Activision Benefits from Robust Product Pipeline, Shift to Digital

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ATVI announced results that came in above street expectations on the top and bottom line, and raised full year guidance for both as well. The stock reacted positively and broke out of its recent trading range to the upside. ATVI continues to make progress transitioning their business model to focus on high-margin digital sales driving year-round engagement and monetization. This progress is clear, as ATVI’s already large gaming community grew by 25% in the past year. With a robust product pipeline and strong execution of their business strategy, we believe ATVI shares can reach the high-$20s.

ATVI has 2 of the top 5 video game franchises year-to-date in North America and Europe in Call of Duty (CoD) and Skylanders. These franchises, like all of ATVI’s titles, are enhanced year-round with new downloadable content to keep users engaged and to drive additional monetization. The next full-game version of CoD is being developed by Treyarch, makers of the most successful CoD of all time, CoD: Black Ops. ATVI has shifted from a two-year to a three-year development cycle for CoD, providing Treyarch with an extra year to perfect the newest installment.

ATVI has made an aggressive push to enter China, the world’s largest gaming market. This creates a large long-term growth opportunity for the company. Most of ATVI’s top franchises are now available in China, including the recently launched Diablo and CoD Online.

There are several other recently announced and soon-to-be announced titles from ATVI, including reboots of the Guitar Hero and Tony Hawk franchises and the newly announced title Overwatch. In addition, ATVI has seen strong engagement and monetization opportunities from its current franchises including Destiny, Hearthstone, Starcraft II, and Heroes of the Storm. The excitement around ATVI’s new franchises along with downloadable content updates and upcoming full game releases of their current franchises lead us to believe that ATVI will have strong results for the foreseeable future.

ATVI is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  ATVI is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Fairly Quiet at Liberty Media and Liberty Broadband

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It was quarter at Liberty Media (LMCA/LMCK) and Liberty Broadband (LBRDA/LBRDK).  This was no surprise at Media as the slimmed down company is mostly now just a holding company for its 58% stake in Sirius XM Satellite Radio (SIRI).  SIRI had already reported a strong first quarter, including raising full year guidance on a number of key metrics.  The idea behind splitting Liberty into separate Media and Broadband companies was to eliminate the complexity discount and the competition for capital between two different businesses (SIRI for Media and Charter Communications for Broadband).  Thus far, this has not worked for Media, where the discount to net asset value has actually widened somewhat.  As a result, investors were listening closely to Media CEO Greg Maffei for hints at any actions the company might take.  Media has begun to accelerate its share repurchases, something investors would like to more of.  There was nothing new about possibly spinning off SIRI in a tax efficient transaction as Media once did with a similarly large position in DirecTV.  The idea of SIRI buying LMCA shares rather than its own to effectively buy back its own shares at a discount was discussed.  Interestingly, John Malone, who controls all the Liberty entities, seems to be in favor.  In the end, little new is happening at Liberty Media.  The shares will ride higher if SIRI shares lead the way.  Fortunately, SIRI continues to perform very well.

It is probably unfair to 2015 has been uneventful for Broadband.  As the controlling shareholder in Charter Communications, Broadband had a big stake in the now scrapped merger of Comcast and Time Warner Cable.  Charter was a major player in that merger, acquiring and swapping cable systems with Comcast.  Broadband is now a pivotal player as Charter is clearly looking to acquire Time Warner Cable itself.  Before Comcast entered the action, Charter was conducting a hostile takeover of the Time Warner Cable.  Charter is playing nice this time around.  Broadband will have a critical role if a deal is stuck as Broadband needs to maintain its 25% stake in Charter to avoid tax and regulatory complications.  Northlake likes the cable industry and, in particular, likes and trusts John Malone to realize value at Charter through Liberty Broadband.  A friendly merger between Charter and Time Warner Cable offers 20%+ upside for Charter shares.  Broadband shares should follow accordingly.

LMCA, LMCK, LBRDA, and LBRDK are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  LMCA, LMCK, LBRDA, and LBRDK are net long positions in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

La Quinta Driving Towards Capital Returns

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La Quinta Holdings (LQ) reported strong results for 1Q15, beating street expectations on revenue and adjusted EBITDA. LQ raised the low end of their adjusted EBITDA guidance, reflecting management’s confidence that results for the rest of the year will continue to be strong. Shares of LQ responded positively and reached a new 52-week high the day following the earnings report.

One highlight from the report was that LQ made a voluntary debt payment of $65m during the quarter. This is important for our investment thesis as the company moves closer to achieving their goal of reaching 4x leverage and initiating some form of capital return to shareholders. We believe reducing leverage at this pace should allow LQ to announce either a share repurchase plan or a dividend sometime in the second half of the year.

Another positive from the report was that LQ increased its pipeline of new rooms from 17,000 to 17,700, providing a clear path for sustainable growth. Additionally, LQ management noted on the earnings call that even if they completed building all of the hotel rooms in their pipeline, they would still be present in only 70% of Smith Travel Research’s U.S. tracts. LQ competitors are present in 90%+ of Smith Travel Research’s U.S. tracts, leaving the company with many new markets where they could potentially expand and continue to grow.

One concern for LQ shareholders has been how the lower price of oil and gasoline would impact the company, since LQ has a large presence in Texas and other markets where oil-related industries comprise a large part of the local economy. LQ continues to state that they will see a net benefit from low oil and gas prices. One reason for this is that corporate business from oil and gas companies make up a very small percent of total group business for LQ. The company believes that any losses in business from oil and gas companies will be more than offset by increased traffic from other consumers who are benefitting from low gasoline prices as LQ hotels are mostly considered “drive-to” locations.

Overall, our investment thesis remains intact. We believe shares of LQ can continue to climb towards $30 as the company continues to execute well and begins to return excess capital to shareholders.

LQ is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  LQ is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Business as Usual is Good Business at Comcast

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It is back to business as usual at Comcast (CMCSK) and investors have no reason to not like that.  The now scuttled acquisition of Time Warner Cable is definitely a lost opportunity but Comcast retains many strengths.  We always viewed the acquisition as a “nice to have” as opposed to a “need to have.”  Comcast’s model of mid single digit revenue growth, slight margin expansion, and stable capital spending intensity leads to 15% plus growth in free cash flow.  On top of an exceptionally strong balance sheet, management retains many options to drive shareholder value.  We expect steady dividend growth and larger share buybacks to dominate the capital allocation debate through 2016.  At that point, larger acquisition attempts might be on the table under a new administration and FCC.

Often overlooked when analyzing Comcast is the company’s ownership of NBC Universal.  This collection of TV networks, theme parks, and move and TV production studios had a great quarter.  Certainly, NBCU deserves to be valued similarly to its peers such as Time Warner, 21st Century Fox, and other TV network owners.  Putting an industry average 10X EBITDA multiple on NBCU leaves the core Comcast cable business trading at 10-15% discount to its peers.  Peers that are smaller, less profitable, more financially leveraged, and in most case growing more slowly.

Even without the benefit of using what seems to be a lot of excess free cash flow, Comcast shares can rise to themed-$60s just by closing the valuation gap vs. other cable and telecommunication companies.  Using excess financial capacity on acquisitions or share repurchases provides more upside particularly looking into 2017.

CMCSK is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  CMCSK is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

ClubCorp Acquistions Paying Off

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ClubCorp (MYCC) reported another boring but efficient quarter.  Headline results were boosted by the acquisition of Sequoia Golf last year but growth in same club revenue of 2.8% and same club EBITDA of 8.6% were at least as good as expected.  Membership also continues its steady march higher with consistent 1% gains annually.  Northlake was pleased to see the margin expansion indicated by much faster EBITDA than revenue growth.  MYCC is not a business with a lot of operating leverage but it does have economies of scale and a good plan to invest in and “reinvent” clubs it acquires.  We think this should offer some margin upside especially coming off a year of many acquisitions.  Management raised its 2015 guidance primarily reflecting recent single club acquisitions.  More importantly, the company established a long-term EBITDA target of $300 million in 2018.  This equates to a CAGR of 8.4%, quite healthy, and excluding any further acquisitions.

With the recent acquisitions starting to drive accelerated EBITDA growth, we think the shares can continue their strong recent run.  Confidence in the long-term target should be quite high.  This could lead to multiple expansion that has the potential to drive MYCC shares to the upper $20s and beyond.  We have long felt that MYCC should be valued more similarly to lodging companies given the hospitality nature of the business.  Lodging stocks trade at a significant premium to MYCC even after the 15% up move in MYCC over the past six weeks.

One other positive for MYCC is that management remains quite firm that the collapse in energy prices is not having any impact on its concentration of clubs in Texas, including those in oil-centric Houston.

MYCC is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  MYCC is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Disney Remains Driven By Popular Content

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Disney (DIS) reported another great quarter, comfortably beating analyst estimates.  The song remains much the same with the power of Disney’s content engine driving growth through the company’s theme parks, TV networks, consumer products, and film studio.  With a seemingly can’t miss lineup of franchise films including Avengers, Star Wars, Ant Man, and two Pixar films this year, Northlake’s thesis on Disney is still bullish.  History strongly suggests that when Disney gets on a content roll that earnings power and earnings surprises are greater than Wall Street expects.  While the stock’s P-E is at the high end of recent history and expensive compared to its peers, we think more upside earnings surprises lie ahead.  Furthermore, Disney has earned its premium valuation.  Northlake sees Disney rising to the mid $120s based up on a low 20s P-E on what we think could be earnings nearing $6.00 per share in 2016.

If there is one worry about Disney on Wall Street it is at ESPN where the pressure on the cable TV programming bundle is rising and may have reached a tipping point.  EPSN appears well protected to remain in the main bundle for every programming service including news ones like Sling TV, Sony Vue, or the upcoming Apple TV service.  However, ESPN’s economic model is built on being included in every programming package and getting paid by 100 million homes.  The company invests the fees it receives from cable and satellite companies directly into very expensive sports rights (NFL, NBA, MLB, College).  Should the bundle fray sooner and more significantly than we expect, ESPN could be at risk.  Most investors probably do not realize that Cable Networks, driven mostly by ESPN is Disney’s largest single line of business.

For now, ESPN’s place in the bundle seems very secure.  Thus, we remain focused on the content engine driving all the other lines of business form theme parks to Disney Channel to consumer products.  The story here is as good as ever.

DIS is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  DIS is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Transitional Quarter for Liberty Global

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Liberty Global (LBTYK) reported a sloppy set of 1Q15 results mostly explained by difficult comparison based on one-time items.  Management reiterated all of its 2015 guidance for revenue, operating cash flow (OCF), free cash flow (FCF), and subscriber growth.  Nevertheless, these results clipped the stock by 3% and it seems likely that the shares will take a breather until a better quarter is reported that reinforces investor confident about the near-term and long-term outlook.  Northlake’s confidence is not shaken.  We intend to hold LBTYK shares, looking ahead to better news in the second quarter and our long-term FCF based target in the mid $60s.

LBTYK reported adjusted revenue and OCF of 3% and 1%, respectively.  Revenues about matched expectations but OCF fell short. Compounding the miss on financial metrics, subscriber growth came in significantly below expectations as the company added just 68,000 revenue generating units against street estimates for around 300,000.  Tough comparisons against one-time items in the year ago quarter and a difficult in the Netherlands following the closing of the acquisition of Ziggo made the numbers look worse than the reality.  We expect a quick bounce back and management noted that April was a strong month for growth.

After several years of M&A activity including major purchase in the UK, Netherlands, and Germany, LBTYK is transitioning to a period where operations lead growth.  Price increases taken in Germany and rebranding in Netherlands contributed to the weaker results this quarter but should give way to a quick improvement without the distraction of M&A.  Growth in the UK financial metrics was very strong as the company is realizing full synergies from the Virgin Media acquisition.  This provides a taste of what is to come in Netherlands and Germany.  Management also noted early progress on the potentially very high return on building out new homes in the UK.  Similar opportunities may exist in Germany, Switzerland, and other countries.

The shift to stressing operations and the build out in the UK set up LBTYK for accelerating growth in revenue, OCF, and FCF, particularly looking ahead to 2017 and beyond.  In the meantime, a return to mid-single growth in revenue and OCF as soon as the second quarter should allow the stock to move back toward the low $50s.

LBTYK is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  LBTYK is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Mid Cap and Large Cap Growth Remain the Favorites

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Northlake’s Market Cap and Style models are sticking with their recommendations of mid cap and large cap growth.  As a result, client positions that follow the models will remain invested in the S&P 400 Mid Cap (MDY) and the Russell 1000 Growth (IWD) for at least another month.

The Market Cap model moved very slightly toward large cap with one of the internal factors moving from small cap to large cap.  The adjusted advance-decline line made the switch, reflecting the narrow breadth in the market during April.  Despite positive returns generated by the S&P 500 and NASDAQ in April, indices that track small and mid cap stocks were in negative territory.

There was a little more movement in the Style model, which saw five indicators shift their recommendation.  Three went from growth to value, while two moved from value to growth. Despite these changes, the two month smoothed average of the model remained unchanged leaving the growth signal intact.

The three indicators that moved in favor of value all reflect the significant shift in the market during the second half of April when growth stocks came under pressure.  Dollar weakness, rising interest rates around the world, and the sharp rebound in oil prices during April all reversed the trends that had been prevailing for many months.  These shifts in market sentiment also led to one of the changes from value to growth as one measure of risk moved toward growth amid fears about global economic growth.  The other factor turning towards growth indicates that the quick turn in market themes in April was overdone.

Both models are performing well so far this year and since they were updated late in 2014.  However, April was not a great month as value slightly outperformed growth and large cap produced positive results, while mid and small cap indices produced small negative returns.

MDY and IWF are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.