Thursday, July 31, 2014

Jul '14 NFP and ISM manufacturing guesstimates ...

We are yet again a bit pessimistic when it comes to the monthly change in NFP.  We estimate that figure to be 190K, compared with the consensus of 233K.  While the 'do me a favor' type of hiring within different parts of the government might have begun as we get closer to the mid-term elections, we do not think they would be enough to get the overall change in NFP to above 200K.  The ADP figure, released on Wednesday, was also a bit disappointing.  Lastly, in our opinion, continuing decline in initial jobless claims does not necessarily mean that more people are being hired; it is more related to less people being fired.  Unfortunately, our NFP change guesstimate has not been very accurate the last two months.  We will see if luck will be on our side this time when the BLS employment numbers are released on Friday morning.

ISM manufacturing will also be released on Friday.  Based on positive results of the regional surveys, we expect the overall index to come in at 56.0, a slight increase from June's 55.3 and in-line with the 56.0 consensus.  We think the higher employees sub-index will be the biggest contributor to the increase.  In addition, we expect new products, production, and backlog sub-indexes to show deceleration in growth.


AMC: Mixed Q2 results; remain 'neutral' on the stock ...

AMC reported mixed Q2 results; beating on the bottom-line, but missing the top-line consensus by $12.5MM.  We remain 'neutral' on the stock and value it at approx. $26/sh based on a 5-year DCF and the Company's share of NCMI. 

The Company reported Y/Y decline in admission and concession revenues, which is mainly due to lack of blockbuster content, along with the World Cup, driving attendance figures down sequentially and Y/Y.  We think Q3 and certainly Q4 will be slightly better mainly due to better movies hitting the theatres.  

Admission revenue per patron (or the average ticket price) increased to $9.55.  For the year, we have assumed a $9.50 average ticket price.  Concession revenue per patron was $4.22 during the quarter.  We have assumed $4.09 for the year.  With better than expected adj. EBITDA margin of 18.1% (versus last year's 17.7%), we think the Company can lower its prices temporarily to drive attendance higher.  However, again, content is king, and is the main attendance driver. 

The stock was down 5% in AHs.  We think it may become attractive if it dips below $18/sh and/or as we get close to the EOY, as 2015 box office guesstimates are a bit higher than this year's.  We continue to rate AMC 'neutral'.  We initially discussed AMC and some other movie theatres on 3/21.

Wednesday, July 30, 2014

IACI: Q2 numbers missed expectations; still value it at $60/sh

IACI reported Q2 results this morning missing on the top and bottom-line.  Revenues came in $40MM short of the Street's estimates.  We remain 'neutral' on the stock and value it at $60/sh.

As we mentioned yesterday, based on Google's traffic acquisition costs (TAC), search & applications revenues for companies such as IACI and Blucora (BCOR) have slowed down and will slow down further.  IACI search & application revenues were down 7% Y/Y.  

Its Match Group revenues were up 8% Y/Y.  We hope the Company either begins to monetize Match Group's assets (such as Tinder) more quickly or acquires additional ones (as it did earlier this month with HowAboutMe), which is what IACI is known for.  Also, on this morning's call, management certainly displayed uber-optimism and excitement regarding the possibility of monetizing Tinder.  We hope the Company can monetize Tinder successfully, but we note that the monetization of Tinder could cannibalize revenues and cash-flow generated from Match.com. 

Media and eCommerce segment revenues were down nearly 16% mainly due to the Company's sale of Newsweek and placing its CityGrid Media into the search & applications segment.  We note that excluding CityGrid Media from last year's figures, IACI's eCommerce (mainly HomeAdvisor) revenues were up 12% Y/Y. 


Valuation

Assuming the best-case scenario, where Tinder can add as much as $200MM to the bottom-line annually in terms of EBITDA, and no other acquisitions, we think IACI's Match Group could be worth around $5.50bil, based on 10x EBITDA.  Of course, the Company has not yet 'decided' on how to monetize Tinder.  The worst-case scenario, assuming Tinder cannot be monetized, could result in a mere $2.03bil valuation (7.5x EBITDA) of The Match Group.  So, we think the valuation of The Match Group could be the mid-point of this range, or approx. $3.77bil (9x EBITDA).  

The search & applications segment, which continues to decline, is worth around $1.75bil, or 5x EBITDA.  Ignoring the other segments (which combined are in the red and will likely remain there), IACI's EV could be around $5.51bil.  After including the latest net debt on its balance sheet, IACI's market cap would be approx. $5.50bil; or ~ $60/sh.  We still view IACI as a 'neutral' stock.  

In our opinion, even-though the potential of Match Group IPO or spin-off is already priced in, we sense the hesitancy from sell-side analysts to downgrade this stock as they'd like to be part of the IPO or spin-off 'process'.  Some things never change. After being down as much as 6% earlier today, IACI is now up 1%. 

Tuesday, July 29, 2014

TWTR, FB: Strong Q2 for Twitter; stock up ~ 30% in AHs; remains overvalued ...

Twitter (TWTR)

TWTR had a good overall Q2, as we expected.  Data licensing revenues which grew 43% sequentially, beat what the Street was looking for, as we expected.  MAUs also beat estimates, as we expected.  The big surprise was the ad price, or ad revenue per 1000 timeline views, of $1.60, which represented a 100% Y/Y growth.  And we think such growth was driven by the fact that more advertisers are jumping on the mobile ad bandwagon and, of course, the World Cup, which helped improve user engagements significantly.

Obviously, the World Cup is not held every quarter.  However, this is an even-year which means the political space will be very hot for advertising and purchasing data, benefiting TWTR.  The better than expected performance of Q2, and in our opinion, the mid-term elections, drove management to up its FY '14 guidance.  One may now call TWTR a media company.    

Although MAUs showed better growth than in the previous quarter, in our opinion, TWTR is still adding users at a slower pace than the market expected when the Company had its IPO.  However, the ongoing and ever-increasing geopolitical factors worldwide will likely help increase growth rate of MAUs during the next 12 months. 

While we do not think that more MAUs and geopolitical factors will increase user engagements as significantly as the World Cup did, they will certainly help the ad revenue growth rate.

As mentioned earlier today, the data created by the social media platforms is also very valuable, helping TWTR's data licensing segment continue its strong double-digit growth going forward. 

Everything we said above regarding TWTR was positive.  Unfortunately, from a valuation standpoint, specially based on the $50 stock price in AHs, we think TWTR remains overvalued. 

After adjusting our estimates higher, our 5-year DCF model still resulted in an $18.4bil valuation of the Company.  At $50/sh in AHs, the market is valuing TWTR at nearly $30bil.  In other words, TWTR, a company with slower than initially expected user growth, and seasonal revenues too highly dependent on huge worldwide events, is trading at 22x and 140x FY '14 sales and EBITDA, respectively.  TWTR remains in its early stages of growth, so let's look at the same multiples for FY '15 and FY '16: 18x and 84x FY' 15 sales and EBITDA; and 13x and 42x FY '16.  Those valuation multiples make FB look like a utility company!  Of course, we believe FB is also a bit overvalued. 

Remember that many jumped on the TWTR bandwagon even when it hit $70, and they all got taken for a ride.  Hopefully, the 30%+ jump in the stock price in AHs doesn't indicate that everyone expects TWTR to perform like this every quarter. 

TWTR, AMC, BCOR, IACI: Earnings previews ...

Twitter (TWTR)

TWTR will report Q2 results today after the close.  FB's strong Q2 numbers may have indicated that TWTR also had a good Q2.  While the World Cup, wars, and other geopolitical factors likely have driven up TWTR's Q2 MAUs more than expected, we think the ad revenues per 1000 timeline views may disappoint.  All of this may be offset partially by better than expected growth in data licensing revenues, given the continuing frenzy over 'Big Data' in the technology and ad spaces.  Our 5-year DCF model spits out a $15.8bil valuation of TWTR, lower than the $22.5bil valuation the market is giving it.   


AMC Entertainment Holdings (AMC) 

AMC will report Q2 results on Wednesday (7/30) after the close.  Similar to Regal (RGC), we expect some weakness in the attendance numbers due to the World Cup and not enough blockbusters.  However, in terms of average ticket prices and average spent on concessions, we think those numbers will be encouraging.  We remain 'neutral' on AMC continue to value it at $26/sh based on a 5-year DCF and its share of NCMI.  We initially discussed AMC and some other movie theatres on 3/21.


Blucora (BCOR) 

GOOG's Q2 TAC, related to its AdSense, grew only 4% Y/Y, compared with 10% in Q2 '13; certainly not encouraging for BCOR.  Such deceleration in GOOG TAC (positive for GOOG as its ad revenues still grew 19%, but not for its partners) has been evident also in annual numbers as TAC grew 5.7% and 20.5% in FY '13 and FY '12, respectively.  Historically, we estimate that AdSense has been responsible for 80%+ of BCOR's search revenues.  Combined with the fact that the latest arrangement between GOOG and BCOR do not include ads on mobile platforms, this is not every good news for BCOR's search segment.  We have touched on this risk faced by BCOR before.

We expect only high single-digit search segment revenue growth for BCOR this year.  We think the Company can accelerate growth in its owned and operated (O&O) search revenues, likely in the teens.  However, O&O revenues represent only 20% - 25% of total search revenues.  We expect total search revenues to grow approx. 10% this year compared to 24% in FY '13. 

BCOR stock has declined 36% since it hit its 52-week high of $30.12 on 11/15/13.  We value it at approx. $20.00, based on sum-of-parts: FY '14 EBITDA multiples of 5, 8, and 7.5 for its search, TaxAct, and e-commerce segments plus net cash.  The Company is trying to further diversify its business and lower its dependency on the search business.  As a reminder, we recommended BCOR on 1/29/13 at $15.13 and 'downgraded' on 11/5/13 at $24.24.  BCOR has not yet announced the date of its Q2 earnings report. 


IAC/InterActiveCorp (IACI) 

The same 'TAC logic' we believe is applicable to IACI when it comes to its search & applications segment.  Although, IACI's acquisition of ValueClick's O&O websites in Dec. '13 may make those figures look a bit better.  We expect approx. 11% growth in search & applications revenues for FY '14.  What has held IACI stock in the mid to high $60s is anticipation of an IPO of the Match Group (online dating) business.  It appears the market considers Match Group's Tinder (which we discussed early on in Nov. ’13) attractive, although the question of monetization still needs to be answered.  Earlier this month, IACI added to its 'dating portfolio' by acquiring some of HowAboutWe, another online dating company.  Zoosk, another online dating service provider, filed its S-1 on 4/16/14.  Of course, a successful Zoosk IPO could shoot IACI stock much higher.  But we still have a 12-month valuation of $60 for IACI, based on 7.5x FY '14 EBITDA.  We recommended IACI on 1/29/13 at $40.65 and 'downgraded' it on 11/4/13 when it closed at $55.68.  IACI is scheduled to report its Q2 numbers tomorrow (7/30) before the open. 


GCI, FB, RGC: Last week's earnings review

Below is a review of the latest quarterly earnings (reported last week) of some of the companies which we have covered on this blog.  We will provide a preview for BCOR and IACI tomorrow before the close.  In addition, we will post our Jul. '14 NFP estimates by Wednesday.


Gannett (GCI) 

GCI reported mixed results, with EPS beating the Street consensus but revenues coming in a bit short of expectations.  We think the Company had a successful 1H14 and positioned itself to benefit from higher spending in political advertising during the second half.  Even with a slight miss on the top-line, the Company controlled costs, especially within the publishing segment, resulting in overall EBITDA margin of 24%, in-line with what we have assumed for the full-year.  We continue to value GCI at $40/sh which is a combination of DCF and sum-of-parts (5x, 8x, and 8x publishing, digital, and broadcasting EBITDAs, respectively).  Our valuation represents another 19% upside based on where GCI closed on Monday.  The stock has crept up nearly 25% since we discussed it on 1/27.


Facebook (FB) 

FB blew away all estimates last week as it reported strong Q2 numbers.  However, from a valuation standpoint, we continue to believe the stock is overvalued.  We adjusted our estimates higher, resulting in an EV of $75.2bil and market-cap of $88.8bil, or $34/sh valuation.  FB closed today at $74.92/sh.
  • Mobile ads continue to drive the impressive ad ARPU growth.  In addition, obviously the World Cup of 2014 helped.  Mobile ad revenues now account for 62% of total ad revenues.  However, we think mobile ad prices will begin to decelerate and flatten out during the next 12 - 18 months, after advertisers realize that ROI's on those ads reveal they should not be that expensive. 
  • "Connecting everyone" is an impressive phrase; more useful in politics rather than what FB is trying to do.  Yes, connecting everyone will increase FB's user base, and may initially attract more ads.  However, as we all know, advertisers target audiences that can purchase; simply put: users that are consumption driven.  In our opinion, while bringing low-cost Internet connections to homes in poor areas and/or to developing regions of the world displays kindness, monetization of the assets (users) that it may help attain, will remain a big question.  We do not disagree with the Company's stratgey; we just think given those questions, current valuation of the Company should be discounted a bit.  Well, maybe more than just a bit.
  • Deceleration in MAU growth seen in nearly every region, which partially explains why FB is investing in "connecting everyone".
With all of that said, Wall Street continues to 'like' FB.  And we continue to think it is overvalued as it is trading at 15.8x and 30.4x FY '14 sales and EBITDA; and 13.2x and 25.4x FY '15.  The Company will likely continue to make acquisitions, but we'll see if any of the acquired assets can be monetized to justify such hefty valuation multiples.  Our $34/sh valuation, based on a 5-year DCF, represents 13x and 11x FY '14 and FY '15 EBITDA, respectively.


Regal Entertainment Group (RGC)
 

RGC reported mixed results with EPS meeting expectations but revenues missing by $41MM.  In our opinion, the stronger second-half of FY '14, likely to be driven by higher quality content, seasonally strong Q4, and an extra week, will make up for the miss in Q2.  In addition, we think the World Cup of 2014 may have impacted attendance negatively in June.  The average ticket price of $9.22 and an average $3.79 spent by moviegoers on food and beverages were encouraging.  We still value RGC at approx. $26/sh based on our 5-year DCF model and RGC's 20% stake in NCMI.  It closed at $20.03 on Monday.  The stock is up approx. 8% since we discussed it on 3/21.

Wednesday, July 16, 2014

Jun '14 Industrial Production Guesstimate ...

The industrial production numbers for Jun '14 are due out this Wednesday (7/16) at 9:15am (ET).  With slight sequential decline in ISM-manufacturing, we expect a 0.3% increase in industrial production versus the latest consensus of 0.4%.  Regarding capacity utilization, we think most of the data including ISM-manufacturing's employment sub-index, and the increasing work week hours from regional surveys, point to an increase in June.  We estimate capacity utilization of 80.8%, a 150bps sequential increase, and higher than the 79.2% consensus.  In our opinion, if capacity utilization goes above 80%, it may be indicate a slowdown in future hiring.  

Lastly, we will post what we believe to be our CY '15 valuation of the S&P 500, before next Monday (7/21).  We publish our valuation of this index basically every six months. 


Thursday, July 3, 2014

Our NFP guesstimate was off again ...

For the second month in a row, our NFP forecast was not accurate at all as BLS reported net change of +288K in NFP for June.  This easily beat the 211K consensus and blew away our mere 190K estimate.  Official unemployment rate declined 20bps to 6.1% while participation rate remained at 62.8%.  The U-6 unemployment rate declined to 12.1% from 12.2%.      

While most figures in the report were positive, we note the 275K increase in part-time jobs due to economic reasons (or basically involuntary part-time jobs) is concerning, especially after seeing a 196K decline in May.   

Another not-so-great-news was that average hourly wages went up by 6c from the prior month, which represents a mere 1.96% wage growth Y/Y.  Let's hope wage growth picks up a bit especially given that the recent increase in oil and gasoline prices will increase overall CPI and may push against growth in consumption.  Average weekly hours remained at 34.5 hours.

We won't go through every industry, but a few things stood out.  
  • Hiring of only 6K in construction, after a disappointing 9K during May, was surprising.  The hiring of 36K people in the construction space during April, thanks to 'pent-up demand' due to the weather factor in prior months, may have been the reason behind less hiring in May and June.
  • Based on the employment sub-indexes of regional surveys and the official ISM manufacturing report, we did not expect additional hiring in manufacturing in June; but 16K people were hired.
  • While jobs in retail trade increased m/m pretty much across the board, the overall 40.2K increase (compared with only 10.5K in May) was driven mainly by huge growth in auto sales.  
  • Professional and business services added 67K jobs but they were mostly low-paying jobs in administrative and support services areas.  Jobs in temp help services grew by 10.1K.  
  • This has become the norm: jobs in health care and social assistance went up by 33.7K.
  • Leisure and hospitality added another 39K jobs, which was surprising as we thought the summer seasonal hiring would slow down a bit, but of course that was not the case.  
  • And we should not forget to mention that those great government jobs added another 26K to the NFP count.


ISM services was also released this morning.  It came in slightly below expectations, 56.0 vs 56.2 and lower than May's 56.3.  The employment sub-index increased nicely, which was also shown in the BLS employment report.  

Initial jobless claims of 315K was higher than the 314K consensus.  Not much volatility is seen in initial jobless claims during the last three months as the figure has been pretty much the same as the 4-week moving average.  

Lastly, the ISM manufacturing number was released on Tuesday morning.  The 55.3 figure was above our 55.0 projection but below the Street's 55.6 expectation.  In addition to the overall index declining slightly from the prior month, its employment sub-index was unchanged; although it remained above 50.0.  


Tuesday, July 1, 2014

Jun '14 ISM manufacturing and NFP guesstimates ...

June ISM manufacturing will be released in approx. 8 hours at 10am (ET).  Based on mixed results of the regional surveys, we expect the overall index to come in at 55.0, a slight decline from May's 55.4 and below the 55.6 consensus.  The number of employees sub-index may disappoint.  

Given the short week due to the 4th of July holiday on Friday, BLS will release the June employment report on Thursday, 7/3.  Based on our model, we think change in NFP will disappoint by approximately 21K.  We estimate an increase of 190K, compared with the Street's estimate of 211K.  Initial claims (both seasonally adjusted and non-adjusted) actually increased slightly in June.  In addition, as mentioned before, growth in jobs on the manufacturing front has been mixed.  Lastly, given that summer has already begun, we don't expect the same spike in hospitality type jobs that we saw the last couple of months.


Wednesday, June 25, 2014

GCI, IACI: The Supreme Court rules against Aereo ...

The Supreme Court ruled against Aereo and in favor of ABC this morning.  We expected such a ruling and we also agree with it.  In terms of how some stocks are reacting, GCI, which we have been viewing as a 'buy' and value at approx. $40/sh, is up 4%+.  IACI, one of the biggest investors in Aereo and a stock that we value at only $60/sh, is down approx. 1%.  Other stocks impacted by this ruling include: MEG (+10%), SBGI (+14%), and CBS (+5%). 

The Court's ruling was based on a few things that we have discussed before: 1) Aereo is actually distributing content and not merely storing the content, nor just providing the hardware, as it claimed; 2) based on (1), Aereo is transmitting "a performance ... of the work ... to the public" (as stated in the Copyright Act of 1976; and 3) given (1) and (2) and the fact that it has not attained nor paid for any right to distribute (or "transmit") the content, Aereo is committing copyright infringement.  Simply put: content remains king and any distribution of it must be paid for.  

What does this ruling mean for GCI?

The Supremem Court's decision means GCI will continue to receive retransmission fees from distributors; whether the distribution is in real-time or delayed, or via cable, satellite or OTT.  The retrans fees basically go straight to the bottom-line, and based on some industry studies such as one conducted by SNL Kagan, we think those revenues could grow at a 16% 5-year CAGR through 2019, possibly expanding GCI's Broadcast segment EBITDA margin to 54%+.  

What does this ruling mean for Aereo?

The CEO of Aereo has been quoted saying that the company does not have a "plan B" if the Court rules against it.  After this morning's news, we will see if Aereo, along with the $90MM+ invested in it, will disappear.  The other option may be that Aereo begins paying broadcasters.    


Other news ...

In other news, the latest Q1 GDP figure was released by the BEA which showed real GDP declined at a 2.9% annualized rate compared with a 1.9% decline expected by those expert economists.  Durable goods orders for the month of May also came in below expectations, -1% compared with the 0% consensus.  PMI services for June beat expectations, 61.2 vs 58.0 consensus.  But we note that deceleration in the outstanding business, business expectations, and prices charged (or revenues) sub-indexes, combined with acceleration in employment and input price sub-indexes, do not sound that great.  But who cares, the equity market continues to go up and up; S&P500 is up 0.23% at 1954.  

Lastly, we are a bit relieved as the Supreme Court also ruled that law enforcement officials need warrants to have access to any data on cell-phones.  Then again, as we have seen in the past, no laws are really applicable to the NSA.  But we continue to hope for change.