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In Defense Of SFXE : Q3 Results, Far Better Than You Would Think

|Includes: SFX Entertainment (SFXE)

Summary:

  • SFXE posted disappointing Q3 results but revenue is growing.

  • Analysts are struggling with the business model, which is reflected in overly bullish estimates that are not realistic.

  • There is a significant earnings potential hidden in the Q3 numbers that currently isn't reflected in the stock price.

On Friday, November 14th, SFXE announced it's results for Q3. Although revenue is growing at an astonishing pace, the stock price took a hit. During the investor's call it became clear that the few analysts that are following SFXE are still struggling with their valuation models:

  • Some analysts mistakenly believe attendance is down, however the biggest festival (Rock in Rio) is a biennial event. If you strip Rock in Rio from last years numbers, attendance is up (for the big events). Additionally preparations for Rock in Rio (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) 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.

  • Two festivals days were canceled due to bad weather. Although SFXE will recuperate these cancellation costs through its company wide insurance. This is however not reflected in the earnings. SFXE already booked the cancellation fees.

  • Roughly 80% of the profits from global sponsorship deals (qualified marketing deals) still need to be incorporated in this years 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.

Taken all this together it is clear that the market is currently undervaluing SFXE which is interesting. SFXE has been shorted significantly in the past and the present so a short squeeze in the foreseeable future is therefore more than possible.

Disclosure: The author is long SFXE.