RGC still has a 7% current yield. Also benefiting is National Cinemedia (NCMI) which began to rally after announcing a good 4Q and providing better than feared guidance for 2009. NCMI is the dominant player in in-theater advertising, one of the few secular growth segments of advertising.
Among the studios, Fox/News Corporation is off to the best start with four of the top ten films of the year, all of which have manageable production budgets that should make them nicely profitable. Fox had a tough year in 2008 which was reflected in the collapse in NWSA’s Filmed Entertainment profits reported last week.

Russians Love Movies

If you think Americans are heading to the movies, get a load of the Russians. Variety recently reported that the Russian box office rose 47% in 2008. Early in the year a strong ruble helped comparison but strength in dollars continued t year end despite the rubles collapse. U.S. studios did well in Russia in 2008 but the #1, #3, and #5 films were all Russian. The best U.S film was Madagascar: Escape 2 Africa which brought in $40 million. To give you some perspective, in the US, Madagascar 2 grossed $180 million. Its total international gross stands at $395 million but should ultimately reach over $400 million. There is no obvious stock market play on the Russian box office but when looking at the Hollywood studios it is important to remember that box office is growing outside the U.S. and often represents more than 50% of a film’s total gross.

Digital TV Transition Delayed Until June

After a false start in the House of Representatives, the plan to delay the transition to all digital broadcast TV was approved on its second vote. This is a slight negative for the major cable and satellite TV companies. There may be 6-7 million homes that do not subscribe to cable or satellite and will lose their TV signal in June unless they purchase a converter box of subscribe to a multichannel service. The delay means more of these homes will opt for the converter reducing the opportunity for new subscriptions. The numbers are not huge but in an environment of intense competition, consumer cost cutting, and growing access to and fears about watching TV on the internet any boost to TV subscriptions is helpful. Comcast and Time Warner Cable are probably the biggest losers.

Live Nation and Ticketmaster Discussing Merger

The two giants of the concert business (LYV and TKTM) are discussing a merger. LYV is mostly in the concert promotion and venue ownership business while TKTM dominates online ticketing. LYV has launched its own ticketing service representing a serious threat to TKTM. Both companies are attempting to diversify to provide more services to bands and concertgoers. Concerts have become very important to bands as revenues form albums have suffered from free, illegal digital downloads. This merger is gong to face serious scrutiny in Washington as it will eliminate competition in ticketing. TKTM is already controversial due to its high ticket fees. Artists may not like the merger either as they do not want to be beholden to a single entity for touring. Bruce Springsteen has already come out publicly against the merger. Analysts think the deal could be good for both companies but I am very skeptical any deal can get regulatory approval.

Both Dreamworks in the News

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Dreamworks is in the news. First, Dreamworks SKG, the privately held, live action movie studio that is home to Steven Spielberg, is changing plans and will use Disney (DIS) as a distribution partner as opposed to Universal Pictures (owned by GE). Second, Dreamworks Animation (DWA), the publicly held animation company, was the subject of a lengthy positive article in the New York Times.
To clear up any confusion, SKG and DWA are completely independent with the exception of overlapping shareholders (Spielberg, David Geffen, and Jeffrey Katzenberg). The news stories about SKG have absolutely no impact on DWA.
The SKG news does matter to DIS, however. I think it could be a modest positive. DIS has sharply reduced its own productions to its core family franchise, both animated and live action. The SKG deal gives DIS another 5-6 adult films per year to distribute and brings the prestige of having Spielberg as a partner. Reports indicate DIS may invest up to $400 million in SKG which should be recouped profitably through the distribution fee (8-10% of box office). Usually these deals give the distributor payment off the top, directly from gross box office receipts, generally producing a modest but consistent profit stream. DIS is strong financially despite its cyclical and secular challenges so the company is in a position to invest while other studios (NWSA/FOX, Warners/TWX, Paramount/VIA, Sony, Universal/NBC) have parent companies who need to preserve cash. On last week’s conference call, CEO Bob Iger indicated DIS would its financial strength to invest and build the company for the long-term. SKG is not a huge deal but I think it is a good example of what Iger was referring to.
As for the article about DWA, I think it provides a balanced view that leans positive and supports my thesis that DWA is uniquely positioned among major media companies as insulated from the some, but not all, of the cyclical pressures currently buffeting the industry.
DWA reports on 2/24. Estimates have dropped sharply due to weak DVD sales at Christmas but I think the lagging performance of the stock reflects this fact. Slowing sales of tickets for Shrek The Musical on Broadway have also contributed to the lagging share performance. I think the earnings report and call will clear the stage for a rally into the March 27th release of Monsters vs. Aliens. Insider buzz on the film is good and the stock has rallied into movie releases in the past. I think DWA is a good long side trade in the current market environment.

Time Warner: Relatively Good Earnings But Murky Outlook

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Given the circumstances, Time Warner (TWX) reported decent 4Q08 results and provided better than expected guidance. However, to be perfectly honest, there are so many charges and related future cost savings that it is very difficult to tell whether guidance for “about flat” results in 2009 fairly reflects underlying operating trends. I fear that guidance may slightly overstate fundamentals. That said, relative to peers TWX is performing quite well. Even if 2009 operating trends are actually slightly down, which is I think is the reality, the other big cap media conglomerates are looking at operating income declines of at least 10-20%.
TWX benefits from the fact that it has no exposure to local advertising and broadcast television. It has troubled business in AOL and magazine publishing but these are smaller business relative to the cable networks and film studio. Both the larger divisions look like they will enjoy small up years in 2009.
The best piece of news out of the quarter is that the dividend will remain unchanged when the Time Warne Cable split occurs. When TWX goes ex-dividend for the split, the share price should drop by about $2. This means the dividend is effectively increased by over 20%. The new current yield will be will be about 3.5%. Management indicated that the dividend would rise with free cash flow. With tight controls on capital investments I think a dividend increase for 2010 is likely assuming business conditions do not get considerably from today. Management also indicated that it was lowering its long-term target for balance sheet leverage and would be below the target for the foreseeable future. They also talked down acquisitions. This means that share repurchases are likely to resume once economic conditions stabilize.
4Q results at the operating level were in line with recently lowered estimates….

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