Tuesday, July 29, 2014

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.

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