AMBlog Index Performance Update

We thought to present the performance of our long recommendations compared with a couple of indexes/benchmarks.  We have been fortunate to have outperformed the market, as displayed below.  In the coming weeks, we likely will add a couple of new names.  As a reminder, while we continue to believe that the overall equity market (S&P 500) is overvalued, we search for and find a few investment opportunities.  

Related links:

• Our latest valuation of S&P 500 (8/24/15) ...
• Our latest valuation of S&P 500 ... (8/7/14)

Our latest valuation of S&P 500 (8/24/15) ...

Given the volatility that we have seen the last few days, and the fact that it was about a year ago that we provided our 12-month S&P 500 valuation, we thought to provide an update.

First, as a reminder, on August 7, 2014, we published a 12-month target of 1776 for the S&P 500.  While on the 12th month the index was at 2077.57, we should point out that only 3 weeks after that (today, August 24, 2015), nearly on the 13th month, the S&P 500 closed at 1893.21, only 6.2% above our previous target.  We note that our valuation does not take into account the Fed's intervention in the market.  As mentioned a long time ago, the Fed finds itself in a bind now.  Sooner or later it will have to wipe its hands clean and let the markets operate without its 'very visible hand'. 


S&P 500 12-month target

We glanced over the latest S&P 500 earnings estimates (provided by McGraw Hill's S&P Dow Jones Indices, LLC) and realized that the consensus for CY '15 operating earnings (bottom up) has declined 18% since July of last year!  Yes, a big chunk of such a decline may be due to the big dump that oil has taken, but then again, one would expect such decline to result in significant top-line growth and margin expansion in other sectors.  Unfortunately, unlike what the 'experts' keep pitching, this has not necessarily been the case.  

Believe it or not, even with the latest significant market decline, we now think the S&P 500 can go lower, possibly to 1660 within the next 4 quarters.  The index is currently trading at 16.9x and 14.4x CY '15 and CY '16 operating earnings, respectively.  Our target represents a P/E of 13.6.  Given that the index covers a pretty broad market, we derived our forward P/E from a PEGY of 1.0 based on the 5-year earnings CAGR consensus of 11.33% plus the current dividend yield of 2.31%; and applied it to the CY '15 and CY '16 earnings estimates.

That operating earnings multiple gives us a 1527 - 1794 valuation range.  We are only in the second month of Q3 '15, and for this reason we took the median of that range, resulting in a 1660 valuation of S&P 500 for the next four quarters; 12.3% below where the market is currently.  We note that applying the same multiple to total earnings over the next 4 quarters (2H '15 and 1H '16), results in a 1674 target, comparable to our 'official' 1660 target.  

Yes, as many say, this time it may be different from the Great Recession.  However, the difference is that nearly all central banks globally have intervened, so there may not be too many options left on the table.  We are not saying that the market and the economy are doomed, but we still believe until the 'central bank premium' gets priced out, there remains significant downside.


Performance of AMBlog Index

Lastly, we thought to display the performance of our long recommendations compared with a couple of indexes/benchmarks (below).  We've been fortunate to have outperformed the market even with the latest 10%+ decline from the all-time highs. 

 

Update ...

It is a bit late, but we thought to share with you the performance of our picks that required in-depth research.  We note that while we continue to think the overall equity market is overvalued; as displayed below, our individual picks certainly outperformed the market.  

• The AMBlog Index is a market-weighted index consisting of our long calls. 
• We have also included information regarding when we made certain calls and how they performed during that period, in the table below.
• Lastly, we went pretty much 1 out of 2 on our short calls.  Facebook's (FB) overall performance, which went completely against what we had projected, offset what appeared to have been a good short call on Twitter (TWTR).  We note that we discussed these two companies and their valuations before their IPOs.

We are in the process of updating our models on these companies as they report their latest quarterly earnings results.  We will provide updates regarding our view of the companies' stocks over time.  We are also in the process of stock screening, which will be followed by detailed fundamental research, and if 'worthy', will be posted on this blog.

Our Jan. '15 NFP change guesstimate ...

We expect approx. 200K jobs to have been added during Jan. '15.  Our estimate is below the 230K consensus, yet again.  Most regional Fed survey employment sub-indexes were lower than last month.  However, the New York Fed survey employment sub-index increased by nearly 50%.  As everyone knows, the ADP number released on Wednesday was disappointing.  Combined with lower employment indices in both manufacturing and service ISM numbers, the not so impressive increase in online job postings in Jan. indicates what we believe will be a disappointing figure released by BLS on Friday morning.

Lastly, this weekend we will finally do what we kept promising the last couple of months, which is update most financial models of the companies that we recommended.  We will also provide some figures showing how our recommendations performed in 2014 and since they were published. 

Our Nov. '14 NFP change guesstimate is +175K ...

For the third month in a row, we are submitting our NFP change guesstimate a bit late, but certainly more than a few hours before BLS releases that figure.  

We expect approx. 175K jobs to have been added during Nov. '14.  Our estimate is below the 230K consensus.  Regional Fed surveys were mixed, both ISM surveys were slightly weaker than the prior month, initial jobless claims went up a bit, and we think the positive impact of the mid-term elections declined a bit.  Online job ads increased nicely during the month, which could be a positive sign more for Dec. than Nov.  

Lastly, we would focus on whether or not there has been wage growth.  In our opinion, wage growth needs to remain above the CPI for an extended period.  Given the recent decline in oil prices (which we discussed last week), we think wage growth and inflation become even more important to track.  In our opinion, if wage growth stagnates again, when compared with CPI, then look for lower oil prices to have more of an impact (a positive one) on consumer staples rather than cyclicals.  Wage growth stagnation could also indicate that companies remain uncertain about the future, and although they may be hiring more, they are discounting that uncertainty risk by not increasing wages and salaries.  Continuing growth in temp positions could indicate the same thing.

Again, our Nov. '14 NFP change estimate is +175K.  BLS will release NFP change on Friday (12/5) at 8:30am ET. 

A few thoughts on the recent decline in price of oil ...

We thought to make a few comments regarding the recent dump that oil prices have taken.  Such a drastic decline (nearly 15% in less than a week) will impact the consumption side of the economy positively, as it has led to decline in gasoline prices, which at the end of the day leaves more cash in the pockets of the always-driving American consumers.  However, we believe such positive impact will not last very long, and is more likely to be more than offset by increase in oil prices.

Let's first discuss why the positive impact on our disposable income will be short-term.  Various studies have shown that while movements in oil and gasoline prices are positively correlated, such correlation is higher when gasoline prices move up.  In other words, when oil prices increase, especially after sudden significant declines such the one that we have seen recently, gasoline prices will spike up faster than the rate at which they declined when oil prices were going down.  This is just one example of the existence of asymmetry when it comes to the relationship of oil prices and GDP growth (a huge component of which is consumer spending).    

Many may ask: why would oil prices go up after such a decline, and after the increase in supplies brought forth by oil exploration and production in the US?  

Well, let's not assume that it is all rosy just because US has increased its oil production and lowered OPEC's control over oil distribution around the world, a bit.  In fact, it is for this reason (or at least one of the reasons) that Saudi Arabia and some other members of OPEC decided not to cut supplies - to put pricing pressure on US oil companies.  Such a move is bad news for US oil companies, as we have already seen by how their stocks have performed.  And let's not forget that most of these companies are highly levered, which could pose additional risks in the future if oil prices do not increase soon.  So while right now dependence on OPEC oil has declined a bit, it may increase in the future if oil prices continue to decline forcing US oil companies to burn more cash.  

Stagnation in wage growth, which we have discussed for a long time, is another reason why positive impact on the economy from falling oil prices will be only for the short-term.  Lower oil prices may also help reduce various companies' opex, but historically, companies are well aware of volatility of oil prices.  For this reason, even if companies take steps to hedge against higher oil prices in the future, we do not expect the savings from lower opex to be offset by higher wages.  So, take your pick: higher earnings the next 1 or 2 quarters due to lower oil prices and lower opex, or higher wages going forward which could have a longer lasting positive impact on the entire economy as it may increase consumption.  We think it is more likely that those great company executives will go with the first option.  

Now let's talk about why oil prices could increase again, although we have no idea when this might happen.  Decline in oil prices was driven mainly by two things, in our opinion: slower growth in demand, especially in the emerging markets and China (whose latest PMI was disappointing) and India; and higher production in US.  One thing that has not changed, and has actually worsened since the last time oil was above $115/barrel (in Apr. '11): geopolitical factors.  With ISIS creating more instability (although it is clearly linked to Saudi Arabia), and the failure, for the time being, of an Iran/P5+1 agreement, we think geopolitical factors could drive oil prices a bit higher, or at least slow down the recent decline that we have seen.  Combined with lower demand, this is not necessarily good news.  

In addition, such significant declines could lead to further instability as they are likely to bring about significant economic hardships on not only Iran and Iraq, but also Russia.  With more instability in the Middle East, with US oil companies having a difficult time, sooner or later supply may decline or the risk of a decline may increase, pushing prices a bit higher and/or significantly increase price volatility, which is not good news for many reasons.

Of course, all of this is just our opinion.  Let's discuss the political side of this 'oil price dump'.  Such a dump is nothing but good news for US political war hawks, more specifically, the neocons.  And the dump came just at the right time - the deadline for Iran and P5+1 to reach a deal.  What Saudi Arabia did (opposing a reduction in oil supplies) was not only to hit the US oil companies where it hurts, but also to severely damage Iran and Iraq.  We can all thank the Saudi government for backing ISIS (and its bloodthirsty 'skilled beheaders') in Iraq and Syria; and now the US neocons can thank the Saudis for further damaging Iran's economy and pushing higher chances of a military conflict.  As always, that Saudi government has its hands in nearly everything inside Saudi Arabia (yes violating human rights 1000x worse than Iran or any other country in the Middle East ever did) and in nearly everything outside of Saudi Arabia.  

We will post our Nov. '14 NFP guesstimate later this week, in addition to a quick review of how some of our favorite names (AVID, CNK, GCI, and others), along with our non-favorite ones (IACI, BCOR, TWTR, and others), have performed.

Other related posts:

• Equity Market, War, Oil, and the Economy (March 2012)

Oct. '14 NFP change guesstimate

We're late again, as it is currently 1:58am (ET) on Friday morning.  However, as usual, we'd still like to post our NFP change guesstimate.  Our model spit out an increase of approx. 195K in NFP for Oct., about 45K below the current consensus.  

ISM manufacturing and services employment sub-indexes increased during the month.  Initial claims were very low, and the ADP figure was encouraging.  However, online listings barely jumped in Oct. from a very weak Sept.  We think such lack of movement indicates deceleration in demand going forward, and drove our model to come up with such a low estimate, compared with the consensus.  Let's see what BLS comes up with this time.

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:

• GCI: Will split into two separate companies; acquires remaining 73% of Cars.com  
• GCI, FB, RGC: Last week's earnings review
• GCI, IACI: The Supreme Court rules against Aereo ...
• GCI: Good Q1 results; on track to meet our FY '14 expectations    
• AVID, FB, GCI, TWTR: Media-tech industry analysis discussion at 2014 NAB ...   
• GCI: Guides higher than expected Broadcast revenues; Reported strong Q4 and FY '13 results   
• GCI: Gannett remains a value-play

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:

• AMC, CKEC, CNK, RGC: Some thoughts on movie theatres ...

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:

• AVID: Revisiting Avid Technology, Inc.
• AVID: AVID at the NAB; more on valuation ...
• Avid Technology, Inc. (AVID)

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.

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!

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. 

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:

• GCI: Will split into two separate companies; acquires remaining 73% of Cars.com  
• GCI, FB, RGC: Last week's earnings review
  GCI, IACI: The Supreme Court rules against Aereo ...
  GCI: Good Q1 results; on track to meet our FY '14 expectations    
• AVID, FB, GCI, TWTR: Media-tech industry analysis discussion at 2014 NAB ...   
• GCI: Guides higher than expected Broadcast revenues; Reported strong Q4 and FY '13 results   
• GCI: Gannett remains a value-play

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.

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.

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:

• GCI, FB, RGC: Last week's earnings review
• GCI, IACI: The Supreme Court rules against Aereo ... 
• GCI: Good Q1 results; on track to meet our FY '14 expectations 
• AVID, FB, GCI, TWTR: Media-tech industry analysis discussion at 2014 NAB ... 
• GCI: Guides higher than expected Broadcast revenues; Reported strong Q4 and FY '13 results
• GCI: Gannett remains a value-play 

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:

• Not a bad start to Aug. '14 at the box office ... 
• AMC: Mixed Q2 results; remain 'neutral' on the stock ...
• GCI, FB, RGC: Last week's earnings review 
• AMC, CKEC, CNK, RGC: Some thoughts on movie theatres ...

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: 

• AMC: Mixed Q2 results; remain 'neutral' on the stock ...
• GCI, FB, RGC: Last week's earnings review 
• AMC, CKEC, CNK, RGC: Some thoughts on movie theatres ...
• AMC, CKEC, CNK, NFLX, RGC: Amazon introduces Fire TV ...

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. 

Jul '14 NFP and ISM manufacturing guesstimates ...

We are yet again a bit pessimistic when it comes to the monthly change in NFP.  We estimate that figure to be 190K, compared with the consensus of 233K.  While the 'do me a favor' type of hiring within different parts of the government might have begun as we get closer to the mid-term elections, we do not think they would be enough to get the overall change in NFP to above 200K.  The ADP figure, released on Wednesday, was also a bit disappointing.  Lastly, in our opinion, continuing decline in initial jobless claims does not necessarily mean that more people are being hired; it is more related to less people being fired.  Unfortunately, our NFP change guesstimate has not been very accurate the last two months.  We will see if luck will be on our side this time when the BLS employment numbers are released on Friday morning.

ISM manufacturing will also be released on Friday.  Based on positive results of the regional surveys, we expect the overall index to come in at 56.0, a slight increase from June's 55.3 and in-line with the 56.0 consensus.  We think the higher employees sub-index will be the biggest contributor to the increase.  In addition, we expect new products, production, and backlog sub-indexes to show deceleration in growth.

AMC: Mixed Q2 results; remain 'neutral' on the stock ...

AMC reported mixed Q2 results; beating on the bottom-line, but missing the top-line consensus by $12.5MM.  We remain 'neutral' on the stock and value it at approx. $26/sh based on a 5-year DCF and the Company's share of NCMI. 

The Company reported Y/Y decline in admission and concession revenues, which is mainly due to lack of blockbuster content, along with the World Cup, driving attendance figures down sequentially and Y/Y.  We think Q3 and certainly Q4 will be slightly better mainly due to better movies hitting the theatres.  

Admission revenue per patron (or the average ticket price) increased to $9.55.  For the year, we have assumed a $9.50 average ticket price.  Concession revenue per patron was $4.22 during the quarter.  We have assumed $4.09 for the year.  With better than expected adj. EBITDA margin of 18.1% (versus last year's 17.7%), we think the Company can lower its prices temporarily to drive attendance higher.  However, again, content is king, and is the main attendance driver. 

The stock was down 5% in AHs.  We think it may become attractive if it dips below $18/sh and/or as we get close to the EOY, as 2015 box office guesstimates are a bit higher than this year's.  We continue to rate AMC 'neutral'.  We initially discussed AMC and some other movie theatres on 3/21.

IACI: Q2 numbers missed expectations; still value it at $60/sh

IACI reported Q2 results this morning missing on the top and bottom-line.  Revenues came in $40MM short of the Street's estimates.  We remain 'neutral' on the stock and value it at $60/sh.

As we mentioned yesterday, based on Google's traffic acquisition costs (TAC), search & applications revenues for companies such as IACI and Blucora (BCOR) have slowed down and will slow down further.  IACI search & application revenues were down 7% Y/Y.  

Its Match Group revenues were up 8% Y/Y.  We hope the Company either begins to monetize Match Group's assets (such as Tinder) more quickly or acquires additional ones (as it did earlier this month with HowAboutMe), which is what IACI is known for.  Also, on this morning's call, management certainly displayed uber-optimism and excitement regarding the possibility of monetizing Tinder.  We hope the Company can monetize Tinder successfully, but we note that the monetization of Tinder could cannibalize revenues and cash-flow generated from Match.com. 

Media and eCommerce segment revenues were down nearly 16% mainly due to the Company's sale of Newsweek and placing its CityGrid Media into the search & applications segment.  We note that excluding CityGrid Media from last year's figures, IACI's eCommerce (mainly HomeAdvisor) revenues were up 12% Y/Y. 

Valuation

Assuming the best-case scenario, where Tinder can add as much as $200MM to the bottom-line annually in terms of EBITDA, and no other acquisitions, we think IACI's Match Group could be worth around $5.50bil, based on 10x EBITDA.  Of course, the Company has not yet 'decided' on how to monetize Tinder.  The worst-case scenario, assuming Tinder cannot be monetized, could result in a mere $2.03bil valuation (7.5x EBITDA) of The Match Group.  So, we think the valuation of The Match Group could be the mid-point of this range, or approx. $3.77bil (9x EBITDA).  

The search & applications segment, which continues to decline, is worth around $1.75bil, or 5x EBITDA.  Ignoring the other segments (which combined are in the red and will likely remain there), IACI's EV could be around $5.51bil.  After including the latest net debt on its balance sheet, IACI's market cap would be approx. $5.50bil; or ~ $60/sh.  We still view IACI as a 'neutral' stock.  

In our opinion, even-though the potential of Match Group IPO or spin-off is already priced in, we sense the hesitancy from sell-side analysts to downgrade this stock as they'd like to be part of the IPO or spin-off 'process'.  Some things never change. After being down as much as 6% earlier today, IACI is now up 1%. 

We recommended IACI on 1/29/13 at $40.65 and 'downgraded' it on 11/4/13 when it closed at $55.68.

TWTR, FB: Strong Q2 for Twitter; stock up ~ 30% in AHs; remains overvalued ...

Twitter (TWTR)

TWTR had a good overall Q2, as we expected.  Data licensing revenues which grew 43% sequentially, beat what the Street was looking for, as we expected.  MAUs also beat estimates, as we expected.  The big surprise was the ad price, or ad revenue per 1000 timeline views, of $1.60, which represented a 100% Y/Y growth.  And we think such growth was driven by the fact that more advertisers are jumping on the mobile ad bandwagon and, of course, the World Cup, which helped improve user engagements significantly.

Obviously, the World Cup is not held every quarter.  However, this is an even-year which means the political space will be very hot for advertising and purchasing data, benefiting TWTR.  The better than expected performance of Q2, and in our opinion, the mid-term elections, drove management to up its FY '14 guidance.  One may now call TWTR a media company.    

Although MAUs showed better growth than in the previous quarter, in our opinion, TWTR is still adding users at a slower pace than the market expected when the Company had its IPO.  However, the ongoing and ever-increasing geopolitical factors worldwide will likely help increase growth rate of MAUs during the next 12 months. 

While we do not think that more MAUs and geopolitical factors will increase user engagements as significantly as the World Cup did, they will certainly help the ad revenue growth rate.

As mentioned earlier today, the data created by the social media platforms is also very valuable, helping TWTR's data licensing segment continue its strong double-digit growth going forward. 

Everything we said above regarding TWTR was positive.  Unfortunately, from a valuation standpoint, specially based on the $50 stock price in AHs, we think TWTR remains overvalued. 

After adjusting our estimates higher, our 5-year DCF model still resulted in an $18.4bil valuation of the Company.  At $50/sh in AHs, the market is valuing TWTR at nearly $30bil.  In other words, TWTR, a company with slower than initially expected user growth, and seasonal revenues too highly dependent on huge worldwide events, is trading at 22x and 140x FY '14 sales and EBITDA, respectively.  TWTR remains in its early stages of growth, so let's look at the same multiples for FY '15 and FY '16: 18x and 84x FY' 15 sales and EBITDA; and 13x and 42x FY '16.  Those valuation multiples make FB look like a utility company!  Of course, we believe FB is also a bit overvalued. 

Remember that many jumped on the TWTR bandwagon even when it hit $70, and they all got taken for a ride.  Hopefully, the 30%+ jump in the stock price in AHs doesn't indicate that everyone expects TWTR to perform like this every quarter. 

TWTR, AMC, BCOR, IACI: Earnings previews ...

Twitter (TWTR)

TWTR will report Q2 results today after the close.  FB's strong Q2 numbers may have indicated that TWTR also had a good Q2.  While the World Cup, wars, and other geopolitical factors likely have driven up TWTR's Q2 MAUs more than expected, we think the ad revenues per 1000 timeline views may disappoint.  All of this may be offset partially by better than expected growth in data licensing revenues, given the continuing frenzy over 'Big Data' in the technology and ad spaces.  Our 5-year DCF model spits out a $15.8bil valuation of TWTR, lower than the $22.5bil valuation the market is giving it.   


AMC Entertainment Holdings (AMC) 

AMC will report Q2 results on Wednesday (7/30) after the close.  Similar to Regal (RGC), we expect some weakness in the attendance numbers due to the World Cup and not enough blockbusters.  However, in terms of average ticket prices and average spent on concessions, we think those numbers will be encouraging.  We remain 'neutral' on AMC continue to value it at $26/sh based on a 5-year DCF and its share of NCMI.  We initially discussed AMC and some other movie theatres on 3/21.


Blucora (BCOR) 

GOOG's Q2 TAC, related to its AdSense, grew only 4% Y/Y, compared with 10% in Q2 '13; certainly not encouraging for BCOR.  Such deceleration in GOOG TAC (positive for GOOG as its ad revenues still grew 19%, but not for its partners) has been evident also in annual numbers as TAC grew 5.7% and 20.5% in FY '13 and FY '12, respectively.  Historically, we estimate that AdSense has been responsible for 80%+ of BCOR's search revenues.  Combined with the fact that the latest arrangement between GOOG and BCOR do not include ads on mobile platforms, this is not every good news for BCOR's search segment.  We have touched on this risk faced by BCOR before.

We expect only high single-digit search segment revenue growth for BCOR this year.  We think the Company can accelerate growth in its owned and operated (O&O) search revenues, likely in the teens.  However, O&O revenues represent only 20% - 25% of total search revenues.  We expect total search revenues to grow approx. 10% this year compared to 24% in FY '13. 

BCOR stock has declined 36% since it hit its 52-week high of $30.12 on 11/15/13.  We value it at approx. $20.00, based on sum-of-parts: FY '14 EBITDA multiples of 5, 8, and 7.5 for its search, TaxAct, and e-commerce segments plus net cash.  The Company is trying to further diversify its business and lower its dependency on the search business.  As a reminder, we recommended BCOR on 1/29/13 at $15.13 and 'downgraded' on 11/5/13 at $24.24.  BCOR has not yet announced the date of its Q2 earnings report. 


IAC/InterActiveCorp (IACI) 

The same 'TAC logic' we believe is applicable to IACI when it comes to its search & applications segment.  Although, IACI's acquisition of ValueClick's O&O websites in Dec. '13 may make those figures look a bit better.  We expect approx. 11% growth in search & applications revenues for FY '14.  What has held IACI stock in the mid to high $60s is anticipation of an IPO of the Match Group (online dating) business.  It appears the market considers Match Group's Tinder (which we discussed early on in Nov. ’13) attractive, although the question of monetization still needs to be answered.  Earlier this month, IACI added to its 'dating portfolio' by acquiring some of HowAboutWe, another online dating company.  Zoosk, another online dating service provider, filed its S-1 on 4/16/14.  Of course, a successful Zoosk IPO could shoot IACI stock much higher.  But we still have a 12-month valuation of $60 for IACI, based on 7.5x FY '14 EBITDA.  We recommended IACI on 1/29/13 at $40.65 and 'downgraded' it on 11/4/13 when it closed at $55.68.  IACI is scheduled to report its Q2 numbers tomorrow (7/30) before the open. 

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.