Friday, December 5, 2014

Our Nov. '14 NFP change guesstimate is +175K ...

For the third month in a row, we are submitting our NFP change guesstimate a bit late, but certainly more than a few hours before BLS releases that figure.  

We expect approx. 175K jobs to have been added during Nov. '14.  Our estimate is below the 230K consensus.  Regional Fed surveys were mixed, both ISM surveys were slightly weaker than the prior month, initial jobless claims went up a bit, and we think the positive impact of the mid-term elections declined a bit.  Online job ads increased nicely during the month, which could be a positive sign more for Dec. than Nov.  

Lastly, we would focus on whether or not there has been wage growth.  In our opinion, wage growth needs to remain above the CPI for an extended period.  Given the recent decline in oil prices (which we discussed last week), we think wage growth and inflation become even more important to track.  In our opinion, if wage growth stagnates again, when compared with CPI, then look for lower oil prices to have more of an impact (a positive one) on consumer staples rather than cyclicals.  Wage growth stagnation could also indicate that companies remain uncertain about the future, and although they may be hiring more, they are discounting that uncertainty risk by not increasing wages and salaries.  Continuing growth in temp positions could indicate the same thing.

Again, our Nov. '14 NFP change estimate is +175K.  BLS will release NFP change on Friday (12/5) at 8:30am ET. 

Monday, December 1, 2014

A few thoughts on the recent decline in price of oil ...

We thought to make a few comments regarding the recent dump that oil prices have taken.  Such a drastic decline (nearly 15% in less than a week) will impact the consumption side of the economy positively, as it has led to decline in gasoline prices, which at the end of the day leaves more cash in the pockets of the always-driving American consumers.  However, we believe such positive impact will not last very long, and is more likely to be more than offset by increase in oil prices.

Let's first discuss why the positive impact on our disposable income will be short-term.  Various studies have shown that while movements in oil and gasoline prices are positively correlated, such correlation is higher when gasoline prices move up.  In other words, when oil prices increase, especially after sudden significant declines such the one that we have seen recently, gasoline prices will spike up faster than the rate at which they declined when oil prices were going down.  This is just one example of the existence of asymmetry when it comes to the relationship of oil prices and GDP growth (a huge component of which is consumer spending).    

Many may ask: why would oil prices go up after such a decline, and after the increase in supplies brought forth by oil exploration and production in the US?  

Well, let's not assume that it is all rosy just because US has increased its oil production and lowered OPEC's control over oil distribution around the world, a bit.  In fact, it is for this reason (or at least one of the reasons) that Saudi Arabia and some other members of OPEC decided not to cut supplies - to put pricing pressure on US oil companies.  Such a move is bad news for US oil companies, as we have already seen by how their stocks have performed.  And let's not forget that most of these companies are highly levered, which could pose additional risks in the future if oil prices do not increase soon.  So while right now dependence on OPEC oil has declined a bit, it may increase in the future if oil prices continue to decline forcing US oil companies to burn more cash.  

Stagnation in wage growth, which we have discussed for a long time, is another reason why positive impact on the economy from falling oil prices will be only for the short-term.  Lower oil prices may also help reduce various companies' opex, but historically, companies are well aware of volatility of oil prices.  For this reason, even if companies take steps to hedge against higher oil prices in the future, we do not expect the savings from lower opex to be offset by higher wages.  So, take your pick: higher earnings the next 1 or 2 quarters due to lower oil prices and lower opex, or higher wages going forward which could have a longer lasting positive impact on the entire economy as it may increase consumption.  We think it is more likely that those great company executives will go with the first option.  

Now let's talk about why oil prices could increase again, although we have no idea when this might happen.  Decline in oil prices was driven mainly by two things, in our opinion: slower growth in demand, especially in the emerging markets and China (whose latest PMI was disappointing) and India; and higher production in US.  One thing that has not changed, and has actually worsened since the last time oil was above $115/barrel (in Apr. '11): geopolitical factors.  With ISIS creating more instability (although it is clearly linked to Saudi Arabia), and the failure, for the time being, of an Iran/P5+1 agreement, we think geopolitical factors could drive oil prices a bit higher, or at least slow down the recent decline that we have seen.  Combined with lower demand, this is not necessarily good news.  

In addition, such significant declines could lead to further instability as they are likely to bring about significant economic hardships on not only Iran and Iraq, but also Russia.  With more instability in the Middle East, with US oil companies having a difficult time, sooner or later supply may decline or the risk of a decline may increase, pushing prices a bit higher and/or significantly increase price volatility, which is not good news for many reasons.

Of course, all of this is just our opinion.  Let's discuss the political side of this 'oil price dump'.  Such a dump is nothing but good news for US political war hawks, more specifically, the neocons.  And the dump came just at the right time - the deadline for Iran and P5+1 to reach a deal.  What Saudi Arabia did (opposing a reduction in oil supplies) was not only to hit the US oil companies where it hurts, but also to severely damage Iran and Iraq.  We can all thank the Saudi government for backing ISIS (and its bloodthirsty 'skilled beheaders') in Iraq and Syria; and now the US neocons can thank the Saudis for further damaging Iran's economy and pushing higher chances of a military conflict.  As always, that Saudi government has its hands in nearly everything inside Saudi Arabia (yes violating human rights 1000x worse than Iran or any other country in the Middle East ever did) and in nearly everything outside of Saudi Arabia.  

We will post our Nov. '14 NFP guesstimate later this week, in addition to a quick review of how some of our favorite names (AVID, CNK, GCI, and others), along with our non-favorite ones (IACI, BCOR, TWTR, and others), have performed.


Other related posts:

Friday, November 7, 2014

Oct. '14 NFP change guesstimate

We're late again, as it is currently 1:58am (ET) on Friday morning.  However, as usual, we'd still like to post our NFP change guesstimate.  Our model spit out an increase of approx. 195K in NFP for Oct., about 45K below the current consensus.  

ISM manufacturing and services employment sub-indexes increased during the month.  Initial claims were very low, and the ADP figure was encouraging.  However, online listings barely jumped in Oct. from a very weak Sept.  We think such lack of movement indicates deceleration in demand going forward, and drove our model to come up with such a low estimate, compared with the consensus.  Let's see what BLS comes up with this time.

Monday, October 27, 2014

GCI: Another good quarter ...

Yes, Gannett (GCI) remains a value play, as we initially mentioned on 1/27/2014.  After hitting a 52-week high of $35.70/sh, which was 33% higher than when we first pitched it, the stock declined along with the market.  Since then it has recovered partially.  As shown below GCI has outperformed the market (S&P 500) since we talked about it in late Jan. '14.

GCI vs S&P 500 since January 27, 2014



The Company reported impressive Q3 numbers, with EPS beating expectations and top-line coming in in-line.  As we mentioned on 8/18/14, with the spin-off in mid-FY15 and the acquisition of Cars.com, we upped our valuation of GCI from $40/sh to approx. $44/sh.  So even with after outperforming the broader market, GCI has another 40% upside, in our opinion.  Below is a review of how we value GCI, which was mentioned initially in August.

Valuation

Sum-of-parts

Regarding Cars.com, we are assuming low double-digit top-line growth until FY '19.  We plugged in 9% revenue growth for FY '19 and FY '20.  Cars.com revenues' 6-year CAGR (from end of FY '14 until end of FY '20) is approx. 12%.  NADA (National Automobile Dealers Association) is assuming a 4-year CAGR (until end of FY '18) of 17%+ in auto digital ad spending.  We believe NADA's estimates are based on the assumption that affiliate programs will continue to grow, with which we disagree.

Cars.com's bigger margins will help expand GCI's digital segment margin an average of 300bps per year.  We think GCI's digital EBITDA margin will be between 25% and 27% going forward.  We have assumed a 7.2% 5-year CAGR (ending in FY '20) for total digital revenues.

Given the sizable margin expansion and slightly higher top-line growth that the acquisition of Cars.com brings to GCI's digital segment, we are now applying an EV/EBITDA of 9.5 (up from 8.0) to average EBITDA of FY '15 and FY '16. 

We also upped the EV/EBITDA multiple applied to the broadcast segment to 9.5 (from 8.0) as not only is broadcast's forward top-line growth comparable to digital, but its EBITDA margin is likely to be double that of digital.  In addition, the risk of the Aereo case is now non-existent.  And other companies in the space are trading at a much higher multiple.  Simply put - our sum-of-parts valuation assumption for the broadcast segment is conservative. 

We continue to apply 5.0 to the publishing segment's EBITDA.  Our sum-of-parts model (which includes net debt adjustments based on the upcoming Cars.com acquisition) results in a total valuation of $44.30/sh for GCI.

Discounted cash flow 
  

Assuming a spin-off, we also applied separate 6-year DCFs to publishing, and digital & broadcasting.  We used 6-year DCF in order to have same amount of odd years as even years, given the significant impact that planned worldwide events (such as the Olympics) and U.S. mid-term and Presidential elections can have on broadcasting and publishing.

Given that most of the debt on the balance sheet is related to acquisitions made in the digital and broadcasting segments, we basically assumed a net debt of zero for publishing.  Based on continuing decline in newspaper publishing and circulation, we assumed a 4.5 terminal EBITDA multiple, which when applied with a 13.3% WACC, results in a $1.5bil equity value of the publishing segment, or $6.85/sh (based on the latest GCI sharecount). 

Assuming a net debt of $4.6bil (by the end of FY '14) for GCI's digital and broadcast segments, along with terminal EBITDA multiple of 9.5 and WACC of 8.9%, the digital and broadcast DCF model resulted in an equity valuation of $8.3bil, or $36.91 per share.  This makes our DCF-based valuation of the entire company, approx. $43.76/sh.


With all of this said, our latest valuation of the entire company is $44/sh, which is the average of DCF and sum-of-parts results.  Based on where GCI closed at on Friday, again this represents a 40% upside.

GCI related posts:

AMC, CKEC, CNK, RGC: More good news ...

Although we have begun working for what we view as the best NoSQL technology startup/vendor, we remain up-to-date on the equity market and the overall economy.  So here's a quick update on the movie theatre companies which we initially discussed in late Mar. '14. 

According to Box Office Mojo, this October "is already the highest-grossing October ever, and still has five days left to add to its record-setting number."  And this is good news for the movie exhibitors that we talked about, especially CNK and RGC.  As a reminder, in Mar. '14 we were very bullish on CNK and RGC, a bit neutral on AMC, and viewed CKEC as slightly overvalued.  As of 10/24/14 (and since we pitched those names), as shown below, CNK has clearly outperformed the rest (incl. the S&P 500), RGC has also done better than the S&P 500.  AMC and CKEC are actually flat to negative and both below S&P 500. 

AMC, CKEC, CNK, RGC vs S&P 500 since March 20, 2014


Besides reviewing our performance, we'd like to discuss some of the other news in this space and their potential impact on movie exhibitors and other players.

First, as many know, NFLX has become active in working with reputable movie makers (such as The Weinstein Company).  It appears that those movies will likely bypass the theatrical release window and will be shown on NFLX and in Imax theatres when they are initially released.  While over time, a long time, this may cannibalize box office gross receipts, we think it may also help theatres differentiate themselves more easily from the 'in-home and on-smaller-screen' environment, especially when going up against NFLX.  In addition, in our opinion, Imax's participation in this 'revolution' may impact the Company's margins negatively as the fixed operating costs of Imax-only theatres (theatres run by Imax and not its exhibition partners/clients) are higher.  Lastly, we don't think large studios are yet ready to cannibalize those traditional box office receipts.  As the financial numbers have shown and the charts above indicate, those traditional movie theatres have done quite well. 

Also, recently, TWX's HBO announced it will bypass MSOs (or cable and satellite content distributors) and stream its content directly to its viewers beginning next year via HBOGo.  While this is not very good news for MSOs, we note that their revenue sources are quite 'diversified' as they include Internet services, wireless, and some, such as CMCSA, actually create valuable and expensive content.  However, in our opinion, such news is a bit worse for NFLX.  Yes, NFLX, the Company beloved by millions of consumers.  Unfortunately, with many other players entering the NFLX OTT space, in our opinion, the price elasticity of demand (PED) by subscribers will increase.  We saw an early indication of this as total NFLX subs in Q3 were disappointing and came in below expectations after the Company increased its price to be able to pay the higher premiums demanded by content makers and to fund its global expansion.  Of course, as we've mentioned many times before, NFLX needs to raise its prices to attract higher quality and more expensive content while minimizing how much cash it burns.  While its subs and top-line continue to grow, although at a slightly lower rate, PED in the space has also increased and the Company has not yet been able to generate FCF consistently, which isn't good news, in our opinion. 


Some of the other related posts:

Sunday, October 26, 2014

AVID: A quick review ...

Given that the important catalysts (which we touched on in late Mar. ‘14) associated with Avid Technology (AVID), are slowly but surely coming to fruition, we thought to provide a quick glimpse of how well it has outperformed the Russell 2000 and S&P 500 indexes.  Those catalysts include finishing up the restatements and possibly trading on NASDAQ again.  The restatements are pretty much done as the Company finally released its Q2 '14 10-Q and had the earnings call last week.  According to management, the Q3 '14 earnings release and 10-Q likely will be done on time.  In addition, the Company could begin trading on NASDAQ again by the end of this year, which is good news as it will impact the stock's liquidity positively and may attract institutional investors to the name.  In terms of performance, the charts below speak for themselves.

AVID vs Russell 2000 and S&P 500 since March 29, 2014


AVID vs Russell 2000 and S&P 500 since December 11, 2012


AVID closed on Friday at $10.05/sh.  For now, we continue to value AVID at around $11/sh, which by the way it hit on 9/12/14.  Our 5-year DCF resulted in a $9/sh equity valuation for AVID.  After adding what we expect is nearly $2/sh in tax savings by carrying forward its US NOLs, we think AVID could be worth approx. $11/sh.  We note that our margin assumptions are very conservative, and although from a top-line perspective, AVID will be a bit short of our expectations at the end of FY14, we think it can begin generating revenue growth in the high single to teens range in FY15, driven mainly by the 2016 Presidential election.  With all of this said, we will likely up our valuation of the Company at the end of this year.  Until then, we remain satisfied with how well it has performed when compared with the overall equity market. 


Some other AVID related posts:

Friday, October 3, 2014

Sept. '14 NFP change guesstimate

We're again late for this month, as it is currently 2:15am (ET) on Friday morning.  However, we'd still like to post our Sept. NFP change guesstimate.  Our model spit out an increase of approx. 200K in NFP for Sept., about 15K below the current consensus.  

Some back to school related hiring in the beginning of September, may have been partially offset by layoffs in the leisure and hospitality spaces.  ISM manufacturing employment sub-indexes were mixed.  Although the services figure isn't out yet, we expect a slight increase.  Lastly, the online indicators were a bit negative not just for the last part of September but also for October, as both total online job postings and new postings declined from last month.  

With all of this said, again we expect a 200K increase in NFP, which is positive but still lower than expectations.  Of course those BLS numbers are becoming more random every month.  If they come in significantly above expectations, the equity market will likely react positively, but only for a short period, in our opinion.  We continue to believe that the QE premium remains priced in, making the market overvalued, specially if it ends in Q1 next year.

Friday, September 5, 2014

Aug '14 employment numbers disappoint ...

While we estimated a big 35K miss as compared with the consensus, the miss was even bigger, 88K.  August NFP change of 142K came in significantly below the 230K consensus and our 195K estimate.   

There was weakness in manufacturing and retail, which we touched on yesterday.  Temp help services increased nicely, but that could also be bad news as it may indicate uncertainty continuing to cloud employers' decisions.  Leisure and hospitality came in higher than we expected, but we think a slowdown in hiring will be seen in that industry during the next few months.  And government sector jobs grew in August compared to a decline in July.

Hourly wages grew 2.1% Y/Y, about 10bps higher than the last headline CPI (Jul. '14), but we'll see how it compares with August CPI.  While higher wage growth than CPI is good news, we note it could also indicate continuing increase in cost per employee.  With the economy still growing at a moderate rate, a higher cost per employee is not necessarily good news for job growth. 

The 'official' unemployment rate went down 10bps to 6.1%, while the U-6 rate declined 20bps to 12.0%, slightly discounting the 0.1% decline in participation rate.  Number of people employed part-time for economic reasons continued to decline, but the ones that could only find part-time work went up, unlike what we saw the last two months. 

Given the continuing increase in online wanted ads, it is likely September will not be as disappointing, something we touched on yesterday and Yahoo!Finance had a story on this morning

Enjoy the weekend ... and J-E-T-S, Jets, Jets, Jets, as the 2014 NFL season began last night!

Thursday, September 4, 2014

August '14 NFP change guesstimate ...

Although we are a bit late this time, we thought to provide our guesstimate for tomorrow's BLS employment report.  We estimate BLS will report a net change in NFP of +195K for August, below the 230K consensus.  While ISM services employment sub-index was encouraging, we think it will be offset by slower growth in retail, and leisure and hospitality jobs.  Although it is back-to-school season, we think disappointing retail numbers overall have likely forced many to take it easy on the hiring, at least in the beginning.  And don't forget that as number of retail stores decline (due to continuing growth of ecommerce), so does the headcount.  We also saw slowdown in job growth on the manufacturing side, based on regional surveys and ISM manufacturing.  Regarding online indicators, total online job postings, in addition to new ones in August, did increase at the highest rate since June, which may be positive for September and Fall '14. 


Monday, August 18, 2014

GCI: We now value it at $44.00/sh, 27% upside ...

With the announcement of a spin-off in mid-FY '15 and the planned acquisition of Cars.com, we now think the combined companies of Gannett (GCI) are worth approx. $9.9bil, or $44/sh, which represents a 27% upside from where the stock closed at on Friday.  The stock has gone up 28% since we discussed it on 1/27/14.  In addition, on Thursday (8/14), the well-known activist investor, Carl Icahn, filed a 13D on GCI stating that he now owns approx. 6.63% of GCI (based on a 225.65MM sharecount).   

Valuation

Sum-of-parts

Regarding Cars.com, we are assuming low double-digit top-line growth until FY '19.  We plugged in 9% revenue growth for FY '19 and FY '20.  Cars.com revenues' 6-year CAGR (from end of FY '14 until end of FY '20) is approx. 12%.  NADA (National Automobile Dealers Association) is assuming a 4-year CAGR (until end of FY '18) of 17%+ in auto digital ad spending.  We believe NADA's estimates are based on the assumption that affiliate programs will continue to grow, with which we disagree. 

Cars.com's bigger margins will help expand GCI's digital segment margin an average of 300bps per year.  We think GCI's digital EBITDA margin will be between 25% and 27% going forward.  We have assumed a 7.2% 5-year CAGR (ending in FY '20) for total digital revenues. 

Given the sizable margin expansion and slightly higher top-line growth that the acquisition of Cars.com brings to GCI's digital segment, we are now applying an EV/EBITDA of 9.5 (up from 8.0) to average EBITDA of FY '15 and FY '16.  

We also upped the EV/EBITDA multiple applied to the broadcast segment to 9.5 (from 8.0) as not only is broadcast's forward top-line growth comparable to digital, but its EBITDA margin is likely to be double that of digital.  In addition, the risk of the Aereo case is now non-existent.  And other companies in the space are trading at a much higher multiple.  Simply put - our sum-of-parts valuation assumption for the broadcast segment is conservative.  

We continue to apply 5.0 to the publishing segment's EBITDA.  Our sum-of-parts model (which includes net debt adjustments based on the upcoming Cars.com acquisition) results in a total valuation of $44.30/sh for GCI. 

Discounted cash flow    

Assuming a spin-off, we also applied separate 6-year DCFs to publishing, and digital & broadcasting.  We used 6-year DCF in order to have same amount of odd years as even years, given the significant impact that planned worldwide events (such as the Olympics) and U.S. mid-term and Presidential elections can have on broadcasting and publishing. 

Given that most of the debt on the balance sheet is related to acquisitions made in the digital and broadcasting segments, we basically assumed a net debt of zero for publishing.  Based on continuing decline in newspaper publishing and circulation, we assumed a 4.5 terminal EBITDA multiple, which when applied with a 13.3% WACC, results in a $1.5bil equity value of the publishing segment, or $6.85/sh (based on the latest GCI sharecount).  

Assuming a net debt of $4.6bil (by the end of FY '14) for GCI's digital and broadcast segments, along with terminal EBITDA multiple of 9.5 and WACC of 8.9%, the digital and broadcast DCF model resulted in an equity valuation of $8.3bil, or $36.91 per share.  This makes our DCF-based valuation of the entire company, approx. $43.76/sh. 

 
Again, our latest valuation of the entire company is $44/sh (up from $40/sh), which is the average of DCF and sum-of-parts results.  Based on where GCI closed at on Friday, our new valuation of GCI now represents a 27% upside.  We note the stock has already moved up 28% since we initially discussed it on 1/27/14.

Icahn's wager on GCI

Regarding Icahn's 13D filing, it appears that he was a bit late this time in trying to force management of a publicly traded company to follow his instructions, as GCI made the spin-off announcement before Icahn started to 'suggest' it.  According to the 13D, Icahn and GCI management did not have any contact before the filing. 

We looked at Icahn's 6.63% share of GCI and noticed that call options expiring in Jun. '16 with a strike price of $20.15, represent 81.73% of his position.  Initially, one might think that Icahn is not that confident in GCI given that most of his holdings are in options.  However, his options position is not simply being long the call options.  According to the 13D filing, Icahn also wrote the same amount of puts with the same strike price, expiring in Jun. '16.  This synthetic long strategy, even though it lowers the dollar amount needed to acquire that many shares, shows he is actually very confident about that investment in GCI.  We estimate the average price at which Icahn purchased the stocks at $29.70.


GCI related posts: