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Lord Baltimore
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Former sell-side media, consumer & internet research analyst for 15 years. Why the pseudonym Lord Baltimore? He was a famous native american scout in the late 1800's as well as an intense character in Butch Cassidy & The Sundance Kid who relentlessly tracked the two heroes. (A 1970s... More
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  • Gray Cash Flow Could Get Hammered By Large CBS Reverse Comp Payments In 2015

    CBS Corporation (NYSE:CBS) is reportedly looking for significant reverse network compensation from Gray Television (NYSE:GTN) when its affiliation deal is up at the end of 2014 according to TVNewsCheck. I happen to agree with the premise of the article. Currently, Gray pays no reverse comp to CBS yet it is enjoying retransmission revenues from its CBS stations. This leads to a temporarily high broadcast cash flow margin. If the $0.90 in reverse comp that CBS is seeking pans out it would cost Gray an estimated incremental $45 million per year or about 20-25% of its broadcast cash flow of approximately $200 million (pro forma for acquisitions and averaged over 2012 and 2013 to normalize for even-year political advertising). I believe the Street is expecting something in the $0.50/sub range so anything close to $0.90 would be a huge negative for Gray. Hard to see Gray having a strong negotiating position especially given it has been paying CBS nothing in the past for the network's top rated content (including NFL). I am short GTN which trades at a rather "full" 10x my estimated 2014-15 average EBITDA. 8x seems more reasonable which would put the shares under $4.

    Disclosure: I am short GTN.

    Apr 17 1:27 PM | Link | 2 Comments
  • Carmike On Target For Stellar Q4

    Carmike (NASDAQ:CKEC) reported its Q3 results this morning. Here is a quick run down versus my expectations. Net, net the quarter was not as bad as I feared. As expected it was a tough quarter due to the Olympics, concerns about the Aurora shootings, and a bomb threat in Carmike theaters specifically.

    Here are the Q3 variances with my expectations:

    • Revenue $127.5mn vs my $129.7mn due to lower avg ticket ($6.52 vs $6.81 estimate)
    • EBITDA $19.4mn vs. my $16.3mn due to lower theatre operating costs
    • EPS $0.13 vs. my $0.12 due to higher EBITDA offset somewhat by higher interest expense
    • Attendance 12.4mn vs. my 12.1mn
    • Avg per caps $3.81 vs my $3.89
    • Film margin 54.9% vs my 55.0%
    • Debt $325mn vs my $325mn
    • Cash $82.0mn vs my $84.6mn
    • Unconsolidated affiliate income (Screenvision) $1.95mn vs. $1.55mn.

    Looking ahead, the U.S. box office appears to be up an estimated 20% in Q4-to-date with a great slate ahead (Skyfall, Twilight and Hobbit). I am still looking for Carmike to "smoke" street estimates in Q4. I am at $140mn in revenue vs $130mn Street consensus and $0.40 in EPS vs $0.20 Street consensus (per Yahoo! Finance). I also like the stock long-term given the turnaround and resumption of growth relative to the valuation of the shares which trade at a mere 4.7x my 2013 EBITDA estimate of $124mn and 10.3x my 2013 EPS estimate of $1.30.

    See my Seeking Alpha articles here and here for a more detailed investment case.

    Disclosure: I am long CKEC.

    Nov 01 1:28 PM | Link | Comment!
  • Three Thumbs Up!
    I was a panelist at the 2nd annual 3D Entertainment Summit last month in Los Angeles. The conference audience appeared to be mostly filmed entertainment executives and personnel along with various 3D technology vendors. With the exception of the Wall Street perspective panel members, very few recognizable Wall Street types were in attendance. When it was time for Q&A following our panel, the audience responded in tranquilized silence. It appeared that the 3D film ecosystem was suffering from low morale (perhaps a sophomore slump after last year's summit) as the hoped for rollout of 3D capable screens has not met expectations. Much of this is a result of fear and greed rather than issues with consumer demand or technology. A look at the data suggests that consumers overwhelmingly prefer the 3D experience and are willing to pay more for it, despite tough economic times. 3D box office grosses have outpaced 2D showings by a 3:1 ratio, through both higher ticket prices and higher attendance per screen. Dreamworks founder and CEO, Jeffrey Katzenberg, suggested the cinema industry was being too timid in charging a 3D ticket premium of only $2 to $3 with studies showing little audience resistance at the $5 level. This is very positive for both the cinema companies and 3D-heavy studios like Dreamworks and Disney. We will drill into the financial implications in more detail below. Back to the fear and greed issue, it appears that last year's financial ice age chilled the financing model behind DCIP (Digital Cinema Implementation Partners), the semi-mysterious funding vehicle for a studio subsidized deployment of theatrical digital projection systems. In addition, it appears that wrangling between the studios and cinema companies over virtual print fees (the amount of the studio subsidy credited to the cinemas) stymied DCIP's inertia as well. According to Katzenberg, everyone around the negotiating table was guilty of wanting too much which ended up hurting the whole studio-theatre ecosystem in 2009 by limiting the box office on films such as Coraline and Monsters vs. Aliens with too few 3D capable screens. Now that the financial ice age is thawing somewhat, DCIP appears to be back in gear (maybe just "first gear", but out of "park") with all but one of the major film studios signed on (we won't name names) and bank loan syndication underway.

    While still evoking snickers from those ignorant to digital 3D, a number of events ahead should not only subdue the snickers but bring 3D entertainment even further into the mainstream. These include several key 3D film releases including several major 4Q releases in James Cameron's Avatar and Robert Zemeckis' A Christmas Carol, to name a few. Also with DCIP back on track, 3D system deployments should re-accelerate, providing audiences access to substantially more than the current 2,000 3D-enabled screens (only about 5% of the total in the US) available to experience the enhanced impact of 3D. No cinema owner wants to get caught short of 3D-enabled screens when Avatar is released December 18th.

    I mentioned on the panel that despite consistent data supporting the impact 3D film may have on the profitability of the cinema and film industry, Wall Street appears largely oblivious to (or frustrated with) the thesis and positive financial impact. While many of the shares of "3D-sensitive" stocks have performed well this year (CKEC +172%, CNK +38%, DWA +33%, IMAX +96% and RGC +19% vs. the S&P 500 +16%) there was limted reaction in the share prices and volume when the dam broke on DCIP two weeks before, and following the 3D Summit the shares have generally traded down with all but Carmike underperforming the S&P. Let's review the investment thesis and potential ramifications of 3D technology.

    It is a proven technology (it works) and customers love it. We know this because of the 18 films shown to date in digital 3D, every one of them has opened at a box office per screen of between 2x-4x the 2D version with an average of 3.1x. Assuming a ticket price premium of $2.50 on an average ticket price of $7.18 (MPAA reported US average in 2008), average attendance per screen is 2x higher. With 3D box office 3x higher, and the studios' splits of the box office at just more than 50%, the studios stand to make considerably more money. For instance, Pixar's Up has grossed $292 million in the U.S. to date (source: Box Office Mojo), of which I estimate a whopping $200 mllion was viewed in 3D. On the opening weekend Up in 3D delivered 60% of the box office and outperformed 2D by 120% on a per screen basis. Assuming this relationship held for the duration of the film (Disney may remark on this on its fiscal 4Q conference call) it would imply 3D generated an incremental $95 million which represents an incremental $45 million to Disney/Pixar (after theatre splits), a terrific return on the approximate $10-15 million extra cost to produce in 3D. Dreamworks Animation (NASDAQ:DWA) has committed to producing all of its films in 3D with three releases per year. The studio's earnings should continue to get a nice bump from the incremental 3D revenue, not to mention reduced piracy in the U.S. and overseas (3D films are hard to "handycam" as the camera would need to record the image through a special polarized lense or two cameras.)

    From the cinemas' perspective a 3D screen with 2x the attendance pays off in several ways. One, according to Richard Hare, Carmike's CFO, who was on the 3D Summit panel with me, a theatre owner makes an extra $1 per ticket on 3D after paying film splits and a 3D technology license fee (to companies like RealD). More importantly, with attendance up 2x the cinemas sell more high margin concessions. Typical concession and cinema advertising revenue per patron runs about $3.35 and gross margins run about 80%. This means a 3D screen showing 7 out of 15 movies per year in 3D could generate an incremental $1.80 or so per patron, 70-75% more revenue and 270-280% more cash flow. (I'll spare you the math equations but we based this on industry average screen economics.) If an additional 20% of screens ultimately become 3D-enabled (about 8,000 in the U.S. for a total of 10,000) the US box office would increase by 16% from $9.8 billion to $11.4 billion (with the studios enjoying half of that increase) and theatre profitability could increase by more than 50%. These eyepopping numbers are best viewed through a pair of 3D glasses! With cinema stocks trading around 6x EBITDA I doubt very much Wall Street has factored in this long term impact.

    I recently bought Cinemark Holdings (NYSE:CNK) shares which pay a $0.72 annualized dividend. The company represents one of the three largest cinema circuits in the U.S. (and Latin America too) and, in my view, represents a great way to play the 3D investment thesis.

    Disclosure: Long CNK
    Tags: DWA, CNK, RGC, CKEC, 3D, RealD, Avatar
    Oct 15 1:13 AM | Link | Comment!
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