Tuesday, May 13, 2014

April '14 Industrial Production Guesstimate ...

The industrial production numbers for April '14 are due out this Thursday (5/15) at 9:15am (ET).  Although we saw slight improvement in ISM-manufacturing, based on declines in production and backlog sub-indexes we expect a 0.11% decline in industrial production (or index of 103.13) versus the latest consensus of no change.  Regarding capacity utilization, we think most of the data including ISM-manufacturing's employment sub-index, and the mostly increasing work week hours from regional surveys, point to a slight increase in April.  We estimate capacity utilization of 79.3%, a 10bps sequential increase, and higher than the 79.2% consensus.  

Wednesday, May 7, 2014

CKEC, CNK: Q1 results ...

Carmike (CKEC)

Carmike (CKEC) reported mixed Q1 results on Monday after the close, with revenues coming in ahead of consensus and EPS a slight miss.  

The bigger news, in our opinion, was the announcement of National CineMedia (NCMI), which is founded and partially owned by AMC, CNK, and RGC, acquiring Screenvision in which CKEC has a 19% stake.  As we wait for details regarding this deal to be released once it is closed, we know that the main benefit for CKEC is access to more national ads which could possibly drive ad revenues slightly higher.  Unfortunately, CKEC will not get a taste of Fathom Events' alternative content as that business was spun off by NCMI.  Based on where NCMI is currently trading at, we think the acquisition could add between $2/sh and $3/sh to the valuation of CKEC, which was trading at what we viewed to be fair-value prior to the acquisition announcement.  It reacted positively to the news and closed up 10% at $32.89 on Tuesday.  Our 5-year DCF model of CKEC still spits out a $30/sh valuation of the Company.  Post the Screenvision acquisition, it could be worth between $32 and $33, which does not represent much upside.  We note that when we initially discussed CKEC, it was trading at $31.69/sh.  

Regarding CKEC's Q1 performance, while its 2013 acquisitions helped the top-line, margins remained below its peers'.  

Total revenues of $158.9MM were up 23% Y/Y. Admission revenues per attendance were $7.19, on track to meet our $7.27 estimate for the full-year.  We break out concessions and other revenues into concessions and ad revenues in our model based on certain assumptions.  We estimate concession revenues only per attendance came in at $3.40, approx. 8% higher than Q1 '13.  This figure is running ahead of our $3.31 estimate for FY '14, representing possible upside.  As mentioned earlier, the acquisition of Screenvision by NCMI could up CKEC's ad revenues, possibly pushing total revenues to $700MM+.  Our estimate for FY '14 total revenues is $696.4MM.  

The negative part of the Q1 report was the adj. EBITDA margin of 13%.  We have assumed a 17% adj. EBITDA margin for this year.  So, let's hope the higher concessions and ad revenues can help expand margins going forward.  

CKEC is still trading at a premium compared to its peers, with highest FY '14 EV/EBITDA of 9.1.  Its peers' average is 8.7, with CNK representing the lowest one at 8.2.  In addition, unlike AMC, CNK, and RGC, CKEC does not distribute any dividends.  Average forward dividend yield of the others is nearly 4%.  We remain 'neutral' on CKEC.  

Cinemark (CNK)

Cinemark (CNK) reported solid Q1 results on Tuesday, beating the Street estimates on the top and bottom-line.  In addition, CNK's EBITDA margin is running ahead of our estimates for the full-year.  We remain positive regarding the stock and maintain our $36/sh valuation based on a 5-year DCF model and CNK's stake in NCMI, representing a 23% upside.  The acquisition of Screenvision by NCMI, could represent additional upside for all NCMI founders and stake holders - AMC, CNK, and RGC.

Total Q1 revenues (US and international) of $602.3MM were up 10% Y/Y.  We note that 2013 numbers include operations in Mexico which were divested last year.  Adj. EBITDA margin of 21.3% in Q1 indicates the Company is on track to meet our 21.4% margin assumption for the year.    

Total US revenues were up nearly 22% Y/Y.  US Admissions revenues increased 21% Y/Y, with admission per attendee at $6.96, up 3%.  This is impressive, in our opinion, as CNK has not yet hiked up its prices similar to its peers, so there is upside.  We expect US admission revenue per attendee to be at $7.09 in FY '14.  Concessions revenue per attendee increased 5% to $3.58, higher than what we have estimated for FY '14.  With overall prices being lower than its peers', CNK still continues to generate higher margins.  US adj. EBITDA margin of 21.2% was impressive, especially given that we have modeled in 20.4% for the full-year.  

International revenues declined 13%, but that is mainly due to the divestiture of operations in Mexico.  Excluding that, international admission revenues were up approx. 12% Y/Y according to management.  International admission revenues per attendee were $4.70 in Q1.  We expect that to increase to $4.80 for the entire FY '14.  Concessions revenue per attendee was $2.27, which makes the $2.30 that we have modeled attainable.  Adj. EBITDA margin of 21.9% is running below our 23.8% estimate for the year.  Given the upcoming World Cup, we think Q2 and Q3 international opex will decline slightly, possibly helping up the adj. EBITDA margin for the year.     

Given the Company's ongoing development in Brazil and management's capex guidance, we upped our FY '14 capex estimate by approx. $15MM to $290MM.  This change did not impact our valuation of CNK significantly. Again, we remain positive regarding the stock and maintain our $36/sh valuation based on a 5-year DCF model and CNK's stake in NCMI, representing a 23% upside.  More details regarding our view of CNK and other movie theatre companies are available at: http://mogharabi.blogspot.com/2014/03/amc-ckec-cnk-rgc-some-thoughts-on-movie.html.

Friday, May 2, 2014

Impressive April NFP, but labor force shrank by 800K+ ...

Today's NFP change came in at 288K, above our 250K estimate and certainly above the 215K consensus.  As usual, those experts lowball just to make sure the official number is a good one.  Unemployment rate fell to 6.3% from 6.7% but mainly due to significantly lower participation rate.  Although the market was volatile throughout the day, the S&P 500 didn't close higher even after the better-than-expected numbers.  It closed down 2.54, or 0.13%.  

Net change in NFP was actually better than the 288K, given BLS' total 36K upward revision of the Feb. and March figures.  The private side grew by 273K while government jobs increased by 15K.  The seasonal businesses added the most jobs as we are approaching summer.
  • Increase in government jobs was driven by local government jobs.  We think many local governments are trying to 'clean up' a bit as we are approaching the mid-term elections. 
  • On the seasonal side, wholesale trade jobs went up by 15.7K, led by 12.6K increase in non-durable goods and electronics markets jobs.  
  • Retail jobs jumped by 34.5K, led by jobs in clothing and clothing accessories stores, which increased by 10.5K.  
  • Leisure and hospitality jobs jumped by 28K, mainly due to a 32.6K increase in restaurant jobs.  
  • Another example of seasonal increase was the 11K jump in construction jobs, especially now that the famous 'weather factor' appears to be disappearing.  Along with that, we saw an 8.1K increase in real estate services jobs.
  • Transportation related jobs went up by 11.3K.  
  • Professional and business services increased by 75K, led by a 37.6K increase in administrative jobs.  That was due mainly to 24K jobs in temp help services.
  • Jobs related to manufacturing durable goods grew by 11K, led by motor vehicles and parts, machinery, and fabricated metal products.  This could indicate expectations of higher capex during the next few months.  Non-durables manufacturing jobs grew by only 1K. 
  • Jobs related to financial activities and information technology were not as strong.  In fact, information jobs declined by 6K.  

Regarding the participation rate, the labor force shrank by 806K, which brought down the participation rate by 40bps to 62.8%.  While these figures are concerning, we note that the U-6 unemployment rate declined by 40bps, matching the decline in the U-3, or the 'official' unemployment rate.  We aren't ignoring the lower participation rate, but it appears that job growth, although at a modest rate, continues.

Some are saying that the low participation rate could be due to people that work in seasonal businesses have not yet started looking for jobs.  In our opinion, the strong increase in seasonal jobs pretty much shuts down that argument.  Of course, when the long-term unemployed see the good NFP figures, they might begin looking for jobs again, no matter what they specialize in.  Then again, taking all upward revisions into account, NFP change has been pretty positive during the last few months, even with the 'weather' factor being ever-present.   

People employed part-time for economic reasons increased by 54K, which is not necessarily good news.  This has been going on for a while.  Historically, during recoveries temp and part-time jobs increased first followed by much stronger overall job growth.  We have not seen much of this during the 5+ recovery years.  

But in terms of length of time being unemployed, those figures dropped for all time ranges.  In addition, unemployment rates dropped across all age groups, and among whites, blacks, and Hispanics.  Surprisingly, the always-low unemployment rate of Asians did not change in April. 

What is concerning is the fact that while we saw job growth, average weekly hours worked and average hourly earnings did not change.  It appears that the good job numbers are good news mainly for the ones that already make money as they are the main ones consuming discretionary products and services.  Again, the job numbers were good, as we expected, but we have not seen much 'trickle down' in a number of years; not necessarily good news. 

Manufacturing ISM

Thursday's ISM manufacturing for April was 54.9, below our 55.4 estimate, but above the lowballing Street's 54.3.  The 1.2 increase from the prior month was due to increases in the employment, exports, and imports sub-indexes.  We note that the new-orders sub-index did not change and the production sub-index declined by 0.2.

BCOR: Difficulties continue ...

Blucora (BCOR) disappointed again, mainly due to weakness in its search segment.  We warned that this may happen on 4/17.  But the problems do not end there.  The Company's eCommerce segment's margin was also disappointing.  We continue to stay away from this stock.  As a reminder, we recommended this name on 1/29/13 at $15.13, and lowered our 'rating' on 11/5/13 when the stock was trading at $24.24, which represented a 60% gain.

Similar to IACI, BCOR is experiencing difficulties conducting its search business which is nearly 80% dependent on Google (GOOG).  Although the Company renewed its contract with GOOG in Feb., it only covered searches on desktops, which is no longer growing much.  GOOG left it out of the mobile platform, so this shortcoming was foreseen.  While the stock has already declined 35% from its 12-month high of $30.12, based on its 10% decline in AHs, it appears that such shortcoming was not that easily foreseen by the market nor its current investors.  We note that management also cited implementation of new technology within this segment as one of the reasons behind its weakness.  

Search revenues grew only 6% Y/Y in Q1.  18% margin was higher Y/Y, but was due to cost cutting, mainly less marketing as the Company expected the disappointing growth.  

BCOR is acquiring HowStuffWorks to hopefully help accelerate growth in the search segment.  The acquisition will close this month, but we do not expect much improvement in the search segment post this transaction.  We continue to expect a mere 8% FY '14 search revenue growth, with segment income of $89MM, or a 19% margin.

BCOR's TaxAct segment performed well, with revenues of $72.3MM, up 12% Y/Y.  Segment's margin of 51.7% appears to be in-line with what we expect for the full-year.  Given expected losses during Q3 and Q4, which are not part of the tax season, we estimate 48% margin for FY '14.  

eCommerce revenues were $37.1MM.  The mere 6% margin was very disappointing.  Even if we take this business' seasonality into account, it appears that it may not meet our $165MM revenue estimate and 11.5% margin assumption for FY '14.  This could be the reason why the Company may bid on Brookstone.  But as we mentioned before, it may be forced to pay too much for the business.  

Overall, we think it would be best for BCOR to sell its search business.  One of the interested parties may be IACI.  We think IACI could place a $450MM bid on that business, representing 5.5x TTM and approx. 5x FY '14 EBITDA.  Whether IACI would place the bid or BCOR would accept such an offer remains to be seen.  We now value BCOR at $20.62/sh, based on 5x, 8x, and 7.5x search, TaxAct, and eCommerce EBITDAs, respectively.  Given growth risks associated with the search and eCommerce businesses, we remain 'neutral' on BCOR.