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:




Monday, August 11, 2014

BCOR: Very disappointing guidance; remaining 'neutral' on the name

Blucora (BCOR) was singing the blues on Friday after reporting better than expected Q2 results, but accompanied by very disappointing guidance.  We advised to remain on the sideline regarding this stock in Nov. '13, after a 60% gain since we initially recommended longing it in Jan. '13.  Our sum-of-parts model now spits out a $16/sh valuation of BCOR based on our newly introduced FY '15 estimates.  BCOR stock has declined 23% during the last 12 months, which includes a 35% decline since we 'downgraded' it.


Search & Content

The Search & Content segment is declining more rapidly than we thought; and we thought we might be too pessimistic!  Yes, as we have stated many times, the latest contract with Google (GOOGL), which excludes the mobile platform is pretty much forcing BCOR to 'beg for forgiveness'.  Of course, it has not done anything wrong, except become too dependent on GOOGL over time.  For the year, it appears that Search & Content revenues will be down nearly 20% Y/Y, while EBITDA margins will contract by around 300bps.  After a 24% top-line growth in 2013, we modeled in huge deceleration in growth (only single-digit growth), and it appears we were actually too optimistic.  Our mere 30bps EBITDA margin contraction assumption has also turned out 'too good to be true'. 

Disappointing results in BCOR's O&O side of the Search & Content were surprising.  While O&O still represents less than 20% of that segment's total revenues, many thought that the growth seen the last few quarters could at least very slightly offset the turmoil seen from the latest GOOGL contract on the distribution side, which we do not think will be helped much by YHOO's contract that includes the mobile platform.  With Q2's 4.6% Y/Y decline in O&O revenues, it appears that salt was actually poured on BCOR's Infospace wound in Q2 and will continue in Q3.

All of this explains why BCOR management decided to add content to its offering by acquiring HowStuffWorks.  While this may spur some growth in O&O, we think it will also lower margins a bit.

We have adjusted our FY '14 Search & Content revenues and EBITDA estimates to $345.1MM (a 19.5% Y/Y decline) and $56.9MM (280bps lower EBITDA margin), respectively.  While O&O revenue growth may be a healthy 18% in FY '15, it will not be enough to offset the 18% decline we expect in revenues from distribution partners, which represent 80%+ of total Search & COntent revenues.  We estimate FY '15 Search & Content revenues of $311.4MM, a 9.8% decline Y/Y (assuming no other acquisitions).  EBITDA margin will likely decline by another 100bps to 15.5%, resulting in EBITDA of only $48.3MM in FY '15.


TaxAct

TaxAct Q2 top and bottom-line looked good.  However, while for the year, revenues will likely come in above our expectations (based on management's guidance on the Q2 call), we note that margins are likely to be approx. 100bps below what we had in mind, as BCOR will not only be marketing for FY '15 more aggressively, but will likely also include additional services surrounding TaxAct's offerings at very competitive prices. 

We estimate FY '15 TaxAct revenues of $112.7MM, which represent a 9.4% Y/Y growth from our adjusted FY '14 estimate of $103.0MM.  Drivers of such growth in FY '15 include an assumed 225K per month change in NFP this year, slight increase in TaxAct's market share, along with servicing more small businesses which we think could up TaxAct's ARPU by approx. 5%.  We expect no change in EBITDA margin for the TaxAct segment in FY '15 when compared with our assumption of 47.25% this year.  We estimate BCOR's TaxAct to generate approx. $53.3MM in EBITDA in FY '15.


eCommerce

Whether the acquisition of Monoprice by BCOR was a good strategic move, remains to be seen.  While Q2 eCommerce revenues came in a bit better than expected, the Y/Y decline in volume forces us to remain cautious.  We did not change our FY '14 revenue estimate of $165MM; however, we lowered EBITDA margin significantly to 8% as we think BCOR and Monoprice will be forced to market much more aggressively.  So we expect eCommerce EBITDA of only $13.2MM this year.  We have modeled in a 7.5% top-line growth in FY '15, resulting in $177.4MM.  We look for margin expansion of approximately 50bps, resulting in eCommerce EBITDA of $15.1MM next year.


Valuation

When applying a sum-of-parts valuation model (5x Search & Content, 8x TaxAct, and 7.5x eCommerce EBITDAs) to FY '14 estimates, BCOR is valued at only $16/sh, or 1.5% above where it closed on Friday.  Unfortunately, improvements in the TaxAct and eCommerce segments will be offset by continuing decline in top and bottom-line of the Search & Content segment in FY '15.  Based on the same valuation model and our FY '15 estimates, we think BCOR is worth only $16/sh, which means the stock is fairly valued.  We also see risk from a technical standpoint as the stock hit its 52-week low of $15.27 on Friday, a 12-month decline of 25.4% (while S&P 500 has gone up more than 14% during the same period!).  For this reason, we think in order for the stock to become attractive, it will not only have to decline to between $12 and $13 per share (to represent a 20% - 30% upside based on our $16/sh valuation), but also will have to stabilize or create a base at that level.  We remain 'neutral' on BCOR.


Thursday, August 7, 2014

Our latest valuation of S&P 500 ...

Let's discuss valuation of S&P 500.  For the next four quarters (including current Q3), we value S&P 500 at 1776, 7% lower than where it is today even after the 4% decline during the last two weeks.  

First, take a look at EPS estimates (bottom-up operating estimates) for CY '14 and CY '15 and see just how they have 'progressed':
 
 














Two things have not changed the last 18 months: 1) so-called 'analysts' have reduced their EPS projections for this year; and 2) 2015 EPS 1-year growth projection has been increased by only 6bps since Q1 '14.  Continuing reduction in EPS estimates has been going on for a few years.  So while growth projections keep getting pushed over to the next year, we would not be surprised if we saw 2015 EPS estimates continue to be adjusted lower going forward.  To give you an idea, in Mar. '13, 'analysts' expected 2014 EPS of $124.73, nearly 4.3% more than what they currently expect.  We must note one more thing displaying irrationality: the uber-optimism continues as while EPS and Y/Y growth projections were getting 'adjusted' lower, estimate of EPS 5-yr CAGR went up.  That figure has increased from 11.4% in Nov. '13 to the current 11.8%.  But let's move on.

S&P 500 is currently at 16x and 14x CY '14 and CY '15 EPS, respectively.  After hitting its record high of 1991.39 on July 24th, it has dipped 4%, but we think remains overvalued as QE policies are still priced in.  While we admit that we are not taking QE premium into account when valuing the market, we think this actually gives us an idea about what further tapering and higher interest rates can do, and what a bind the Fed is finding itself in right now. 

The S&P 500 index covers a pretty broad market, so we look for our forward P/E to represent a PEG (or PEGY) of 1.0.  Given that we can only work with the data we have, we are applying the 5-year EPS CAGR estimate of 11.82% plus current dividend yield (2.06%) to come up with our forward P/E of 13.88, applicable to 2014 and 2015 earnings estimates.

That multiple give us a 1657 - 1895 valuation range.  We are only in the second month of Q3 '14, and for this reason we took the median of that range, resulting in a 1776 valuation of S&P 500 for the next four quarters; approx. 7.0% below where the market is currently.

Tuesday, August 5, 2014

GCI: Will split into two separate companies; acquires remaining 73% of Cars.com

Gannett (GCI) announced it is planning to split into two separate companies trading on the NYSE.  This will likely be completed by mid-2015.  GCI also announced it will buy the remaining 73% of Cars.com for $1.8bil in cash.

GCI will be split into a newspaper publishing company and a broadcast and digital company.  As a reminder, one of our valuation methods applied to GCI was sum-of-parts. 

The acquisition of Cars.com will likely double EBITDA of GCI's current digital segment in 2015.  We think it will also expand the segment's EBITDA margin to high 20s.  Based on that alone, we think 10x EBITDA is a more appropriate multiple for the digital segment (higher than our original 8x).  We note that after the split, the digital and broadcast company will be able to focus on further top-line growth and margin expansion without having to worry about the declining publishing segment. 

We will adjust our model by the end of this week and will suggest our updated valuation of GCI.  Our latest valuation was $40/sh.  The stock is practically unchanged after being up more than 8% before the open. 


Posts related to GCI: