Mixed Results for Virgin Media

/0 Comments/in /by

Virgin Media (VMED) reported mixed 2Q11 results. Financial performance matched expectations as revenue rose 2.2% and EBITDA gained 6.1%. The disappointment was on the subscriber side as overall subscribers fell slightly. Losses were seen in video, phone, and high speed data. Gross additions were not too bad but churn picked up. VMED’s leading broadband and video platform is constantly improving the customer mix and driving subs to spend more money on services, driving revenue per subscriber higher so that modest growth is achieved even when subscribers are flat to slightly lower.
The big question for VMED is whether the poor subscriber performance is merely a function of the weak UK economy amid strict government austerity. If so, the story has not really changed and VMED’s superior competitive positioning will reignite sub growth and sustain long-term financial performance once the economy improves (4Q11 or 1H12). Management is showing great confidence in the company by announcing a much larger and sooner than expected new share buyback program. The share buyback is quite accretive on a per share basis as 12% of the current shares outstanding will be retired in the next 18 months.
I suspect that 3Q11 results will look quite similar to 2Q. Wall Street worries a lot about subscriber numbers for cable companies so I expect the stock to be sluggish for another few months. However, the aggressive share repurchase should support the shares and limit downside.
I have great confidence in VMED’s management team. Upgrades to the network and software interfaces give VMED the fastest and most reliable internet offering and the leading next generation cable TV product. Unfortunately, right now, those competitive advantages are only enough to hold the ship steady in stormy economic waters. Calmer seas lie ahead so holding the shares is the best option. Mid-$20s represents an excellent point for those who are not long VMED.
Disclosure: Virgin Media is a net long position in the Entermedia Funds. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in the Funds’ investment management company, and has personal monies invested in the Funds. Virgin Media is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor.

Another Apple Blowout as Emerging Markets Lead

/0 Comments/in /by

Apple reported another blowout quarter. While that is never surprising, there was some reason to be concerned going into the quarter. Supply constraints have left uncertainty about the true level of iPad demand. Verizon iPhone sales have been good but not great. Pending product transitions including the new Lion operating system and iPhone5 could have served to slow demand. Alas, none of the worries were warranted. Massive upside in iPhone and iPad unit shipments and better than expected margins drove EPS to $7.79 vs. the consensus expectation of $5.85. My own spreadsheet was dictating $6.20.
The only issue that came up on the conference call or in the press release was guidance for the September quarter. Apple guided to EPS of $5.50 on revenues of $25 billion against consensus of $6.03 and $27.7 billion. Given that Apple’s guidance has become a running joke, this is not a major concern. However, I have noticed that Apple shares tend to respond in the short-term to the guidance. When guidance is in line to ahead of consensus, the stock responds positively and vice versa. I think that the subdued reaction today to Apple’s earnings last night is probably this relationship in action.
Working backwards from management comments on the conference call about iPad, iPhone, and iPod trends, I think guidance assumes iPhone 5 does not ship until the December quarter. Guidance also reflects the newly announced revenue deferrals across the product lines related to Lion and iCloud. Analysts are not lowering their estimates for the September quarter and are dramatically raising estimates for 2012. I don’t really care whether iPhone5 ships in September or October as the demand is clearly going to be sky high.
One other takeaway from the report and conference call is that Apple’s business in emerging markets, most definitely including China, is booming. This geographic segment grew 247% last quarter and represented 22% of sales. In China alone, management indicated revenues were up six times from a year ago. While a lot of focus remains on iPhone vs. Android in the U.S. and the level of demand for iPhones at AT&T and Verizon, the real story is how well iPhones are selling in emerging markets. The bull case for Apple has always been relatively low market shares in very large and growing end markets defined by product. We can now expand the addressable end markets dramatically to include geography, specifically emerging markets.
I remain bullish on Apple. I think there is a good chance that fiscal 2012 EPS will exceed $35. Apple has $81 in cash today on its balance sheet and should have around $110 by this time next year. Put a 15 P-E multiple on $35 in earnings and add $110 in cash and you arrive at a target of $635, still more than 60% above current levels.
Disclosure: Apple is a net long position in the Entermedia Funds. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in the Funds’ investment management company, and has personal monies invested in the Funds. Apple is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor.

Google is a Growth Stock Again

/0 Comments/in /by

The most important takeaway from Google’s (GOOG) second quarter 2011 results is that GOOG is still a growth company. This means that earnings in the future will be higher than Wall Street expects for a longer period of time. In turn, investors will now pay a higher P-E multiple for GOOG. These basic facts explain the immediate 12% positive revaluation of the shares after the company reported.
It may seem odd to many but Wall Street has been very concerned that GOOG is a mature company facing a steadily declining growth rate. Parallels could be drawn to Microsoft or more recently Cisco Systems. The bearish thesis is that desktop search is mature and other revenue streams like mobile search, display, and YouTube were too small and unlikely to ever be profitable enough to reaccelerate overall corporate growth. Much of this concern emanated from competitive inroads made by social media, in particular, Facebook.
Going into the quarter, the street had been lowering estimates and writing cautiously about 2Q search trends as several large search consulting firms indicated the quarter was showing less than expected growth. The stock declined sharply as this exacerbated concerns that growth was slowing and the P-E multiple continued to compress.
The stock did stage a big rebound beginning two weeks ago when the company introduced Google +, its latest entry into social media, to good reviews. The stock gains accelerated as user growth at Google + was much faster than anyone anticipated. This was a hint of what was to come if the earnings changed the story arc from “mature” to “growth.” Google + gave people hope again and while it will not have any earnings impact for years, it improved the psychology and the P-E multiple.
The earnings clinched the growth meme by showing that despite very heavy investment in operating expenses, GOOG is still able to grow the bottom line rapidly. Revenues rose over 30% and even with margin pressure from expenses, operating income grew over 20%. Key operating metrics such as number of searches and revenue per search came in at the high end of expectations, reducing fears about GOOG’s most important business. Although no specific numbers were provided, the conference call strongly suggested that mobile search, display ads, and YouTube are witnessing accelerating growth. In other words, the investments are paying off.
Finally, the conference call went quite well, especially Larry Page’s comments. He was in charge, handled much of the call, and took lots of questions. One analyst said it sounded like he had just graduated from an MBA program. That was meant as a compliment. Page focused on the company’s growth initiatives but made clear he understood and the company took seriously the expense management. This was very reassuring as the ease with which GOOG has been criticized over the past several months is directly related to lack of confidence in senior management stemming from the abrupt senior management shakeup.
Street estimates for 2011 and 2012 are now rising. Next year is looking like $45. I think the stock can trade at 15 times that number now that GOOG is back in favor as a large cap growth stock. By the end of 2012, GOOG could have over $150 a share in cash which this simple target calculation ignores, making it conservative.
Heading into the quarter I was nervous being long GOOG for the first time ever. Exiting the quarter, even after the stock popped 12%, I am very comfortable being long and expect the stock to be significantly higher over the next six to twelve months if the market provides just a little bit of help.
Disclosure: Google is a net long position in the Entermedia Funds. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in the Funds’ investment management company, and has personal monies invested in the Funds. Google is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Microsoft is held by select clients of Northlake. Cisco Systems is held by select clients of Northlake and in Steve’s personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor.

Mid Cap and Value Still Reign

/0 Comments/in /by

For the seventh consecutive month there were no changes to the signals from Northlake’s Market Cap and Style models. Mid Cap and Value continue to be favored. As a result, client positions in the S&P 400 Mid Cap (MDY) and the Russell 1000 Value (IWD) will be maintained for another month.
The lack of change to the signals for this long is unusual but no unprecedented. The Market Cap model typically changes signals every four to six months and the Style model normally changes every five to seven months.
There was little movement in the underlying indicators of the Market Cap model, which remains right in the model of the range that favors Mid Cap. However, the Style model saw two indicators shift in favor of growth. Any further shifts in specific indicators in July could change the signal from value to growth for August.
The two indicators that shifted toward growth this month were insider activity and trend. The insider indicator measures net buying by insiders of stocks in growth and value industries. Over the past few months it has shifted decisively toward growth. The trend indicators measure recent relative performance of value and growth indices and are picking up the relative strength in growth stocks over the past few months. In reality, it has been weakness in value stocks that is driving the shift. Bank, industrial, and industrial stocks fared poorly in the market correction when investors lost confidence in the economic recovery and worried again about bank balance sheets in light of renewed problems in Greece.
In June, the model signals were inaccurate. Small and Mid Cap stocks led the market lower so MDY trailed the return of the benchmark S&P 500. However, year to date, the Market Cap model has added significant value with MDY gaining almost 8% versus 5% for the S&P 500.
The Style model’s value signal produced a return slightly worse than both the S&P 500 and small cap Russell 2000 in June. For the year, the Style model is now slightly worse than the market and the Russell 1000 Growth. Neither gap is large, however. This lagging performance for value stocks is what the trend indicator discussed above has picked up.
Disclosure: MDY and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve Birenberg is sole proprietor of Northlake, an SEC registered investment advisor.