During the second half of February, most major media stocks reported December quarter results and gave a look ahead to early 2012 business trends. In general, the results and outlook were good. This was definitely the case at CBS (CBS), Discovery Communications, Charter Communications (CHTR), and Liberty Media (LMCA), each of which is held in most Northlake client portfolios.
The big picture for media is dominated by two themes. First, after an unexpected and abrupt slowdown in national TV advertising demand around Thanksgiving, business has picked back up. Visibility is low but the first half of 2012 presently looks like a return to moderate growth with networks producing good ratings set up for double digit gains. Second, despite constant headlines, there is little sign of cord cutting or cord shaving in the cable and satellite TV industry. The total number of households receiving multichannel TV is growing again despite worries about Netflix (NFLX) and other online video viewing. Stabilization of multichannel video subscribers is positive for cable and satellite and providers and the networks they carry on their systems. Charter Communications gets a boost from improved sentiment toward cable stocks as a result of better subscriber trends.
Here is a brief, closer look at each of the Northlake holdings' latest earnings reports.
CBS had another good quarter driven by continued expansion of profit margins. Advertising trends were a bit below expectations driven by the late year slowdown. However, management was extremely confident in a 2012 pickup, with good reason, given CBS' excellent ratings performance this season. CBS is diversifying away from advertising as it adds more subscription revenue. Good rating performance is also keeping programming expenditures in check. 2012 is setting up well for CBS and the stock still has 20% upside even after the huge gains since mid-2009.
Discovery Communications led the industry with 17% advertising growth as almost all of its large networks including Discovery Channel Investigation ID, Animal Planet, and TLC have positive ratings growth. Management indicated trends were continuing in 2012. Discovery is another stock that has made a giant move since 2009. The company remains the best positioned of TV network owners due to its international growth profile, as non-fiction programming translates well overseas. The stock is nearing my initial target and could be a candidate for a trim in the days ahead.
Charter Communications reported solid results driven by growth in broadband internet subscribers. Cable TV subs continue to stabilize, removing a primary risk to the Charter story. New CEO Tom Rutledge, a cable industry star, participated in his first conference call with the company in late February. He sounded optimistic and outlined opportunities to sustain modest operating income growth and keep the free cash growing at a double digit pace. Charter is a free cash flow story as it pays down debt to benefit shareholders.
Liberty Media is an asset play. The stock trades at about 20-30% discount to the value of the assets it owns. By far the largest asset is a 40% stake in Sirius XM Satellite Radio (SIRI). The primary issue at Liberty now is that its standstill agreement with Sirius expires this week allowing Liberty to increase its stake. It is very difficult to know what will happen next but Liberty will be in a much stronger position to undertake a transaction that closes the gap between its stock the value of its assets. Management has a multi-decade record of doing just that leaving Liberty shareholders with plenty of upside.
Disclosure: CBS, Liberty Media, Charter Communications, and Discovery Communications are widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. All four stocks are also long positions in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in the Funds' investment management company, and has personal monies invested in the Funds.