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Published: March 9, 2012 at 01:37 PM GMT
Last Updated: July 31, 2013 at 01:37 PM GMT
IPOs, a strong market and exciting product launches buoyed media stocks during February but earnings appear to be decelerating.
Not to put a damper on the excitement this week behind Apple becoming a half a trillion dollar company, some new IPOs, and general euphoria in the market, but Credit Suisse published a research piece that shows downward EPS revisions for global media stocks accelerating. While all segments (minus radio) have seen strong stock performance in February (averaging a 4.6% gain), revisions are gathering steam, with an average decline of 2.2%, compared with a 1% drop in the previous quarter. The Internet sector led the downward revisions (Google and Netflix were the largest contributors), driven by softness in business from Latin America and Eastern Europe.
Groupon (GRPN) has been quietly sucking up companies, making a total of 25 strategic acquisitions since May 2010, including five already in 2012. Mark May at Barclays believes these quick tuck-ins haven't shown up on investors' radars and believes they underscore the fact that the local e commerce leader is becoming an increasingly tech-driven business. "We continue to view Groupon in the early stages of what could prove to be a long-term growth opportunity in the local commerce and online deals space globally," he wrote in an investment note this week. He's sticking with his OW rating and $27 price target.
Speaking of M&A activity, digital photo company Shutterfly (SFLY) entered into an agreement with Eastman Kodak to acquire its North American customer accounts for about $24M. Barclays' Kevin Allen likes this deal for four reasons: 1) he thinks SFLY gets a good deal, 2) consolidation can be good for industry pricing, 3) Shutterfly has experience integrating these types of deals, and 4) on the outside, the deal appears to be accretive. He believes things are turning around for the firm and has a PT of $40, representing almost 50% upside from these levels.
JP Morgan spent a lot of time analyzing online platforms this week, asserting that the upcoming new launch by gaming firm, Zynga (ZNGA), may be a game changer. Zynga announced the beta launch of Zynga Platform, a dedicated gaming environment on Zynga.com. Whereas Zynga built its brands and its footprints by distributing its games to other sites, Zynga Platform takes the opposite tack. ZNGA will lure customers to its own property to engage and provide an environment for 3rd parties to distribute their own games. With recent offerings for the cloud (zCloud) and social tie-ins (zFriends), Doug Anmuth and his analyst team like ZNGA's prospects and have an Overweight on the stock.
The news doesn't look as positive for Electronic Arts (EA). Word got out this week that UK retailer GAME Group was unable to get supply of EA's newest, highly-anticipated launch of Mass Effect 3. This may say more about the retailer than it does about the gaming group but it does have an impact on the supply chain. Goldman Sachs' Brian Karimzad was out with a note, helping investors to frame the news' impact. He believes that EA has provisioned for such an event, as the retailer has shown signs of stress. The Goldman Sachs analyst performed some back-of-the-envelope math to estimate that the retailer represents 3-5% of EA's revenues and 2-3% of ATVI's -- so while impactful, investors should keep some perspective.
Perhaps news of a new gaming cycle can breathe some life into some of the bigger gaming stocks. And Janney's Toby Wible is seeing increasing evidence that consumers are going to begin seeing the next generation of gaming tech. Trolling job postings and patent filings at Microsoft (MSFT), the media analyst believes we'll hear of a new Xbox launch at the E3 conference later this year. If true, this spells good things for Gamestop (GME), which typically sees its valuation jump as investors expect a revival in game sales and household penetration.
Analyst Todd Juenger from Bernstein Research launched his coverage of the media group Discovery Communications (DISCA) with an Outperform with a $55 target price. He believes that DISCA has turned in an Oscar-worthy performance, presenting investors with a 46% average yearly return for the past three years.
Janney's Tony Wible doesn't like DreamWorks Animation SKG (DWA) stock. He's got a lot of concerns, including: decreasing franchise film performance, cannibalization from a recent deal with Netflix (NFLX), weak performance in its recently launched films, and just softness in the sector in general. The analyst concludes kids are consuming content differently (low priced rentals, for example) which is eating away at DVD revenues for DreamWorks. With some uncertainty and probable decay in pricing in the distribution channel (with Paramount/Viacom), Wible's got a $13 fair value estimate on the stock and a SELL rating on the firm.
Barclays' Anthony DiClemente is also taking a wait-and-see approach on DWA, as the firm turned in performance with operating income and EPS falling short of his expectations. He believes a recently announced JV in China may prove beneficial for the firm, but it shouldn't add much in the short term. He's underweight the stock and has a $16 PT.
Despite modeling a slight EBITDA loss for digital music's Pandora (P), Bo Nam, an analyst at JP Morgan, is expecting strong listening hour growth and continued share gains. The analyst thinks the music streamer puts up $83.3M in 4Q revenues (up 75% yoy) when it reports on Tuesday, March 6. He's modeling for an 80% growth in advertising revenues and 40% in subscriptions. Nam expects that the trend toward mobile streaming will weigh on margins for the near term but will strengthen P's market position.
Local business review website Yelp (YELP) priced its IPO on Thursday. The offering consists of 7.15 million shares at $15 apiece and is expected to begin trading on Friday. That places a valuation on the firm, founded by former PayPal engineers, of $900 million, at the high end of the expected range.
Another beat and raise for the online travel juggernaut known as Priceline.com (PCLN). The firm turned in very strong 4Q results as strong international bookings seem to be oblivious to the macro picture in Europe. If you neutralize FX effects, Priceline showed bookings growth of 53% Y/Y for the fourth quarter of 2011, beating JP Morgan analyst, Doug Anmuth's estimates. One of his team's top 2 Internet picks for 2012, he raised his PT on the stock to $730.
Credit Suisse's Stephen Ju will see Anmuth's bid and raise…his target price to $790. He, too, was impressed by the strength of international bookings (up 67%), contributing to the $5B in gross bookings. According to Ju, Priceline.com continues to grab share in the hotel segment, something Perry Gold at Barclays thinks will continue to drive its stock price higher. He massively raised his target (from $600 to $725) as he thinks Priceline is still priced relatively cheaply for its growth rate.
Stefan Anninger at Credit Suisse liked Charter Communication's (CHTR) end to 2011 and reads the performance through to 2012 for the cable company. Quarterly performance came in inline to slightly better for him as the firm had PSU net adds of +61k (versus his estimates of +48k). The buoyed financials which with $1.84B (Y/Y growth of 2.6%), enticed the analyst to raise his TP to $74 (from $60). The firm bought back 7.6M shares for a total of just over $400 million.
The same performance wasn't enjoyed by Cablevision (CVC). Investors sold off the stock after its 4Q earnings disclosure, sending it down 9%. Kicking the stock when it was down was Collins Stewart analyst Tom Eagon who promptly downgraded the stock. He doesn't think 2012 bears any different fruit for the cable company after three straight quarters of near flat to declining operating cash flow.
Moving to the agency side of media, Deutsche Bank believes a wave of consolidation kicks off in the wake of Japanese firm, Dentsu selling down its stake in Publicis. This leaves Dentsu with approximately E1bn of cash in its coffers, ready to execute a takeover. Analyst Matthew Chesler believes MDC Partners (MDCA) with a market cap of $400M is the most likely candidate for some M&A, followed by Havas and Aegis. While we've previously covered the DB team upgrade of the sector, the analysts still see upside risk to earnings.
And one of those firms, Interpublic Group of Companies (IPG), appears less likely to falter and instead, is one of the best earnings stories in the sector. DB upgraded the firm this week to a Buy and raised its PT to $15 (from $10.50). In a note this week, Chesler wrote that he sees evidence that IPG is "securely on track to peer level margins despite micro and macro headwinds and returning cash to shareholders, creating one of the best stories in media." With 21% EPS growth and attractive metrics, DB thinks the stock is priced too cheaply.
Bo Tang at Barclays agrees -- he's raising his price target $1 (to $13) as he sees IPG benefiting from its geographic mix (highest exposure of the group to US, lowest to Europe) and a strong balance sheet. Return of capital remains key to his investment thesis on the stock, as IPG announced a $300M buyback program in addition to $50M it has under a previous authorization.
Goldman Sachs did a "ratings restack" on its coverage in the media space as it rolled valuations forward in 2013. Disney (DIS) was a clear winner, earning a Conviction Buy from Drew Borst and team. He sees accelerating growth in ESPN advertising and affiliate fees as well as US parks adding a slew of upside to the stock. He's got a new $51 target, up from $44. News Corp (NWSA) also came out ahead with a Buy upgrade. Borst thinks "NWSA is among the cheapest stocks in our coverage group on CY13E EPS (10.6X), despite having among the fastest EPS growth (20% CY11-13E CAGR)."
Viacom (VIAB), on the other hand, received a downgrade from GS. Ratings are declining and, while cheap compared to peers, the stock is trading at historical valuations. Borst doesn't believe the stock gets a higher multiple until ratings improve.
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