MGM Resorts Executing on Profit Growth Plan

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MGM Resorts (MGM) reported a solid quarter with sales coming in slightly below consensus estimates and earnings that beat expectations due to progress on streamlining the business. The company received a meaningful one-time benefit from the sale of The Shops at Crystals, which it owned 50% of through a joint venture in CityCenter. We believe shares of MGM can climb toward $30 as the company executes on its Profit Growth Plan.

In the Profit Growth Plan, MGM has identified several areas where they can improve profitability by restructuring the business with a focus on increasing sales and reducing expenses. As part of the restructuring efforts, MGM recently spun off a significant portion of the real estate on which its casinos sit in a publicly traded REIT, MGM Growth Properties (MGP). MGM now owns slightly over 75% of MGP. Further restructuring includes the disposition of other non-core assets such as The Shops at Crystals as MGM works to simplify its business and exit joint ventures.

Other aspects of the Profit Growth Plan include the upcoming openings of new casinos in Macau and Washington, D.C., which will serve to drive organic revenue growth. MGM will also benefit from efficiency across the organization intended to reduce expenses. In total, MGM expects the Profit Growth Plan to contribute an incremental $400 million of earnings by 2017, an increase from the previous target of $300 million.

In addition to the Profit Growth Plan, MGM’s core assets in Las Vegas and Macau have improving fundamental operating results. MGM’s operations in both downtown Las Vegas and on the Las Vegas Strip are benefiting from increased traffic and spending, partially driven by consumer travel trends as tourists’ fear of the Zika virus influences them to avoid other popular destinations such as Miami. The entire Macau market appears to be stabilizing somewhat after a rough period of traffic and profit declines driven by a Chinese government crackdown on corruption by the junket operators, which led to an exodus of wealthy VIP customers. The mass market stabilization and lapping of difficult year over year comparisons has helped to put Macau back on the path to growth.

In summary, we believe that several catalysts exist over the next two years to drive MGM shares toward our $30 target. The Profit Growth Plan will help streamline the business while increasing sales and reducing expenses. Operating fundamentals for MGM’s core assets are improving. Most importantly, we believe that the shares are mispriced when valued as a sum of the parts. For example, if you back out the market values of MGP and MGM China’s Macau operations, MGM’s other core assets are trading at a very attractive 7x 2017’s estimated EBITDA (earnings before interest, taxes, depreciation and amortization). Whichever way you look at the valuation, we believe MGM shares have substantial upside.

MGM 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.  MGM is a 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.

Momentum Building at Activision Blizzard

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Activision Blizzard (ATVI) reported a second straight quarter of sales, earnings, and forward guidance above consensus estimates. Strength in the quarter was largely attributed to the successful launch of Blizzard’s newest game, Overwatch, which already has over 15 million players globally. Continuing momentum across key franchises, signaled by strong pre-orders for the next expansions of World of Warcraft and Destiny, give us confidence that ATVI can surpass its typically conservative guidance for the remainder of the year, pushing the stock into the upper-$40’s.

One area of concern from the report is that pre-orders for the next installment of Call of Duty (CoD), titled Infinite Warfare, are tracking below the pace from last year. ATVI management attributes this to a delayed marketing plan, insisting that the outlook for the new release and the entire CoD franchise is stronger than ever. We believe the lowered expectations create an opportunity for upside as ATVI drives awareness of the new release through their marketing plan and eSports competitions. Additionally, Infinite Warfare will launch with a remastered version of 2007’s massively popular Call of Duty 4: Modern Warfare for an additional $20, possibly leading to a higher average sales price compared to previous CoD titles.

ATVI has several other potential drivers of upside. First, we expect improved profitability driven by the ongoing transition to digital game downloads instead of physical game discs. Second, the acquisition of King Digital Entertainment (KING) opens the door for new revenue streams such as advertising on mobile games and creates a path to monetizing popular ATVI intellectual property similar to the recent success seen by Niantic’s Pokémon Go app using Nintendo’s intellectual property. Third, ATVI is beginning to monetize its franchises through films and TV series, which dual as a marketing tool. Fourth, ATVI is making a strong push to become the global leader in eSports by putting its popular competitive games on display on a new eSports network. Fifth, global distribution expansion represents a large opportunity for growth, and early success can be seen in important markets such as China.

In summary, we continue to believe that the combination of conservative guidance, solid execution, and several underappreciated opportunities to drive long-term growth and profitability leave ATVI shares well-positioned to climb into the upper-$40s.

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 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.

Expecting LBTYK to Rise from Here

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Liberty Global (LBTYK) reported a slightly weaker than expected quarter, much as we expected.  Admittedly, with rebased revenue growth of 4% and operating cash flow growth of 2%, the results were a bit less than our low expectations.  But we always have thought that after a rough 12 months, 2Q16 would mark the low point for LBTYK with acceleration in financial performance coming in 3Q and again in 4Q and throughout 2017.  We have faith in management guidance for growth to pick up to 7-9% over the next several years.  If so, LBTYK have major rebound potential, into the $40s.

Our confidence in management guidance is fourfold.  First, despite a tough recent stretch amid more competitive markets throughout its European footprint, LBTYK management has an excellent track record of delivering on its promises.  Second, mergers and acquisitions completed over the last several years In the UK, Netherlands, and Belgium were strategic in nature and thus had near-term costs.  The strategic benefits are now positioned to assert themselves including extending the reach of the cable systems to new neighborhoods and integrating wireless into the bundle.  Third, management is initiating an efficiency program that should keep many operating costs flat as revenue accelerates.  Fourth, management indicated that thus far they have seen no drop off in growth in the UK post the Brexit vote.  This remains a risk, however, given leading indicators of UK economic growth.  LBTYK has flexibility to slow its new build program in the UK if conditions warrant providing some protection to financials although investors would probably be unhappy if a UK recession develops.  We are hopeful that just as we have seen in the U.S., cable TV and broadband are almost utilities these days and hold up well even during a recession.

We have been patient with LBTYK, maybe too patient, but we firmly believe 2Q marks the bottom for financial performance and the stock price.

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.

Disney Plays Offense in Disruptive TV Technologies

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Disney (DIS) reported slightly better than expected result for its 3Q16 driven by theme parks and the film studio.  There were slight shortfalls vs consensus expectations at media networks and consumer products although there was no further deterioration in affiliate fee trends and subscriber losses at ESPN.  It has been the worries about ESPN that have caused DIS share to lag the market so far this year.

At the same time as the earnings report, DIS announced that it was buying 1/3 of BAMTech, which is the streaming video technology leader owned by Major League Baseball.  DIS will use the technology that already powers many leading OTT services, such as HBONow, to launch its own direct to consumer OTT services for ESPN and the Disney brands.  Additionally, DIS also announced that its main cable networks, including ESPN and ESPN 2, will be included in AT&T’s upcoming nationwide launch of a cable TV like OTT streaming service.  These two announcements were well received by investors as they reveal a good balance for DIS between protecting its traditional cable network business while moving ahead to participate new disruptive TV delivery technologies.

Since last summer when DIS first announced subscriber losses and lower growth at ESPN, the company has been on the defensive regarding new technologies.  Playing offense now should help investor sentiment for DIS shares.  DIS shares trade a discount to the market on P-E basis, a highly unusual occurrence.  Given the quality of the company’s brands and assets and the unique ability to capture broad economic benefits from its intellectual property across all its divisions, DIS is a company that deserves a premium.  Thus, while we are cognizant of the challenges at ESPN – high and rising fixed cost sports rights amid falling subscriber counts – and the difficulty of growing the studio after the incredible success of Star Wars and Pixar and Marvel films, we are sticking with DIS shares.  That said, DIS has been a big winner for Northlake, up about 70% from initial purchases.  Thus, much like we recently did with Activision Blizzard (ATVI, another big winner, we may trim larger positions in DIS to provide buying power for a new idea.  With sentiment improving off the recent quarter and new business announcements, we hope to do so on a catch up move in DIS shares.

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. 

 

Quiet Quarters for Liberty Media and Liberty Sirius

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It was a quiet quarter at Liberty Media (LMCK) and Liberty Sirius (LSXMK) after the companies were spun off as tracking stocks from Liberty Media’s corporate holding company earlier this year.  The good news is that the major assets held by each company performed well in the quarter.  In addition, transactions completed on smaller assets owned by each company added meaningful cash to their balance sheets and simplified the stories.

LSXMK owns 64% of Sirius Satellite Radio (SIRI).  Besides some cash and debt this is the only asset owned by LSXMK.  SIRI had a strong quarter, beating Wall Street estimates and raising guidance for 2016.  Eventually we expect LSXMK and SIRI to merge, probably in 2017 or 2018.  SIRI is aggressively buying back its own stock with its significant and consistently generated free cash flow.  By the end of 2017, LSXMK will own nearly 80% of SIRI at which point a merger makes sense.  That would be good for LSXMK which trades at an unwarranted 15% discount to SIRI.  In the meantime, We think SIRI is well positioned to continuing growing subscribers even as new car sales plateau at high levels.  Recent success in used cars looks sustainable as SIRI has programs to reach used car buyers who inherit a car with a Sirius radio.

LMCK owns 35% of Live Nation (LYV).  LYV dominates the global concert and ticketing industries.  In its most recent quarter, LYV reported results better than expectations as the summer concert is booming.  This comes as no surprise to Northlake as we have closely followed the shifts in the music industry that are pushing touring to be the primary economic vehicle for artists to make money.  Additionally, the trend by consumers to value experiences over things plays right to LYV’s strength.  We expect continued growth in the seasonally large third quarter and years ahead as LYV captures more dollars from consumers and advertisers looking to reach its massive global audience of adults aged 18-54.  LYV shares moved to a new 52 week high after reporting its 2Q16 results and we see further upside ahead.

LMCA. LMCK, LSXMA, and LSXMK 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, LSXMA, and LSXMK 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.

 

 

Another Month at Mid Cap and Neutral on Growth vs. Value

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There are no changes to the signals from Northlake’s Market Cap and Style models for August.  The Market Cap model continues to recommend mid cap and the Style model remains on a neutral reading between growth and value.  With no changes to this month’s signals, clients following the models will continue to own the S&P 400 Mid Cap (MDY) for Market Cap and have monies evenly split between the Russell 1000 Growth (IWF) and the Russell 1000 Value (IWD) for Style.

The factors underlying the Market Cap model were quite stable for August.  Only one of the internal technical/trend indicators shifted from large cap to small cap.  This indicator is reflecting better recent performance for small caps compared to large caps.  The Market Cap model is positioned pretty firmly in mid cap and seems likely to hold there for at least one more month barring dramatic change in market trends or economic data during August.

The Style model remains solidly in the neutral zone between growth and value.  There was some underlying movement in the indicators, however.  Two internal factors shifted from value to growth following a big rebound in the performance of growth stocks during July.  The rebound was driven by strong earnings reports from major companies including Google, Facebook, and Microsoft.  One external indicator moved the other direction, in favor of value.  The external indicators mostly favor value now as despite weak GDP growth in the first half of the year, there has been in improvement in a wide range of reported economic data for the U.S economy.

The Market Cap model performed well in July and continues to outpace the benchmark S&P 500 so far this year.  The Style model would have been better off with a pure growth recommendation for July but still managed to match the benchmark for the month as it has done so far this year.

MDY, IWD, 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.