SFX Entertainment: Is A Short Squeeze Imminent?

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About: SFX Entertainment (SFXE)
by: Michael Van De Velde

Summary

Analysts are struggling with their valuation models which resulted in a sell-off after the Q3 numbers.

Q3 numbers look far better after careful analysis.

CEO Robert FX Sillerman has started to follow through with the 10b5-1 plan announced earlier and is planning to purchase +/-3 million additional shares in next several weeks.

SFXE has been and continues to be heavily shorted, with more than 17 days to cover a short squeeze becoming a real possibility.

Originally published on Nov. 25, 2014

During the latest conference call it became clear many analysts that are tracking SFX Entertainment (NASDAQ:SFXE) are still struggling with their valuation models. It seemed some analysts simply don't understand the business model or are misreading the income statements:

  • Some analysts mistakenly believed attendance was down, however the biggest festival (Rock in Rio) is a biennial event and shouldn't be counted in this year's numbers. If you strip Rock in Rio from last year's numbers, attendance is up (for the big events). Additionally preparations for Rock in Rio 2015 (including expansion of the franchise into Las Vegas) is driving up costs.

  • Real revenue from Tomorrowland will be corrected in Q4. Tomorrowland's numbers aren't consolidated (SFXE is only a majority shareholder in this private entity) and are therefore estimates based on last year. Crucial detail, Tomorrowland was organised twice this year (two weekends). Both weekends sold out completely. Overhead and infrastructure costs therefore need to be spread over two weekends. This should have a positive impact on the real revenue. Corrections are expected in Q4.

  • Two festivals days were canceled due to bad weather. Although SFXE will recuperate these cancellation costs through its company-wide insurance, cancellation fees and missed sales are dragging down real revenue.

  • Roughly 80% of the profits from global sponsorship deals (qualified marketing deals) still need to be incorporated in this year's numbers. Earlier this year Sillerman announced deals worth roughly 60 million of guaranteed EBITDA, however less than 15% have been booked. The majority of these deals are performance-based and span the whole year. Expect significant earnings from these deals in Q4.

  • In an interview/statement to Billboard magazine Sillerman explained that the company is restructuring and that investors can expect to see improved efficiency and improved EBITDA as of Q4.

Sillerman Is Buying

It is clear Sillerman firmly believes in the future of SFXE. Not only has he bought stock after the publication of - what is generally considered - a "hit piece" earlier in October (575,000 shares 10/8/14), he has recently, after the publication of the Q3 numbers, continued to buy (181,991 shares 11/19/14) additional shares. This shouldn't be a surprise. Sillerman closed the last earnings call - slightly annoyed - saying the following:

And just one other thing. I have already purchased stock at higher prices than we are trading now and will continue to purchase both directly and in the open market, as it is my personal belief that our stock price bears no relationship with the true value of the company.

Sillerman's latest buying spree is only the tip of the iceberg. Sillerman has stated multiple times that he is planning to follow through with the 10b5-1 plan announced over the summer and is purchasing 3 million additional shares in next several weeks.

A Short Squeeze Looks Imminent

Although the short interest has gone down slightly, almost 21.9% of the stock's float is still short. What's more important are the days to cover. Generally speaking, if the days-to-cover ratio is in the low single digits, a short squeeze isn't as likely. But when the days-to-cover gets into the high single digits or even double digits, it starts to be a bit more meaningful. Currently the days-to-cover ratio is 17.8 which makes a short squeeze in the near future more than likely. Remember, most of the analysts have marked this stock as a strong buy with some of them aiming at 11$/share.

Disclosure: The author is long SFXE.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.