Zebec Research

Meredith reported 1Q20 (its 3QF20) earnings yesterday ( link to full note ). Key takeaways for MDP and the broader industry:  Results were in-line during the first two months of the quarter, the advertising outlook deteriorated dramatically in March and April.  Secularly challenged print revenue at the publishing business averaged a 12% decline over the past three quarters. This accelerated to an 18% decline in 1Q20 with 2Q pacing down 30%. Publishing’s digital revenue averaged 7% growth over the previous three quarters before declining 4% in 1Q20. 2Q is pacing down 40%. Non-political ad growth at the TV stations averaged 2% over the past three quarters but declined 11% in 1Q20. 2Q results are expected to be down 40%.   The results also highlight the more challenging environment for traditional media companies relative to digital natives. To see this, compare the 40% decline in digital ad revenues at Meredith’s publishing business to Google.   On its 1Q20 c...

1Q20 results:  Alphabet posted solid 1Q20 results, all things considered.  Advertising results sounded strong in January and February but saw an abrupt drop off in March.  Search increased 9% for 1Q but ended March down at a mid-teens rate.    While search activity increased, the searches were focused on less commercial topics.    And advertisers reduced spending.   YouTube ad revenues grew 33% but declines accelerated to a high-single digit rate by the end of March.    Brand advertising accelerated in the first two months of the quarter but saw headwinds beginning in mid-March, while direct response advertising was strong across the quarter. Google Network ads grew 4% in the quarter.    Growth was solid during the first two months but ended March with a low-double digit decline. Non-ad related revenue remained strong throughout driven by Google Cloud. Overall, the ad declines were not as bad as we expected.  Goo...

In this report ( link ), we build an analytical approach to frame the key questions around the Trolls 2 PVOD release: 1) will Universal make more money under a PVOD release for Trolls 2 than it would have under a traditional theatrical release and 2) if so, is it replicable?  To answer the first question, we build a simple film model to evaluate Trolls 2 profitability under both a traditional theatrical and PVOD release. Model suggests profit of $54mm under theatrical release:  Our film model suggests that Trolls 2 could have generated $267mm in lifetime revenues under a traditional theatrical release and adjusted profit (excluding the Universal distribution fee) of $54mm. The analysis is driven by the assumption of a $130mm domestic box office, which may be too bullish as some industry sources saw weaker tracking. Conservative PVOD model suggests profit 9% higher than theatrical:  Forecasting results for a PVOD-only release is tricky as several key assumptions are e...

We are initiating a Hold Trade rating on Townsquare as our more positive near-term fundamental views are offset in the near-term by the potential impact of the coronavirus.  ( Report link  and  model link ). The terrestrial radio business has been facing secular challenges with likely LSD declines in core advertising in recent years driven by listenership declines.    However, we think Townsquare is differentiated from peers because of the markets that it serves and its high-quality digital solutions.    We believe Townsquare offers a strong portfolio of digital products to small advertisers that typically don’t have access to the services of an ad agency.    And, because it is in smaller markets, it is generally competing with smaller media operators that don’t have the resources to build out these offerings. The structural attractiveness of Townsquare’s portfolio is reflected its relatively strong revenue growth outlook. Our current estimat...

A couple of weeks ago, we initiated a Sell trade rating on E-Trade saying that the competitive environment was only going to get worse following the closure of the Ameritrade/Schwab deal and that we struggled to see a buyer for the company. That was the wrong call as Morgan Stanley announced this morning that it would acquire E-Trade in a stock deal worth $58.74/share. We continue to believe that the fundamentals would have gotten worse, which is why we think E-Trade chose to sell.  However, we underestimated its attractiveness to a traditional Wall Street investment bank that was looking to move downstream into the more stable consumer market.  In retrospect, when Goldman Sachs focused on its recent analyst day on the consumer markets, we should have realized that E-Trade would be in play. The deal will help MS build out its brokerage as well as its stock administration business. MS acquired Solium, a competitor to E-Trade's stock administration business last year for what lo...

We are initiating a Buy Trade Recommendation on Sinclair Broadcasting (SBGI) with a $47 12-month price target, ~50% upside. ( Link ) Three key points to our thesis:  We believe concern over CMCSA negotiations are overblown;  Estimates are de-risked after removal of DISH from FCF guidance;  Per consensus, company should generate $17 in FCF/share in 4Q19 and 2020, much of which should accrete to equity holders assuming company de-levers and EV/EBITDA multiple is unchanged. Originally published on 02/05/20.

We are initiating a Sell Trade Recommendation on E-Trade (ETFC) with a $37 6-month price target, ~16% downside. ( Link ) Three key points to our thesis:  We see risk to the business from potentially lower rates and increased competition from Schwab/Ameritrade and larger financial companies moving into the retail space   specifically around revenues from commissions, net interest margin and payments for order flow;  Contrary to bulls, we think E-Trade’s sub-scale RIA business is unlikely to see meaningful share gains post-Schwab/Ameritrade and we don’t see a likely buyer for the company; Applying the recent 10x trough multiple to the current $3.66 consensus EPS estimate implies a $37 price target. Originally published on 02/06/19.

We initiate on Okta with a  Buy Investment Rating and  fair value of ~$150, 27% upside.  ( Link )  Per leading Technology Research firms, Okta is the leader in the IAM industry due to several competitive advantages.  As a result, we think Okta is well positioned to take share from competitors due to aggressive investments in its products, which has resulted in a best-in-class offerings. We estimate Okta currently has only a 5% share of the IAM market. The attractive market growth and Okta’s leading position suggest a long runway for growth for Okta. Our DCF and EV/Sales models point to a fair value for the stock of ~$150+.  This valuation is supported by Okta’s potentially to be an acquisition candidate for a legacy provider. Originally published on 12/11/19.