Northlake's Market Cap model shifted to Large Cap from Mid Cap for the month of December. The current signal is just barely in large cap territory. The shift reflects the lessening impact of a cyclical bottom in the economy and financial market conditions. When the financial markets and economy quickly decelerated following the collapse of Lehman Brothers (LEHMQ.PK) in September 2008, the Market Cap model began to strongly favor small caps. As the markets and economy have been in recovery mode since spring, the extreme readings seen in many of the underlying indicators have moderated.

One basic tenet of the model is that at extreme readings you should take the opposite trade. In other words when all the indicators were reflecting the disaster in the global economy and markets, the next move was likely to be up. Thus, it was time to favor small caps and bet on their higher volatility. Now that economic and market conditions have eased, there has been a gradually lessening in the desirability of the higher risk small and mid cap indices. This was first reflected in October when the Market model shifted from small cap to mid cap. After a two month run, the model took the next step in reducing portfolio risk by moving to lower volatility large cap.

Last Thursday, shareholders of Liberty Media Entertainment (LMDIA) and DirecTV (DTV) formally approved the merger between the two companies. The merger closed Thursday night. Many Northlake clients owned shares in LMDIA. Each share of LMDIA is now one share of DTV. In addition, for every ten shares of LMDIA, shareholders received one share of Liberty Starz (LSTZA).

For example, if a Northlake client owned 500 shares of LMDIA they would now own 500 shares of DTV and 50 shares of LSTZA. Any fractional shares of LSTZA will be paid in cash.

Disney (DIS) reported better than expected fourth quarter 2009 financial results. Benefiting from an extra week, the company reported adjusted EPS of 46 cents, easily beating consensus of 40 cents. Revenues also beat expectations handily, coming in at $9.69 billion against a consensus estimate of $9.26 billion.

Although it got little direct questioning on the call (see earnings call transcript here), I think a material portion of the upside came from the extra week. My initial back of the envelope calculations still show some upside but not enough to justify the initial 3.8% pop in the stock.

Disney (DIS) wraps up September quarter earnings for media and communications companies when it reports after the close on Thursday. Analyst estimates call for EPs of 40 cents on revenue of $92.6 billion. If estimates are hit, revenues will be down about 2%, operating income will fall 15-20% and EPS will be down 4%.

At the segment level, Media Networks should hold up the best while Studio Entertainment operating profits will plunge. Media Networks includes ABC and local TV stations, ESPN, the Disney Channel, and other cable nets. Growing affiliate fees and a rebound in advertising growth, though still negative, should be the drivers at Media Networks. Studio Entertainment faces challenging comparisons and is coming off generally poorly performing movies at the global box office.

CBS reported modest upside to estimates in 3Q09 with most of the excess coming from the syndication business. However, it was still a strong quarter of improvement with the CBS Network returning to positive ad growth, dramatically lower ad revenue declines at the local TV stations, and modest improvement but still deeply negative ad sales at the radio stations and outdoor properties. Furthermore, on the conference call (see transcript here), management noted that Oct and November trends have continued to improve, particularly at the local TV stations which are showing positive growth excluding the huge political spending during 2008's Presidential election.

Management reaffirmed 2009 guidance despite the upside in the third quarter. This disappointed some investors who saw it as a lack of confidence in 4Q ad spending at the TV network. If you add current 4Q EBITDA estimates to year-to-date reported EBITDA you get exactly to the mid point of management's guidance. What the street would have liked was an increase in the low end of guidance to suggest that results would ultimately settle in the top half. I understand that reading but I think it is overly bearish and that the company will reach the high end of its guidance.

Discovery Communications (DISCA) reported another good quarter, making it five in a row since the company went public in September 2009. The upside was not as big this quarter than prior quarters but that is due to factors beyond management control: higher expectations and analyst estimates and a still tough environment for advertising sales. What is in management's control continues to perform as well or better than any peer media company. Ratings are good, channel upgrades are on target and creating value, and cost controls remain strict.

DISCA shares are up 90% since Northlake's initial purchase in mid-September 2008 on the first day of the market crash. I still think upside remains but it will take more help from an economic and advertising recovery to drive future gains. I expect continued strong operating performance and support from merger activity at other cable networks to combine with an ad rebound and take the shares to the mid-$30s in 2010.

When I first read the DirecTV (DTV) press release I was worried the stock would trade down. I saw the results as mixed with a few negatives offsetting plenty of positives. I sure was wrong. As the conference call (see transcript here) concluded, the stock was up 6.1%.

I think part of the gains relate to ongoing takeover speculation as DTV approaches the closing of its merger with Liberty Media Entertainment (LMDIA). LMDIA owns 54% of DTV. The deal dramatically reduces LMDIA's John Malone's influence and simplifies the corporate structure. It also sets up a spin-off of the rapidly growing DirecTV Latin America unit. That step is widely expected and makes DTV an easier and more attractive merger candidate for AT&T (T). AT&T exclusively sells DirecTV service in the telco channel and is already accounting for the bulk of DTV's new subscribers. With telco TV subscriber additions slowing but telcos still needing TV as part of the bundle in the battle with cable, DTV looks like a better and better acquisition candidate.

Northlake clients own DirecTV (DTV) through their position in Liberty Media Entertainment (LMDIA). LMDIA owns 54% of DTV. DTV will acquire LMDIA prior to year end in a transaction that has already received all necessary government approvals. LMDIA shares will convert into DTV shares. LMDIA shareholders will also receive shares in a new company called Starz Entertainment. I am bullish on both DTV and Starz.

DirecTV is expected to report 3Q09 EPS of 39 cents on revenues of $5.42 billion. EBITDA is projected at $1.39 billion. One of the most impressive things about DTV is that the company is continuing to grow right through the recession. On a year-over-year basis, revenue is projected to be up 8.7%, EBITDA up 11.2%, and EPS up 21.2%. EPS gets an extra boost form very aggressive share buybacks that have been in place for several years.

There are no changes to Northlake's Market Cap and Style models for November. The Market Cap model is sending a Mid Cap signal for the second consecutive week. The Style model has a Value reading for the fifth consecutive month.

Underlying trends in the Market Cap model show a continued shift toward large cap and away from small cap. However, while leaning toward large cap, the indicators remain mixed, so the signal remains on mid cap. Two indicators moved in favor of large caps this month. Both were technical/trend indicators, reflecting the weak performance of small cap stocks last month. More detail can be found below.

Analysts and investors are rightly looking ahead to 2010 when deciding how to invest in Dreamworks Animation (DWA). The company has three films coming out next year including two originals and Shrek 4. 2009 is in the books and although Monsters vs. Aliens produced disappointing international box office and will not be a new franchise (management has ruled a sequel), the impact of the film is no longer a driver for the stock.

Mostly, the street has become more bullish on DWA over the last six months. First, DVD sales for Madagascar 2 held up better than expected. In fact, animated films in general have weathered the DVD slowdown pretty well. Second, EPS estimates firmed up after falling sharply early in the year. The company is now expected to earn about $1.55, pretty darn close to where the estimate was entering 2009 and well above estimates that went as low as $1.20 in late winter/early spring. Third, the return of Shrek along with two other features and a few TV specials sets up 2010 as a big year for EPS. Current consensus of 2010 is $2.30, up 44%.

I attended Central European Media Enterprises' (CETV) Investor Day in Prague on October 15th. The stock is presently not widely held by Northlake clients but I continue to monitor it closely as I strongly believe that when advertising growth returns to Central and Eastern Europe, the company's results will have a V-shaped recovery and the stock will respond.

Unfortunately, the near-term news delivered at the meeting was disappointing. 2009 results, particularly at the profit level, are going to fall well short of expectations. Two factors are at work. First, despite a rebound in the region's economies, multinational advertisers are sitting on their hands. It appears there will be no rebound in local currency advertising in revenue in the fourth quarter as I had previously expected. Second, the company is being forced to spend more to defend its ratings lead in most of its markets. Whether this is a long-term issue or one that is being forced on the company due to the brutal environment for all of the region's broadcasters is open to debate. The street is skeptical but I think there is a possibility that the fight for advertising dollar share may relax modestly when advertising dollars begin to flow again in 2010 and 2011.

I was on my way to O'Hare airport last Monday when Apple (AAPL) reported its 4Q09 results. The conference call (see transcript here) occurred while I was in the air on my way to New York for business meetings. It was the first earnings conference call I have missed since my first purchase of Apple stock for clients in early 2005.

I think it is fair to say that Apple had an outstanding quarter. The fact that the stock jumped $10 in after hours trading and added another $5 to gains during the rest of the week pretty much tells you all you need to know. Apple is hitting on all cylinders and the outlook remains robust. Fears that the global recession and very pessimistic consumers would hurt sales and profits have proved completely incorrect. Apple always provides lots of statistics and analysts like me parse them endlessly but two statistics from the latest quarter capture the Apple investment story. First, total corporate revenue grew 25% year-over-year. With the global economy at best just emerging from recession, the fact that Apple can grow at 25% is mind boggling. Second, sales of Mac laptops were up 35% in units on just a 6% drop in average selling prices.

Ahead of AT&T's (T) third quarter earnings report (see earnings call transcript here) I decided that I would either sell or hold Northlake's shares based on what was reported and what I heard on the conference call. Northlake clients have owned AT&T for almost a year and the stock prices is actually down a bit offset by the hefty quarterly dividend.

I have decided to continue holding the shares following a pretty solid earnings report. AT&T is not growing. Revenues fell by 1.6% and EBITDA fell by 2.8%. However, both figures, along with the adjusted EPS of 53 cents matched or exceeded analyst estimates. AT&T is facing a challenging economic environment that is pressuring their business markets while consumer landlines continue to melt away. The company is also taking a non-cash hit to EPS from pension accounting as a resulting of 2008's stock market collapse.

Merger and acquisition rumors have reemerged as drivers of media stocks after a mutli-year absence. The latest rumor was posted by The Wall Street Journal in a Heard on the Street column speculating about a possible Verizon Communications Inc. (VZ) takeover of DIRECTV Group Inc. (DTV). The speculation emanated from Verizon CEO Ivan Seidenberg discussing TV as the "core product" for the company's wireless network.

Given that FiOS TV, despite having more than 2 million customers, lags far behind the major cable and satellite distributors, an acquisition of DIRECTV is a logical way to quickly expand Verizon's TV business. Of course, DIRECTV would do virtually nothing to directly help the company's fixed-line phone business, which is rapidly losing residential phone customers to cable companies and wireless substitution.

One of my reactions to breaking news or rumors is always to get my thoughts down on paper. This allows me to organize my ideas, determine questions and get a handle on how the stock market may initially react to the news.

I've written recently about how mergers and acquisitions have returned to the forefront of media investors' minds. I have also noted that I thought there would be more M&A activity than most observers think as long as credit markets remain open and stable. Certainly, the rumored deal for Comcast Corp. (CMCSA) to buy NBC Universal Inc. supports the view that media M&A is back.

After 13 months flashing a Small Cap signal, Northlake's Market Cap model shifted to Mid Cap for October. I had anticipated this move after steady weakening of the small cap signal over the past several months. The new mid cap signal is a weak one and could shift back next month but the message is clear: the extreme conditions in place in the economy and credit markets have eased reducing the attractiveness of small caps as the play in a market and economic recovery.

As a result of the shift, all Northlake client positions in the Russell 2000 (IWM) dedicated to the model were sold and the proceeds were reinvested in the S&P 400 Mid Cap (MDY).

Media stocks continue to be market leaders in the latest phase of the stock market rally. The market rally is based on improved sentiment and data toward a global economic recovery. Most revenue drivers for media companies are highly sensitive to economic growth so it is not surprising that media stocks are among the sectors leading the rally. However, I think another is at work. After a multi-year lull, mergers and acquisitions have returned to the forefront of media company strategic planning.

Until this decade, media companies were very acquisitive providing strong support for media stock prices. The AOL-Time Warner (TWX) merger represented the peak and quickly went wrong putting an end to media M&A except for divestitures. The recession, the collapse of credit markets in 2008, and accelerating secular challenges completely took takeover activity off the table. Now it appears that activity is picking up. In the past, media properties always were sold at a premium to their public market values because they were trophies and often produced good cash flow. Renewed acquisition activity now supports higher valuations for media properties which still trade at a discount to private market value.

There were no changes to Northlake's Market Cap and Style models for September. The signals remain small cap and value. As a result, all client positions in the Russell 2000 (IWM) and Russell 1000 Value (IWD) controlled by these models will remain in place until at least the first trading day of October.

August marks the 12th straight month that the Market Cap model has sent a small cap signal. September's signal weakened for the third straight month and could easily switch to mid cap for October. The Market Cap model generally follows a stair step approach as it moves from small to mid to large and in reverse.

Most media companies report quarterly earnings in a two week span beginning with the last week of the first month of each calendar quarter. Below is a two-part recap of second quarter earnings season that was originally published on the Dow of Steve Blog at SNL Kagan Interactive.

Week One Recap: July 27 – July 31

CBS reported 8 cents on revenue of $3.01 billion against consensus of 7 cents and $3.05 billion. EBITDA of $387 million was at the top of end expectations and includes about $20 million of what could be considered one-time charges. Most importantly to the outlook for the stock, the company maintained 2009 EBITDA guidance. Many investors anticipated at least a lowering of the midpoint of the targeted EBITDA range. While the low end seems likely to be the final result, maintaining guidance is a win for CBS longs. The stock was trading up after hours, appropriately so in my opinion.

While CEO Les Moonves is always one to spin optimistically, his tone on the call was noticeably more positive than the rest of major TV companies that have reported. He noted ongoing improvement in pacing of ad sales at local radio and TV stations. He says that revenue on inventory sold in the upfront is flat vs. a year ago. He claims scatter advertising for 3Q is up sharply vs. a year ago with pricing above last year's upfront. More so than any other media executive, Moonves is pointing to positive signs in advertising.