Media Stocks Review: Buy Gemstar, MasTec, NDS, Sell Tivo

by: Todd Mitchell

Key points from Kaufman Bros. analyst Todd Mitchell's recent note to clients (for a full-length version of this report, click here).

  • Gemstar (GMST)
    ($4.13-BUY-$4.25 Price Target)

    Shares were off late last week after News Corp. (NASDAQ:NWS) CEO Rupert Murdoch reportedly said "absolutely not" buying the part of Gemstar he does not own, in our opinion. We feel Murdoch has proved unencumbered by his convictions before so absolutely not could be taken with a grain of salt. A valuation of $5 to $6 could easily be put on the assets on a sum-of-the-parts basis. That is not the point though. We feel Gemstar's cross platform media strategy is coming together and that is why this is an interesting idea. Thursday's announcement with Verizon (NYSE:VZ)Wireless was not the IPG licensing deal we would like to see, but it is a positive step in the right direction. Stock has had a nice run and has hit our price target, but the story is still unfolding.

  • MasTec (NYSE:MTZ)
    ($11.73-BUY-$14 Price Target)

    Increase in DirecTV (NYSE:DTV) activity is a positive indicator for MasTec. MasTec is the largest DirecTV home service provider [HSP]. MasTec expanded this business in 2006, consolidating its footprint in 13 states primarily in the Southeast, and last quarter it hired more than 800 hard to find installers. Given the activity we saw in 4Q06, DirecTV's increased outlook for capital spending in 2007, and its plans for driving advanced HD and DVR service down into its network with another 10% penetration in 2006, we think that MasTec is about to see a strong lift in demand for its biggest segment.

  • NDS (NNDS)
    ($46.22-BUY-$57 Price Target)

    DirecTV highlighted SD and HD DVR software glitches as a key operating problem in the quarter. Management claimed it has solved the problem. We think it did it by replacing NDS' DVR software with another option. Shares of NNDS have been fighting an uphill battle since this issue emerged two quarters ago. We think it is time investors get past this issue. There is still a large amount of NDS IP in every DirecTV STB, particularly the new HD DVR. DirecTV deployed more than 500,000 of these in 4Q06, and we believe it is on the path to use NDS' next-gen Fusion middleware. We think DirecTV is a committed customer of NDS and investors should instead look to higher capital spending in 2007 as a positive sign.

    $5.96-SELL-$5 Price Target)

    Shares were up 10% on the announcement of video download deal with Amazon (NASDAQ:AMZN). We don't see what warrants a $40 million increase in valuation. Deal is for 1.5 million TiVo standalone boxes only. We don't think it will be expanded to Comcast (NASDAQ:CMCSA) TiVo, as it would compete with Comcast's VOD. We do not see how it changes the basic consumer proposition for TiVo, or helps to drive TiVo sub growth. Amazon is likely to offer the service to other distributors. If 250,000 TiVo subs were to order $10 per month on this service, assuming a 25% contribution, this would translate into about $7.5 million in yet to be seen cash flow.