ClubCorp Story Still Intact

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ClubCorp (MYCC) shares were cut in half in the first 8 weeks of 2016 as investors grew concerned about the company’s exposure to Texas.  Approximately 30% of MYCC’s country clubs are in Texas with 8% in Houston.  A second part of the problem was an extremely negative research report issued by a broker that emphasized the Texas worries and also noted that the company’s growth by acquisition strategy was faltering.  We were shocked at the decline in the stock price, which continued even after the company preannounced 2015 full year results that were in line with Wall Street estimates.

MYCC reported its complete 4Q15 results last week and provided guidance for 2016 and we were pleased to learn that the overall story remains intact.  Management provided extensive detail on the results of the Texas clubs and also revealed incremental data on its acquired clubs.  These additional details have firmed up investor confidence and undercut the bear case and the stock has begun to recover, regaining about 1/3rd of this year’s losses in just a few days.  Even the bearish analyst threw in part of his towel, upgrading MYCC shares from Sell to Neutral.

Regarding Texas, MYCC noted that in the fourth quarter, Houston clubs saw revenue and operating cash flow decline less than 1%.  Furthermore, Texas-ex Houston grew in the mid-single digits, at least as fast as markets in Georgia, Arizona, and California.  Management also provided data that revealed any slowing in Texas that took place during any part of 2015 was much more likely to have been caused by extremely heavy and unusual rainfall than energy-related memberships or club spending.

On acquisitions, management showed year by year results of acquisitions since 2010 supporting the high cash on cash returns from the initial purchase price and the “reinvention” capital committed to upgrade the clubs.  The company also explained that the expensive debt raised in December was not done out of desperation but rather to finance a deal to acquire a multi-club portfolio that later fell through.  Liquidity is now over $200 million, enough to support a normal 2016 acquisition slate.

Despite the excellent return on acquisitions, the Board chose to raise the hurdle rate for future acquisitions and simultaneously initiate its first even share buyback.  The message is clear:  the stock price is way too cheap and the company can buy itself for an even greater return than all but the very best acquisition opportunities.  As investors, we appreciate the discipline the Board is taking with this action.

Guidance for 2016 brackets the current consensus for revenues and operating cash flow.  Management reiterated 2018 guidance of $300 million in EBITDA although may have slightly qualified its language.  This is not particularly concerning considering that even after the recent recovery, the stock price still implies a significant shortfall for 2016 and the 2018 target.

Northlake feels MYCC can easily recover to over $15 as recent concerns continue to moderate.  A stable economic and operating environment for the U.S. economy and MYCC could rally the stock back to $20 later this year.  We believe the management team is very strong and support from the share buyback and very healthy 4% dividend yield will make the wait for much higher prices worthwhile.

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.

 

 

Liberty Media Making Moves to Drive Value

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Liberty Media (LMCA/LMCK) reported quarterly results last week and as usual the focus was on the company’s portfolio of assets.  Liberty trades in relation to its net asset value rather than its earnings and cash flow like most stocks.

There were three interesting pieces of news from the press release and conference call.  First, Liberty settled its long running lawsuit against Vivendi and received $420 million in after-tax cash proceeds.  We had assumed Liberty would receive about this amount of proceeds but not until later this year.  Given the current stress in global financial markets, we are pleased that Liberty has extra cash to invest.  This is exactly how the company has built asset value in the past.

Second, management indicated that the company’s plan to split into three tracking is proceeding and could close by the end of April.  Liberty has recently traded at a larger than usual discount to its underlying net asset value.  Management has decided to create separate tracking stocks for its majority ownership stake in Sirius XM Satellite Radio (SIRI) and its full ownership of the Atlanta Braves baseball team.  The third piece will be the remaining Liberty Media that is composed mostly of 35% of Live Nation Entertainment (LYV) and cash and other liquid assets.  With each new stock reflecting a simple underlying asset base, there is a little reason for the discount to NAV to persist.  Furthermore, strategic flexibility is enhanced to use each asset to create further value.

This last point is directly related to the final interesting tidbit we culled from the company’s conference call.  In response to the final analyst question, CEO Greg Maffei provided the firmest indication yet that Liberty will eventually own 100% of SIRI.  SIRI is aggressively buying its own stock, a wise investment in Northlake’s view, while Liberty is not selling.  As a result, in just a couple of years, Liberty’s ownership has gone from 50% to 62%.  We suspect that Liberty probably wants full control of SIRI’s high free cash flow for the same reason that we like Liberty receiving the Vivendi cash settlement:  get access to firepower when the markets are in flux.

Northlake continues to think both SIRI and LYV are significantly undervalued.  As a result, LMCA/LMCK are undervalued as well.  We like the strategic direction at Liberty and expect the upcoming split into three companies to be a catalyst for the shares.

LMCA and LMCK 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 and LMCK 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.

Liberty Global Clears The Air for Renewed Growth

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Following a rough stretch that management described as a perfect storm, Liberty Global (LBTYK) had some good news today.  First, 4Q15 earnings met expectations with 4% adjusted revenue growth and 6% adjusted operating cash flow growth.  This marked the second consecutive quarter of accelerating growth after a below par 1H15, exactly as management had promised.  Executing on promises should help damaged management credibility and increase confidence in the second piece of good news.  For 2016, management issued guidance for 5% and 7% adjusted revenue and operating cash flow growth, respectively.  Both figures were in line with current Wall Street analyst estimates and likely a bit ahead of investor fears following the slow first half of 2015 and 25% drop in the stock price in the past few months.  Long-term guidance for even faster growth, 7-9% EBITDA growth was also issued.  Finally, LBTYK announced it had entered into a joint venture with Vodafone in the Netherlands whereby the companies would combine Liberty’s cable network business with Vodafone’s industry leading mobile network business.  Vodafone had announced a few weeks ago that discussions were underway.  Projected synergies in the deal were ahead of expectations and the terms of the deal seem highly favorable to LBTYK.  LBTYK’s Ziggo business in the Netherland sis being valued at 11X EBITDA, a large premium to the current valuation for the whole company near 8X.  Additionally, LBTYK will get a $1.1 billion cash payment from Vodafone to equalize value contributed to the JV.

Investors are cheering today’s news with LBTYK shares rising over 5% initially.  The perfect storm management alluded to includes currency weakness, rising competition, a poorly received acquisition in Latin America, a misstep in Germany in early 2015 with price increases, and being a highly leveraged company in a market suddenly fearful of debt.  We believe that today’s news on earnings and Netherlands has reset expectations and cleared the air.  Merely executing on 2016 guidance should be enough to move the shares back to $40, up 20%.  Any easing in the macro environment or improvement in credit markets provides additional upside.  Further accretive M&A is likely given the outsized synergies in the new joint venture.  Finally, should the new build activity in the United Kingdom, Germany and elsewhere meet expectations, long-term growth in revenue, operating cash flow, and free cash flow will accelerate.  LBTYK shares lost their way over the past few months but the long-term record of the management team and stock price is secure.  Northlake thinks the bottom is in with plenty of near-term and long-term upside ahead.

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.

 

Patience To Be Rewarded for Well Positioned CBS

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After a year of negative operating income growth and falling earnings estimates, CBS is back on track.  The recently reported 4Q15 showed operating income growth of over 6% and for the first time in nearly two years, analysts maintained their earnings estimates.  2016 sets up very well for CBS with a stronger national TV adverting market, political and Olympic ad spending, the just announced better than expected growth in high margin retransmission revenues, and a shift form losses to profits for CBS’s new over the top services, CBS All Access and Showtime OTT.

The combination of CBS’s negative growth in 2015 and the collapse in media stock valuations leaves the stock at just 11x earnings as the company enters a period of accelerating growth.  Furthermore, the main issue troubling media stocks, cord cutting and cord shaving, has minimal impact on CBS.  CBS owns no cable networks.  Showtime is a premium network with different economics and is growing is subscriber base and launching an OTT product.  Showtime is akin to HBO and Netflix not a basic cable network like ESPN or Food Network.  The main CBS Network is going to be part of any bundle purchased given its broad reach and popular sports and entertainment programming.  Management had good foresight to control the rights to its programming, enabling the launch of CBS All Access as both a growth vehicle and a hedge against cord cutting and cord shaving.  With one of the best creative management teams and the #2 TV production studio, CBS has the potential for success in its digital ventures.

Northlake sees CBS’s resiliency and 2016 growth outlook as undervalued by investors.  We expect nerves to calm and the multiple to expand to a more reasonable 13X,leading to a price target in the low $50s, about 25% above recent prices.  It has been a painful ride and we were probably overly patient with this great management team, led by Les Moonves, but with an improving outlook now is the time for our patience to be rewarded.

CBS 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.  CBS 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.

Steady as She Goes At Comcast

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Comcast continued its long string of good quarterly earnings reports with the highlight being the best cable TV subscriber growth in nine years.  Yes, for all the worry about cord cutting, Comcast added subscribers in 2015.  And growth in broadband subscribers, where Comcast and the cable industry maintain dominance with the fastest network continued unabated.

Comcast grew revenues and EBITDA in mid to upper single digits and free cash flow in the double digits in 2015.  We see similar growth in 2016 as the company has invested wisely in its network and TV business.  Fastest internet speeds remains a strong draw for cable and enables moderate prices increases for broadband.   Comcast’s X1 box is now being very widely deployed and the software interface is best in class.  Comcast has also invested heavily in program rights allowing subscribers to access full currents seasons of almost all major TV shows.  Additionally, Comcast’s apps enable easy viewing in any location or any mobile device of live, on demand, or recorded programming.

The cable industry, led by Comcast, is in pretty good shape despite all the concerns about Netflix and cord cutting.  Satellite companies do not offer broadband technology and while AT&T purchased DirecTV, so far subscriber gains are just being passed around among the two companies.  Cable also benefits from being a domestic only industry when most of issues plaguing Wall Street emanate form overseas.

Comcast does own some cable networks in its NBC Universal division.  These networks comprise only about 15% of total operating cash flow, however.  The rest of NBCU is made up high performing theme parks, the most successful film studio in 2015, and the NBC Television Network which is staging a nice turnaround.

Backing out NBCU at a depressed multiple of 8X its cash flow leaves the cable business that dominates Comcast trading for 6.5X operating cash flow.  This is way too cheap for a business growing steadily in the mid upper to upper single digits and throwing off enormous free cash flow.  Comcast has used its cash flow wisely leaving it with a very strong balance sheet, another positive when global markets are nervous.  We see Comcast trading up the mid-$60s, 20% of recent prices, as investors grow to appreciate its attributes.

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.

 

Activision Blizzard Hits a Bump in the Road

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Activision Blizzard, Inc. (ATVI) reported disappointing quarterly results with revenue, earnings, and guidance all worse than expected. The shortfall in the fourth quarter was driven by unfavorable foreign exchange rates and weakness in ATVI’s casual franchises on consoles, Skylanders and Guitar Hero. The underwhelming guidance for next year was mainly due to a delayed release date for Destiny 2. ATVI fell sharply in response to the weak results, but we believe the decline is overdone and the stock can trade back into the mid-$30s.

ATVI guided to FY16 EPS of $1.75, well below street expectations of $2.05. However, the guidance was not as bad as it initially appeared. When you include the $0.15 impact from moving the release date for Destiny 2 from FY16 to FY17 and the $0.06 impact from compensation changes for incoming KING employees, the adjusted $1.96 EPS compares much more favorably to street estimates. Additionally, ATVI tends to guide conservatively and regularly outperforms their estimates. For example, there are no synergies from the KING acquisition included in the guidance even though it is likely that ATVI will be able to find cost savings and other upside from the deal. Therefore, we believe it is possible ATVI could earn more than $2 per share in FY16.

ATVI’s core franchises performed well in the quarter and throughout the year. Call of Duty and Destiny continue to show impressive user engagement and strong sales of add-on digital downloadable content (DLC). ATVI also benefitted from high-margin digital sales which grew 20% compared to last year; digital sales accounted for 54% of total revenue and surpassed the less profitable physical retail sales for the first time. We expect this trend to continue with new DLC for Call of Duty, Destiny, and many other titles coming soon.

Looking forward, we believe ATVI has several exciting opportunities to drive growth. This spring, Blizzard will launch its first major new franchise in 17 years, Overwatch, which currently has 8 million people playing the beta test. A new World of Warcraft expansion will launch in June, following the release of ATVI’s first Warcraft film. ATVI’s foray into media production will also lead to a new animated Skylanders TV show. Many of ATVI’s games already have strong e-sports communities, and the acquisition of Major League Gaming will continue to drive upside in this exciting area. Finally, ATVI will continue its geographic expansion following strong growth in China now that most of its major franchises are available in that market. ATVI plans to take advantage of the opportunity to sell their products in virtually every country in the world on every type of device. Although we were disappointed with the most recent quarterly results, we believe the long-term investment thesis in ATVI is intact.

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.

ESPN Concerns Trump Star Wars and Theme Parks For Now

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Disney (DIS) reported excellent December quarter earnings driven the massive success of Star Wars.  Star Wars not only drove the studio but also boosted consumer product sales.  Theme parks also had a very strong quarter.  Despite a big beat to consensus EPS estimates, investors focused on slightly disappointing growth in affiliate fess earned by DIS’s cable networks.  This is primarily ESPN where there is great concern that cord cutting or cord shaving is causing ESPN to lose subscribers.  Given that ESPN is locked into very high cost sports contracts out to 2020-2022, margins could get squeezed badly.  This issue was first raised in August when Disney announced that ESPN had lost about 3 million subscribers.  Today, it remains the controlling issue for the DIS shares and this seems unlikely to change in the near future.

Northlake believes these concerns are real but that investors have overreacted.  DIS is well protected in the near-term by its contracts with cable and satellite companies (MVPDs) that have required minimum carriage.  Additionally, DIS management appears to be showing some flexibility to work with MVPDs and Over The Top providers to design smaller channel packages that include ESPN.  Management also feels confident in their ability to extract higher per subscriber fees in future negotiations.

Away from ESPN, everything is going well for Disney.  The company is in the midst of fantastic content cycle using its Star Wars, Marvel, and Pixar franchises.  Additionally, the opening of the new theme park in Shanghai in June will allow the company to get beyond the upfront opening costs and heavy capital spending.  Theme Parks, the film studio, and consumer products should allow DIS to grow earnings even as cable networks face a couple of slow growth years starting in 2017 when the much higher costs for the new NBA contract kick in.

DIS is the sort of quality company that investors find attractive when the market is in turmoil.  We expect the strong content cycle to continue to power better than expected results in 2016.  Concerns about ESPN will not be put to bed right away but with the stock at 15X 2016 earnings, we think the shares offer value and could trade back to $100-110 in a stable market environment.  We are willing to give DSI the benefit of the doubt for now and plan to continue to hold the stock for Northlake clients.

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. 

 

Facebook Offers Opportunity After Good Earnings

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Facebook (FB) is a new buy for Northlake clients. The social networking giant operates its original namesake product, as well as other widely used and fast-growing services including Instagram, Messenger, and WhatsApp. The company’s most recent quarterly results demonstrate strong user engagement and strong ad sales trends. This momentum is largely due to FB’s successful transition from desktops to smartphones as the key platform for its users. The company is also benefitting from a rapid change in the advertising industry, where ad dollars are shifting from traditional print and TV ads to digital ads. FB continues to strategically and significantly invest in its business to drive long-term growth. The cost of this investment has been a headwind but recently issued guidance for 2016 suggests management is being careful with its spending.

Aside from strong momentum on the original Facebook service, we believe that Instagram will grow to become a meaningful contributor in 2016. According to management, 98 of the top 100 advertisers on Facebook are also advertising on Instagram. This will likely be a strong growth driver in the near term. Other near term growth will come from improved measurement of the impact FB digital ads have on consumers, allowing advertisers to better understand the real value of ads on FB’s services.

Looking longer term, FB is developing Messenger and WhatsApp. Each of these services has great potential for future monetization, but FB management has chosen to focus first on driving user growth and improving the user experience. This is consistent with the way FB developed and monetized Facebook and Instagram.

FB management is also investing in virtual reality, which they believe could eventually be the next big platform in computing. The first version of the Facebook-owned Oculus Rift virtual reality headset will ship in July 2016, but management has cautioned that adoption of virtual reality will likely be slow. However, there is potential for VR to be another large growth opportunity longer term.

Facebook faces the same risks as many global companies today, including unfavorable foreign exchange rates impacting revenues and earnings and other macroeconomic uncertainties. However, we believe that FB is extremely well managed and well positioned for explosive growth.  The shares could easily reach $140 later this year as investors look ahead to over $4.00 in earnings in 2017, another year of over 30% growth in earnings.

Core Google Shows Accelerating Growth

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Alphabet (GOOG/GOOGL) reported excellent 4Q15 results.  Revenue trends accelerated for the second consecutive quarter and operating profit margins expanded.  It appears that Google is finally benefitting from the transition to mobile internet.  There have been long standing concerns about whether search on mobile could maintain its high growth rate and profitability.  The worries related to a greater use of apps versus mobile web and the ability to get good pricing for search ads.  Google has now shown better than expected search volume without further deterioration in search pricing for two straight quarters.  This strongly suggests that the shift to mobile is not a headwind and could finally be a tailwind, as it has been for Facebook.

This was the first quarter where Alphabet broke out revenue, cost and capital spending between its core Google business and what it calls Other Bets (self driving cars, Google Fiber, Verily, Nest, weather balloon internet, etc.).  Since the company came public and especially in the last few years when spending on the many non-core initiatives seemed to accelerate, Alphabet has only reported consolidated results and offered little detail on the amount of investment going to the Other Bets.

The news on this front was also good for the stock even if losses in 2015 at Other Bets of $3 billion were higher than expected.  It is a bit perverse but larger losses at the Other Bets mean that profitability of core Google has been higher than expected, and it is core Google that drives the valuation of the stock.

The bottom line is that a very strong quarter for core Google suggests the growth and profitability outlook remains bright.  Maybe more importantly, the company seems to finally be benefiting from the transition to mobile, undercutting a key risk to the long-term growth profile of Alphabet.  Finally, the new CFO has initiated a more shareholder friendly culture that includes better cost controls throughout the company, greater accountability, more transparency in financial reporting, and return of cash to shareholders via share repurchases.

Alphabet’s accelerated growth is likely to hold for several more quarters until comparisons get more difficult.  This should allow the P-E multiple to rise to 25X 2016 estimated earnings resulting in a stock price of $875.  While only 10% upside from current prices, in the difficult stock market environment this year, it pays to stick with strength and that is exactly what Northlake plans to do with client positions in Alphabet.

GOOG and GOOGL 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.  GOOG and GOOGL 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.

New Large Cap Signal for February as Growth Stays Ascendant

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Northlake’s Market Cap model flipped from Mid Cap to Large Cap for February.  As a result, client positions in mid cap were sold and the proceeds reinvested into the large cap S&P 500 (SPY).  Current mid cap positions that were sold included both the S&P 400 Mid Cap SPDR (MDY) and the iShares S&P 400 Mid Cap (IJH).  Some clients may continue to own small amounts of MDY and IJH as core holdings independent of the models.  The Style model did not change for February, so client positions in the Russell 1000 Growth (IWF) will be held at least one more month.

The shift to large cap emanated entirely from the internal indicators that measure market breadth and trends.  Given the poor performance of small cap stocks in January and more generally over the past six months, this is not a surprise.  Last month five of the eight internal indicators in the Market Cap model favored large cap.  For February, all eight indicators now recommend large cap.  The external indicators that measure economic and interest rate factors remain evenly split between large cap and small cap.  Overall, the new large cap signal is moderately strong.  It could flip back in a month if the stock market broadly recovered from January’s sell-off.

The Style model remains on a growth signal and this month’s reading is more firmly in favor of growth as tow indicators shifted in favor of growth, while one moved the other way toward value.  The growth signal looks pretty strong which might be expected when the outlook for economic growth is weakening.  Growth stocks are less impacted by the economy, while value stocks are more cyclical.

Last month the models did a little worse than the market.  MDY fell by -5.5%, about 50 basis points more than the S&P 500.  MDY did save quite a bit of money vs. small caps, as the Russell 2000 fell by almost 9% in January.  Surprisingly, the Style model performed worse, falling -7%, even though it was on a growth signal when global recession worries were the primary driver of stock market weakness.  Growth massively outperformed in 2015 and one characteristic of January’s correction was that investors appeared to be selling winners and looking for a rebound in some of the most depressed sectors such as value-oriented energy and industrials.

The just completed mid cap signal had been in place since August 2015.  During that time, MDY fell by -12% against a loss of -8% for the S&P 500 and -16% for the Russell 2000.

SPY 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.