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, 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.



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.

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.