The hottest names this week were ATUS (245bps better than the S&P), DISH (237bps), WWE (182bps), AMCX (92bps), and CBS (5bps).
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With CMCSA earnings coming up next week (1/23), we provide our thoughts on the numbers, sentiment and what to do with the stocks into the print. Please see the Full PDF link below for our detailed 30 page slide deck. OK
We think an SSP-COX deal makes the most sense. Recall that on 7/24, Cox Enterprises announced its intention to explore strategic options for its 14 TV stations in 10 markets. Our view at the time was that Cox understood its need for scale (Cox covers only 6% of the U.S. with the UHF discount) and is looking for a partner (i.e. GTN-Raycom) rather than the highest bidder. While the process initially involved just about every broadcaster in the space, there are 3 final bidders per press reports – SSP, TGNA & Hearst – looking to pay “almost $3B”, or 11x ‘18/’19 EBITDA per our ests. Based on our analysis, an SSP deal makes the most sense from a geographic/regulatory and an accretion standpoint (16% ‘18/’19 blended FCF/sh.) but we also ran the math for two additional scenarios: TGNA buys the whole thing (15% FCF accretive) or TGNA & Hearst team up to split the assets (12% FCF accretive to TGNA). CONFIRMATION SHOULD COME END OF JAN/EARLY FEB.
This note details our conversations with London investors, with the biggest surprises being: 1) The skepticism regrading New DIS – particularly the value of streaming vs. long-tailed content. That said, should uncertainties become more certain, this is the one most still want to buy. 2) The tremendous pushback on CMCSA – all because of Sky. And 3) the number of requests for our ATUS and OUT models (which must be positive signs, no?). PERHAPS THE BIGGEST TAKEAWAY IS HOW IMPORTANT MANAGEMENT TRANSPARENCY AND CREDIBILITY HAVE BECOME – above and beyond the numbers and the balance sheet.
Eric, Stephan, Se and I are reintroducing our WHAT’s HOT WHAT’s NOT weekly wrap up – this being our first edition from Wolfe Research.
We went straight from our launch (check out our 252-page slide deck – which was NOT an easy feat) to a whirlwind of marketing – hitting NYC, NYC (not a typo), Boston, the Mid-Atlantic, and more NYC. Ahead of us is CT, the West Coast, NYC (again, not a typo), and then Europe (Cheers!). The biggest surprises from our first set of meetings have been: 1) The fact that just about every conversation has begun with New DIS and New FOXA (there are way more bulls than bears). 2) There appears to be significant incremental interest in OUT and ATUS. 3) There appears to be significantly more concern re. CBS & VIAB. 4) No one has pushed back on our “downgrade” of DISH (Peer Perform). And 5) Local isn’t a huge focus due to macro and leverage. BOTTOM LINE: We feel incrementally positive on New DIS, New FOXA, CMCSA, ATUS and OUT; we are worried that our positive call on VIAB might take longer to play out.
MDP is tricky – 75% of its EBITDA comes from the magazine business, which has no publicly traded peers (they bought the only one earlier this year in TIME). And if we incorporate all of management’s guidance, we can seriously get to a $100 stock. The problem(s) we have is that while management has complete control over expenses: a) investors do not tend to put high multiples on expense-only stories; and b) we have zero visibility into revenue trends – more-so at TIME than at MDP. To put this in perspective, TIME went from modest LSD advertising losses just 2-3 years ago, to mid-teen declines as the print industry accelerated to the downside and digital ad growth slowed. This led to several major guidance cuts at TIME, as mgmt. couldn’t rein in the losses and missed the mark on several restructurings. Yes, MDP’s recent quarter was a good one – but is it sustainable? We don’t have a clue, and we don’t know if the issues at TIME are easily correctable (keep in mind TIME’s publishing assets were twice the size of MDP’s). We did try to assess the risk-reward here by performing a sensitivity analysis – we assumed EBITDA misses the 2020 target of $1B by $100-150MM, with the assumption that TIME’s topline trends don’t improve under MDP’s control (down HSD-LDD instead of the expected MSD declines) - and we get a downside target of $49-54/sh. Given our lack of visibility into revenue trends, we are on the sidelines. We do want to mention MDP is also looking at Cox on the TV side. While our M&A math suggests this is accretive, we think MDP has enough work to do for now. We initiate MDP with a Peer Perform and $67 price target.
We think AMCX is doing the absolute best it can with the assets it has. And it has been a good stock – relative to the rest of our sector(s) under coverage, +6% YTD vs. the S&P, +1%. But we’re not sure that the “as-long-as-it-isn’t-as-bad-as-expected-thestock-will-work” thesis is sustainable. We want to be clear – our call is that this stock is likely to underperform its peers next year, but we still get 16% upside from today’s price. It just isn’t enough for us to hang our hat on – we would love to see real momentum (or even stabilization) in the story from some of the really good content that AMCX has on its schedule (Better Call Saul, Preacher, Into The Badlands, The Son, Dietland, The Terror, Lodge 49, McMafia, etc.). But it still feels as if there is so much reliance on The Walking Dead (TWD) – just listen to the last earnings call or read the transcript. You know how many times TWD was mentioned in prepared remarks? We counted – it was 23. That’s way too many for me to survive a drinking game (although admittedly I am a total light weight so maybe I should say that is way too many for ERIC to survive a drinking game – he said he’s willing to find out). So relative to our expectation for its peers, we initiate on AMCX with an Underperform and $66 price target.
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