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, 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).   



Regarding, we are assuming low double-digit top-line growth until FY '19.  We plugged in 9% revenue growth for FY '19 and FY '20. 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.'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 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 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 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.


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.


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

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 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 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:

CNK, CKEC: A bit more encouraging Q2 numbers than peers ...

Cinemark (CNK)

Unlike its peers, CNK, reported better than expected Q2 results on the top and bottom-line.  We still the stock is worth $36/sh based on our DCF model.  We initially discussed the name in March '14, when it was trading at $28.13/sh. 

Within its US operations, CNK's attendance figures looked better than the rest of the industry as they included the Rave theatres it acquired near the end of Q2 last year.  We said the Company has more room to increase its prices, and it has as US admission revenue per viewer went up 0.56% to $7.20.  We have modeled $7.09 for the year.  Total US admission revenues were down only 0.4% Y/Y.  US concession revenues went up nearly 4% Y/Y, helped by the Rave theatres and higher prices.  US concession revenues per patron came in at $3.67.  We have $3.51 in our model for the year.    

Attendance in CNK's international business declined nearly 10% Y/Y, mainly due to the Company's sale of its Mexico theatres in Q4 '13.  The same can be said regarding international concession revenues.

Operating margin was down 250bps from last year as the acquisition of Rave pushed facility lease expense and D&A higher as percentage of revenues. 

CNK remains on track to meet or beat our FY '14 revenues and EBITDA projections of $2.77bil and $593.9MM, respectively.  
As mentioned earlier this week, Guardians of the Galaxy helped August box office numbers get off to a strong start, which is a bit encouraging; but there is still a long way to go.     

Carmike (CKEC)

CKEC reported mixed Q2 results with revenues coming in ahead of estimates but EPS a bit short of expectations.  Revenues were helped by the acquisitions the Company made last year.  CKEC appears to remain very aggressive when it comes to acquisitions, demonstrated by the Digiplex acquisition announced in Q2. 

Similar to its peers, higher admission and concession prices are partially offsetting decline in attendance.  Admission revenue per viewer was at $7.39 in Q2.  We have modeled $7.27 for the year.  Concession per patron was at $4.36.  We have modeled $4.35 for the year.

CKEC's operating margin took a big hit, coming in at 10.2%, significantly lower than last year's 13.8%, mainly due to much higher leasing expenses after the acquisition of Muvico last year.  We note the Company is on track to hit the $120MM in EBITDA for the year.

We continue to value CKEC at $32 - $33 per share. 

Other posts related to CKEC and CNK:

Monday, August 4, 2014

Not a bad start to Aug. '14 at the box office ...

Led by Guardians of the Galaxy, this past weekend's box office numbers provided some hope that Q3 may not be as bad as many initially expected.  We note that there is still a long way to go.  However, Guardians of the Galaxy's $94MM not only broke the first-week of August record of $69.3MM, held by The Bourne Ultimatum since 2007, but also blew away the experts' $75MM estimate.  According to Box Office Mojo, this weekend's $172.6MM was up 26.1% from the prior week and up 40.0% Y/Y.  Again, there is still a long way to go, but a start like this is a bit encouraging. 

Carmike (CKEC) will report Q2 numbers on Monday after the close.  And Cinemark (CNK) will report on Tuesday before the open.  While their Q2 numbers may miss expectations on the top-line (similar to AMC and RGC), the good box office news of this past weekend might renew faith for some investors.  We continue to rate AMC as 'neutral', CKEC as overvalued, and CNK and RGC as undervalued.

Our thoughts regarding these movie theatre companies and the overall space can be found here: 

Thoughts on Jul. '14 employment and ISM figures ...

BLS Employment Report (Jul. '14)

Change in NFP for Jul. '14 came in practically in the middle of the range between our 190K estimate and the 233K Street consensus; 209K.  Even with prior two months' upward revisions of 15K, the July NFP was considered disappointing, although it remained above 200K.   

As we expected, government jobs helped by adding 11K to the NFP.  Surprisingly, manufacturing was very strong, adding 28K jobs, mostly related to automobiles.  Jobs in retail also came in above expectations, having added 26.7K in July.  As always, health care and social assistance kept 'helping the economy' by adding 21K jobs.  

Participation rate went up by 10bps from the prior month, but remains at historically low levels.  It likely pushed up the official unemployment rate to 6.2%, from June's 6.1%.  The U-6 unemployment rate also increased by 0.10% to 12.2%.  

Average weekly hours stayed at 34.5, and although average hourly wages went up by only a penny from June, they were up nearly 2% from a year ago.

In addition to wage growth, other employment costs have gone up.  According to the Q2 ECI (released last Thursday), while total Q2 compensation increased by 2% Y/Y (not seasonally adjusted), the benefits component rose by 2.5%.  We are highlighting this because we think accelerated growth in benefits, most of which are costs for employers, may slow down hiring going forward.  And if it does not, then it will very likely lead to price hikes, or higher inflation rates, which means Yellen might begin raising rates sooner than expected.  

If wage growth remains at a modest rate, it will not necessarily help boost consumption of non-necessities by the middle and lower classes.  Consumption by the top 10% will not move this economy forward much longer, in our opinion.  Unfortunately, there are two things keeping wages from rising: 1) higher health care costs (and no, we are not taking any political position on this topic), and 2) fear of inflation which will make capital less accessible for corporations.  In other words, while companies are hiring more to accommodate overall growth, they certainly understand that bad news remains good news for the equity market, their shareholders, their self-defined "Non-GAAP" earnings, and access to capital.  By the way, even with the recent so-called 'pull-back', we still think the overall equity market is overvalued as the QE premium remains priced-in.  We will post our next 12-month valuation of the S&P 500 during the coming week.  

ISM Manufacturing

On the ISM manufacturing front, that figure came in at 57.1, a bit higher than our 56.6 estimate, and well above the Street's 56.0.  The spike in employment sub-index was expected.  However, increases in new orders, production, and backlog were surprising to us.  We think the significant decline in inventories was one of the main reasons new orders spiked up, as growth in backlog and production were not nearly as significant.  We look for ISM manufacturing to get back down to the 53 - 55 range in August.