GCI, IACI: The Supreme Court rules against Aereo ...

The Supreme Court ruled against Aereo and in favor of ABC this morning.  We expected such a ruling and we also agree with it.  In terms of how some stocks are reacting, GCI, which we have been viewing as a 'buy' and value at approx. $40/sh, is up 4%+.  IACI, one of the biggest investors in Aereo and a stock that we value at only $60/sh, is down approx. 1%.  Other stocks impacted by this ruling include: MEG (+10%), SBGI (+14%), and CBS (+5%). 

The Court's ruling was based on a few things that we have discussed before: 1) Aereo is actually distributing content and not merely storing the content, nor just providing the hardware, as it claimed; 2) based on (1), Aereo is transmitting "a performance ... of the work ... to the public" (as stated in the Copyright Act of 1976; and 3) given (1) and (2) and the fact that it has not attained nor paid for any right to distribute (or "transmit") the content, Aereo is committing copyright infringement.  Simply put: content remains king and any distribution of it must be paid for.  

What does this ruling mean for GCI?

The Supremem Court's decision means GCI will continue to receive retransmission fees from distributors; whether the distribution is in real-time or delayed, or via cable, satellite or OTT.  The retrans fees basically go straight to the bottom-line, and based on some industry studies such as one conducted by SNL Kagan, we think those revenues could grow at a 16% 5-year CAGR through 2019, possibly expanding GCI's Broadcast segment EBITDA margin to 54%+.  

What does this ruling mean for Aereo?

The CEO of Aereo has been quoted saying that the company does not have a "plan B" if the Court rules against it.  After this morning's news, we will see if Aereo, along with the $90MM+ invested in it, will disappear.  The other option may be that Aereo begins paying broadcasters.    

Other news ...

In other news, the latest Q1 GDP figure was released by the BEA which showed real GDP declined at a 2.9% annualized rate compared with a 1.9% decline expected by those expert economists.  Durable goods orders for the month of May also came in below expectations, -1% compared with the 0% consensus.  PMI services for June beat expectations, 61.2 vs 58.0 consensus.  But we note that deceleration in the outstanding business, business expectations, and prices charged (or revenues) sub-indexes, combined with acceleration in employment and input price sub-indexes, do not sound that great.  But who cares, the equity market continues to go up and up; S&P500 is up 0.23% at 1954.  

Lastly, we are a bit relieved as the Supreme Court also ruled that law enforcement officials need warrants to have access to any data on cell-phones.  Then again, as we have seen in the past, no laws are really applicable to the NSA.  But we continue to hope for change.  

May '14 NFP increased by 217K; our guesstimate was off significantly ...

Well, our accuracy trend of estimating monthly net change in NFP ended abruptly today as May NFP increased 217K, slightly higher than the 213K estimate, and significantly above our 129K guesstimate.  Official unemployment rate remained at 6.3% with no change in labor force participation rate.  The U-6 rate dipped to 12.2% from 12.3% in April.  In terms of revisions, April NFP change was lowered by 6K to 282K while the March figure was unchanged at 203K.  Overall, the numbers were pretty much in-line with what the market expected, but we will see what happens next month, in terms of revisions.  We must say thank Goodness for those ever-increasing health services jobs as they increased by nearly 55K!  

• Private NFP increased by 216K
• On the production side (goods-producing), the biggest gainers were manufacturing (+10K) and construction (+6K)
• Within manufacturing, strength in durable goods was offset partially by decline in non-durable goods, especially in food manufacturing
• On the services side (private service-producing), led by education and health services (+63K), professional and business services (+55K), and leisure and hospitality (+39K). 
• Health-services jobs jumped by 54.9K.  We are guessing that Americans aren't getting any healthier as jobs in this space continue to increase.  Or the Obamacare is actually creating the jobs, for good and bad reasons.
• Professional and business services increased due to strength in technical services and those administrative employment services jobs.  Temp-help jobs continue to grow; whether that is good news or not, remains to be seen.
• Wholesale trade jobs increased by 9.9K with strength in durable goods trade jobs partially offset by decline in nondurable goods.
• Increase in retail trade jobs was helped by a 6.8K increase in car dealer related jobs but jobs in electronics and appliance stores declined by 5.1K
• Information related jobs declined mainly due to another decline in motion picture and sound recording industries jobs.  
• Average weekly hours remained unchanged while hourly earnings went up by a nickel or 0.2% from April; and by 2.05% from last year.   

S&P 500 futures are up 0.2% indicating possibly another record close for the equity market today.  Gold is up 0.14%, which is a bit surprising given the solid jobs report.  Front-month oil futures up 0.44%, maybe a bit more due to the good durables-related jobs numbers rather than the usual geopolitical factors. 

May '14 NFP guesstimate of only 129K ...

BLS employment report will be released this Friday, 6/6.  Our model spit out an NFP increase of approx. 129K, significantly below the 213K Street consensus.  While initial jobless claims have been declining consistently, we note that such trend does not necessarily indicate acceleration of job growth, but rather a deceleration of job loss.  In addition, the ISM manufacturing and services employment sub-indexes were mixed in May, while the ADP report missed big.  Lastly, the latest online job postings, both total and new ones for May, declined slightly.  For these reasons we think the NFP net change in May employment report may turn out to be a big miss.

Disappointing May ISM manufacturing ... or not?!? (part II)

This is amazing!  ISM appears to have corrected its mistake TWICE, and only on its homepage and on a correction *.pdf report , not within the published report on its website .  So the 'final' May ISM manufacturing index stands at 55.4, slightly below our estimate and the consensus.  By now, we think the overall consensus is that ISM may have needed a 3-day weekend to get this right. 

The main differences between the original report and the double-revised one are: growth in new orders and production accelerated, while deceleration in employment was a bit lower. 

We're wondering if Vegas is taking any bets on whether or not ISM will revise the revised version of the first revised version!

Disappointing May ISM manufacturing ... or not!?!

May ISM manufacturing may not have been as bad as initially reported by ... yes, by ISM!  There are some reports out there saying that ISM used the wrong seasonal factor to adjust its results, and because of that it spit out the disappointing 53.2 that we discussed earlier today.

Some reports have said the number is actually 56.0, which, if true, is closer to our 55.8 estimate and above the 55.5 consensus.  It remains to be seen, as the last time that we checked the ISM website, no changes were made to the report.  We called ISM's Kristina Cahill and left a message.  We also emailed her.  Hopefully we will get a response.  Below are links to various reports stating the correction (or no correction ... or too many corrections) associated with ISM's May manufacturing data.  

http://www.businessinsider.com/stone-mccarthy-on-ism-2014-6
http://www.bloomberg.com/news/2014-06-02/ism-corrects-u-s-may-factory-index-to-56-after-adjustment-error.html
https://twitter.com/StoneMcCarthy/status/473475377453862912

GCI: Positive article on Gannett in Barron's

We wanted to highlight a positive piece on Gannett (GCI) published in Barron's last weekend (5/31).  Pretty much everything we said about GCI in Jan. '14 was supported in that Barron's article.  Most of the buy-side guys that Barron's quoted also value GCI around $40/sh.  Link to the article: Gannett Could Rise 40%.  

GCI has reacted well to the story as it is up 3% on high volume; it is up only 4.2% since we published our opinion on it in late Jan. '14, compared to a 7.5% increase in the S&P 500 during the same period.    

Related AMBlog posts:

• GCI: Good Q1 results; on track to meet our FY '14 expectations
• GCI, IACI: Supreme Court to hear the Aereo case ...
• AVID, FB, GCI, TWTR: Media-tech industry analysis discussion at 2014 NAB ...
• GCI: Strategic partnerships announced; may help drive top-line growth down the road
• GCI: CBS to simulcast 8 Thursday night NFL games during the 2014 season 
• GCI: Guides higher than expected Broadcast revenues; Reported strong Q4 and FY '13 results 
• GCI: Gannett remains a value-play

Disappointing May ISM manufacturing ...

ISM manufacturing for May came in at 53.2, below our 55.8 estimate and the Street's 55.5.  Data show that growth slowed across most sub-indexes.  In our opinion, deceleration in new orders, production, employment, backlog, exports, and imports, accompanied by no change in inventories, continuing weakness in customer inventories, and overall prices surging higher, isn't a very good sign.  

Construction spending for April came in below expectations, but the miss was mostly due to an upward revision of the March data.  

Equity market's reaction to all of this has been pretty modest, with S&P500 down only 0.08%, as many await release of the May employment report this Friday.

Related posts:

• May ISM manufacturing guesstimate and more ...

May ISM manufacturing guesstimate and more ...

This week will be somewhat busy when it comes to market-moving macro indicators.  Along with the weekly initial jobless claims, ISM manufacturing and the BLS employment report for May will be released.  

We will publish our NFP (employment) estimate on Wednesday, 6/4.  Regarding the ISM manufacturing (to be released on Monday, 6/2), based on the regional surveys, we expect the overall index to come in at 55.8, slightly above the latest 55.5 consensus.  

In terms of how the equity market may react to any big surprises, that question has become more difficult to answer.  It used to be that bad news was good news as it increased chances of further QE policies, which would likely push asset prices higher.  However, tapering talk began putting at risk some of that hefty 'QE premium' that is still priced into the equity market, in our opinion.  

Then came the 'tapering of the taper-talk', which diluted impact of actual tapering, at least psychologically.  But with continuing tapering, many believed the economy will soon be back at full-speed, or 4.5%+ growth rate.  Then the 'weather factor' popped up which did impact economic growth negatively.  And that diluted the impact of the very disappointing Q1 GDP growth (on the equity market), which turned out to be a 1% decline, at least based on the second estimate released by BEA last week.  April's durable goods numbers offset the weakness we saw in Q1 GDP inventories and may indicate that Q2 has gotten off to a better start.  

However, with personal savings having declined to a mere 4% of disposable income in Q1, even with the bad weather impacting personal consumption negatively, overall PCE in Q2 may not jump as high as some economists expect.  With continuing slow growth in wages, it is more likely that consumers will bump up their personal savings to 5%+ in Q2.  The April personal income and consumer spending numbers indicate a not-so-great start to Q2 as they grew only 0.3% and -0.1% m/m respectively, both below expectations.  And consumer confidence hasn't been as strong, with the latest Reuters/UMich consumer sentiment index coming in below expectations.  

We think higher savings and stagnation in wage growth could slow down growth in the real estate market, especially among the first-time buyers that may not be able to handle  continuing increase in home prices.

Those housing numbers have been mixed lately with prices rising, although at much lower rates, but pending home sales in the very important West region declining slightly.  Then again, new home sales, housing starts, and permits for April came in better than expected.    

Simply put, there are still many questions about whether or not the economy will get up to full-speed; however, the equity market continues to hit new highs, while US treasury yields get lower.  The only consistency we have been seeing in these markets is: confusion.

April '14 Industrial Production Guesstimate ...

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

CKEC, CNK: Q1 results ...

Carmike (CKEC)

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

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

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

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

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

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

Cinemark (CNK)

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

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

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

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

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

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

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

Net change in NFP was actually better than the 288K, given BLS' total 36K upward revision of the Feb. and March figures.  The private side grew by 273K while government jobs increased by 15K.  The seasonal businesses added the most jobs as we are approaching summer.

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

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

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

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

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

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


Manufacturing ISM

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

BCOR: Difficulties continue ...

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

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

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

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

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

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

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

April Manufacturing ISM & NFP ...

Thursday, 5/1, will be a busy day regarding some potentially market-moving macro indicators.  The ISM manufacturing along with jobless claims are scheduled to be released.  Of course, what Yellen says to the Independent Community Bankers of America, likely will be watched more closely, further displaying the fact that the economy, equity markets, and politicians' well-being remain completely dependent on the almighty Fed.  Economists expect initial jobless claims of 320K and manufacturing ISM of 54.3.  As usual, we have our own estimate for ISM.  Based on the regional surveys released during the last few weeks, we think manufacturing ISM will come in at 55.4. 


April net change in NFP

Looking a bit further ahead, the BLS employment report will be released this Friday, 5/2.  We estimate NFP increased by approx. 250K, higher than the 215K consensus.  While this may appear to be 'uberly optimistic', we remain confident in our model.  We note that although last month's official net change was 192K, below our 225K estimate, adding the 37K net revision of the prior two months (Jan. and Feb.) actually made our 'guesstimate' pretty accurate.  Again, we are looking for NFP change of 250K for April.  Of course, after the S&P 500 climbed again today (up 5.62 or 0.30%), even after the miserable initial Q1 GDP of 0.1% (of course impacted by that ever-present 'weather') and the Fed indicating further tapering, we believe the positive surprise may be priced in or hoped for.  We note S&P 500 is not too far from its all-time high of 1897.

TWTR, AMC, IACI: Q1 earnings results ...

TWTR

Twitter (TWTR) reported Q1 numbers yesterday after the close.  It beat both on the top and bottom-line, but the MAU figures were disappointing.  In addition, although its Q2 guidance was in-line with consensus, estimates for FY '14 ended up at the high-end of TWTR's full-year guidance.  The stock is down approx. 10% today and down 49% since its all-time high of $74.73 the day after Christmas.  Currently, TWTR's $22bil market cap remains far above our $15bil valuation of the Company.  

A mere 19% and 27% MAU growth, in the US and international markets, respectively, were not very impressive.  However, for the time-being, advertisers have jumped on the mobile platform and paid higher rates, as TWTR generated $3.47 and $0.61 ad revenues per 1000 timeline views in the US and international markets.  But in time advertisers will be looking for consistent growth in audience and audience interaction with content, two important factors driving higher ROI of ads.  While we do not think that growth in TWTR MAUs has peaked, we must say that it may decelerate a bit earlier than originally expected, similar to Facebook (FB).  If that's the case, then ad price growth may also decelerate.  No matter how low TWTR's ad load is currently, lack of growth in demand will result in an unwanted and very low capacity utilization, which is not positive.   

We upped our FY '14 revenue estimate by around $30MM to $1.22bil and now expect adj. EBITDA of $186.1MM.  Again, we are valuing TWTR at approx. $15bil, which based on a 5-year DCF.  The stock is currently trading at over 110x, 102x, and 41x FY' 14, FY '15, and FY '16 EBITDA, respectively.  TWTR's revenue multiple for those same years are: 17, 15, and 12.  We continue to think the stock is overvalued.  By the way, some additional selling due to expiration of the lock-up does pose more risk for the stock.  We were a bit surprised that management tried to discount that risk on the earnings call.  

AMC

AMC Entertainment (AMC) reported mixed Q1 results yesterday as it beat on the top-line but missed on EPS.  As expected, growth in concession revenues was stronger than admission revenues, as the Company (and others in the space) continues to invest in enhancing movie goers' experience.  We note that attendance remained strong in the quarter.  We did not make any adjustments to our FY '14 estimates, nor to our $26/sh valuation of AMC, which is based on a 5-year DCF and its share of NCMI.  Based on where AMC is currently trading, our valuation represents only 17% upside.  We remain 'neutral' on the stock.  

IACI

IACI reported Q1 results this morning with in-line revenues and higher than expected EPS.  As we mentioned after Google (GOOG) reported its numbers, search & applications revenues for companies such as IACI and Blucora (BCOR) have slowed down and will slow down further.  IACI search & application revenues came in flat Y/Y.  Its Match Group revenues were up 9% Y/Y.  We hope the Company either begins to monetize Match Group's assets (such as Tinder) more quickly or acquires additional ones, which is what IACI is known for.  Media and eCommerce segment revenues were down 12% mainly due to the Company's sale of Newsweek.  We did not make any changes to our FY '14 estimates which include total revenues of $3.4bil and EBITDA of $705.5MM; although the EBITDA number may be at risk given the lower margins we saw in Q1.  We continue to value IACI at $60/sh, representing 7.5x FY '14 EBITDA.  Given that the stock is trading slightly above our valuation, we still view it as a 'neutral' stock.  We note that while the potential of Match Group's IPO and/or spin-off represents upside, it may be discounted due to the mere single-digit Y/Y top-line growth in that segment during Q1.

NFLX: Netflix Agrees to Pay Verizon for Faster Network Access (Bloomberg)

It appears that NFLX is expecting what everyone is expecting from the FCC: ISPs can charge a premium for its content to be delivered without any slowdowns.  According to Bloomberg, the latest ISP to charge NFLX is Verizon (VZ) ... www.bloomberg.com/news/2014-04-28/netflix-agrees-to-pay-verizon-for-faster-network-access.html

NFLX: More competition and higher costs; tough times possibly ahead

Netflix (NFLX) is facing a few 'issues' these days that have come to the forefront and pushed the Company's stock down 32% from its YTD high of $458 in less than 2 months.  We've touched on some of these for a long time.  For example, the fact that NFLX is merely a distributor and its subscription-based-only business model is not a good fit with its efforts to also co-produce original content.  We've talked about the bad pricing strategy that NFLX began implementing early on - starting at a low price.  Recently some new issues are banging on NFLX's door.  They include NFLX's streaming causing a 'traffic jam' for ISPs and increased competition from solid companies, with Microsoft (MSFT) being the latest one.

Regarding the 'traffic jam', given that NFLX is an OTT and it has 35.7MM subscribers, and that many of them go on the 'binge content consumption', it is basically slowing down the Internet for all on-line users, even the non-NFLX Internet users.  In order to maintain at least average performance, ISPs have to increase bandwidth, creating additional costs.  

One way to offset such costs is to increase rates for all Internet subscribers, even the non-NFLX users.  Given the already high prices, we do not think this would be welcomed by consumers.

Another way is to have NFLX and other OTTs pay a premium to make sure content is delivered to households at the right speed and without any interruption.  This appears to be a more logical approach.  We view it similar to toll-roads set up on US highways.  Given many different costs associated with expanding all highways for which all citizens will have to pay via higher taxes, toll-roads (via public and mostly private funding) are set-up for drivers that are willing to pay extra to avoid traffic, or more accurately, to hit less traffic.  Costs of constructing and maintaining a few toll roads are less than costs of expanding all highways, in dollar terms and in terms of environmental costs.  At the same time, those costs are covered mostly via private funding and the tolls paid by those willing to pay.  Tolls increase or decrease based on traffic level.

ISPs such as Comcast (CMCSA) are using this approach.  And the FCC may officially ok such method (with huge oversight and likely caps on how much can be charged) later in May.  We note that wireless companies have been doing this for a long time.  Unlike the CMCSA/NFLX deal, wireless companies are forcing consumers to pay more for more data that they consume online; in other word, tiered pricing.  By the way, NFLX will likely implement tiered pricing to its subscribers.

Whether such premiums are charged for the first mile or the last mile of content delivery, is irrelevant in our opinion.  We do not view this as the end of net neutrality, as some so-called 'pro consumers' have said recently.  In fact, this approach actually makes sure that all Internet users get good performance no matter what content or data they are requesting.

And we must say that NFLX initially approached CMCSA with the proposal that NFLX be treated differently just so NFLX content would get delivered to households or mobile platforms without any hiccups.  Of course, as expected, NFLX did not want to pay a premium for such 'special treatment'.

If FCC finally puts all of this in writing, other ISPs will demand NFLX to pay a premium for content delivery, which will not be very good news for the Company.  We note that NFLX is already barking at another ISP, AT&T (T).

Now let's turn to competition.  As it was widely reported over the weekend, MSFT has taken another step to compete with NFLX and other OTTs.

Unlike Amazon (AMZN), MSFT got its foot in the door a long time ago.  According to the Company, it has around 48MM Xbox Live subscribers.  So the hardware is already in millions of homes and MSFT will be working on providing more than just games; it will try to provide original programming.  This does discount the risk associated with MSFT's Xbox - it is a much more expensive hardware than AMZN's Fire TV.  Then again, Sony has been moving down this path too.  MSFT's Xbox Entertainment Studios certainly won't have big-hit original programming over night, but over time, we could see MSFT's Xbox being the gateway to the one-stop-shop for all types of content, or at least we think that has been MSFT’s strategy.  That 48MM figure can attract many content providers.  Of course, Xbox Entertainment Studios has been working on original programming for a while now.  We note that Xbox users already have access to NFLX via the Xbox.

Overall, competition has intensified for NFLX.  As we mentioned before, its only option is to pay more for premium content and pass that cost down to its subscribers.  And this is a tough task given that NFLX initially priced its service very low.  Unfortunately for NFLX, more competition is good news for the content creators as all players will place higher bids for rights to quality content.  NFLX may not be able to throw money at content as easily as AMZN, MSFT, and some of its other competitors; while at the same time its subscribers may begin frowning at the higher price.

RGC: Q1 numbers beat expectations ...

On Thursday afternoon, 4/24, Regal Entertainment Group (RGC) announced Q1 results which beat expectations on the top and bottom-line.  We think the Company is on track to meet or beat our FY '14 revenue and EBITDA estimates of $3.14bil and $538MM, respectively.  

While RGC's Q1 $8.88 average ticket price was below our $9.23 estimate for the year, we think it will increase throughout the remainder of FY '14 and will be driven by growth in attendance and more box office hits to be rolled out during the summer and Christmas Holidays.  According to management, more children's and matinee tickets, along with lower priced tickets at the acquired Hollywood screens, put some downward pressure on prices. 

RGC's guidance for theatres and screens by the end of FY '14 was below our estimates, but again, higher attendance and likely higher prices will help generate revenues above our expectations for FY '14.   

Q1 concession revenue per attendee was $3.64 and on its way to hit our $3.69 estimate for the year, which represents a 3.4% increase from FY '13.  More menu options for attendees helped drive the 5%+ Y/Y growth.  

The Company is planning to continue its theatre enhancement strategy which includes installing reclining seats and rolling out the IMAX and RPX screens. 

It appears that RGC's and other theatre operators' strategy of differentiating film viewing in theatres from the in-home experience by providing more options on their menus and creating those IMAX and RPX premium experiences, is working.  Of course, the most important attendance and revenue driver - quality and/or popular content - appears to be ever-present.  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 $18.95 on Friday.  We discussed RGC and some other movie theatre companies here: http://mogharabi.blogspot.com/2014/03/amc-ckec-cnk-rgc-some-thoughts-on-movie.html .

AMZN, NFLX: Amazon/HBO deal is a big deal!

As we basically stated on 4/2, Amazon's Fire TV service may not be good news for Netflix (NFLX).  Well, NFLX got the first taste of that on Wednesday (4/23), as AMZN announced a huge deal (huge, in our opinion) with Time Warner's (TWX) HBO.  Maybe NFLX management saw this coming as it spoke too kindly of one of its 'partners', AMZN, while it announced plans to increase subscription prices during its Q1 conference call, or 'interview'.  

Although the agreement with HBO includes only HBO's old shows, AMZN still gets that initial and first ever "online-only" access to HBO's very valuable content library.  In addition, this is an exclusive and multi-year deal.  AMZN has now taken the first step to compete very effectively with NFLX.  

We note that according to the Company's press release, AMZN will get the older episodes of more recent shows about 3 years after they are shown on HBO.  And Games of Thrones, the latest HBO hit, is not included in the deal.  

With all of this, the deal may not sound very significant, but we think it is, as it will increase Fire TV subscribers which will likely attract more content creators to sign additional deals, possibly exclusive ones, with AMZN.  This will also force NFLX to pay more for content and/or spend more on co-producing original content.  This deal also eliminates the pursuit of 'long tail' content as an option for NFLX.  As we discussed after NFLX's Q1 release, this is why NFLX plans to increase its prices; it is being forced to do so.  And higher prices are not usually welcomed by consumers over the long-term.   

We are assuming AMZN is paying a hefty price for this deal.  As we said earlier this month, we think AMZN is willing to throw money at 'premium' content; it is capable of doing so.  

Lastly, we are assuming that cable companies and telcos are now glad they added Internet service to their offerings and became ISPs a while back, as the more content is being streamed by OTTs, the more bandwidth is necessary, and the more likely it is that OTTs will pay a premium to maintain or increase, as NFLX management says, "member satisfaction" (e.g., the NFLX/Comcast agreement).

FB: Another impressive quarter, but ad revenue growth may slow down a bit ...

Facebook (FB) once again beat expectations.  The Company's Q1 top and bottom-line came in well ahead of our estimates and the Street's.  The stock was trading up 3% in AH, and will likely have a good day on Thursday.

It appears that us adjusting our estimates and the valuation of FB higher is becoming the 'norm'.  We note that with all the good news, management stated Y/Y ad revenue growth will not be as high going forward.  It believes that Q2 Y/Y growth will be lower than what we saw in Q1, and the rest of the year will be "meaningfully lower".  It appears that mobile ARPU, driven by mobile ad pricing, will not be spiking as high as we have seen the last 3 quarters.  We have been expecting this, but unfortunately were expecting it to occur a bit earlier.  However, combined with the slowdown in MAU growth, not only in the 'mature' North American market, but also in Europe and Asia, maybe our 'mere' 40% and 37% Y/Y growth assumptions for FY '14 ad and total revenues are not too pessimistic.  

We're now valuing FB at $33.23/sh, much higher than the $28.39 we gave it after Q4 '14, and remains significantly below where the stock closed at on Wednesday and where most analysts value it at.  We note that at the last closing price, $61.36, FB is trading at 27x and 14x FY '14 adj. EBITDA and revenues, respectively.  It is trading at 13x the Street's total revenue estimate for FY '14.  Our DCF valuation represents a 14 forward EV/EBITDA.  We remain positive regarding FB's services, as we mentioned in our initial post on the Company; however, we continue to think the stock is overvalued.