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Telecom / Media Overview - Buy-Write Google (GOOG)
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Telecom / Media Overview - Buy-Write Google (GOOG)
EQUITY PRODUCT MANAGEMENTJuly 14, 2005 North America Product Management GroupTelecom/Media Overview Telecom/Media OverviewIndustry Overview Alvin P. Kressler III 1.212.526.3375Telecom & Media Research Monitor firstname.lastname@example.orgSector View:New: 0-Not RatedOld: 0-Not RatedInvestment conclusion! Highlighted: GOOG, YHOO, PLCM, FFIV, NWSA, DIS, CVC, SBSA, GCI**PLEASE REFER TO FULL COMPANY NOTE(S) on http://www.lehmanlive.com **Lehman Telecom & Media Research from North AmericaGoogle Inc. (GOOG, $298.86, 1-Overweight, Sector Neutral) Raising Numbers, Raising Target – Douglas AnmuthWe are raising our estimates for Google for 2Q05, and 2006 and beyond. We expect GOOG to post strong 2Q05 numbers onthe heels of continued secular growth in search, intl expansion, and further gains in monetization. Our estimates for netrevenue move from $844M (+6.2% Q/Q) to $861M (+8.3% Q/Q), for EBITDA from $541M (-1.2% Q/Q, 64.1% margin) to$566M (+3.3% Q/Q, 65.7% margin), and for PF EPS from $1.22 to $1.28. While we expect 2Q05 to be a strong quarter, ourhigher price target and incrementally more positive outlook on the company are based on GOOGs fundamental earningspower over the L-T. We are raising our EBITDA margins for 2Q05 and the outer years as we believe GOOG simply cannotspend money fast enough given the extremely high incremental margins associated with the core search business, and thecompanys technological focus and lean approach to new projects provide distinct advantages in terms of costs and efficiency.Equity Derivatives Strategy: GOOG Buy-Write – Ryan RenickerWe are seeing signs that option market participants are pricing in a relatively high degree of uncertainty for Google (GOOG)shares heading into Q2 earnings (July 21), as measured by Google implied volatility levels. Specifically, Google 2-monthimplied volatilities are currently trading relatively high 1) on an absolute basis 2) versus realized and 3) versus the Nasdaq 100.From a fundamental perspective, GOOG is likely to post strong 2Q numbers on the heels of continued secular growth insearch, international expansion and further gains in monetization, according to Lehman Internet & Media analyst DouglasAnmuth. We believe investors should consider implementing a August 320 “buy-write” strategy on GOOG shares heading intoGOOG’s July 21 earnings release. This short-term strategy allows investors to maintain a bullish stance on GOOG shares intoearnings, while partially protecting against a downside move in the stock. The buy-write makes money as long as GOOGtrades above $289.46 as of the August 20th expiration date and outperforms a long-only position in GOOG shares if GOOGtrades at or below $329.40 at expiration. If GOOG trades at $329.40 on expiry, both the buy-write strategy and the long-onlyposition would result in call-away or holding-period return of about 10.25%.Yahoo! Inc (YHOO, $36.73, 1-Overweight, Sector Neutral) Branded & Intl the Likely 2Q Highlights – Douglas AnmuthWe believe YHOOs branded advertising and international businesses could provide modest upside potential to our current 2Qestimates, which call for revs of $889M (+46% Y/Y), EBITDA of $358M (+53% Y/Y), and EPS of $0.13. Based on our tracking,we believe YHOOs branded business experienced increased spending from the automotive, wireless, and consumer verticals,Lehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investorsshould be aware that the Firm may have a conflict of interest that could affect the objectivity of this report.Customers of Lehman Brothers in the United States can receive independent, third-party research on the company orcompanies covered in this report, at no cost to them, where such research is available. Customers can access thisindependent research at www.lehmanlive.com or can call 1-800-2-LEHMAN to request a copy of this research.Investors should consider this report as only a single factor in making their investment decisions. PLEASE SEE ANALYST(S) CERTIFICATION(S) ON PAGE 3 AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 4 1
EQUITY RESEARCHwhile also benefiting from increased inventory sell-through as YHOO devoted less of its prime real estate to its own productsand services. In terms of international, we believe further roll out of its algorithmic tech, sponsored search, and contextual-based advertising continues to fuel strong rev growth and Y/Y margin expansion. While modest upside potential to our 2Qestimates and a slight increase to full year guidance are not likely to have a material near-term impact on the stock, wecontinue to believe in the L-T potential of YHOO shares. We reiterate our 1-Overweight rating.Polycom Inc (PLCM, $16.40, 1-Overweight, Sector Neutral) Expect Solid Jun-Q; Main 1OW – Jiong ShaoWe expect PLCM to deliver a solid Jun-Q w/ rev ahead of our mdpt of guid est of $138.9M(+1%QoQ) v mgmt guid flat to +2%& EPS est of $0.18, driven by improved US ent & govt/public, w/ momo in vid & VoIP handset biz & increased traction in intlbiz. We main 1OW & $20 tgt. PLCM reports on Jun 20 @ 5 PM EDT. Dial-in: 800.205.6183. GM & OM likely to be stable at62.9% &15.7%, respective, w/ higher op ex fr ramp in R&D & SG&A to expand international sales, execute strat partnerships &further infrastructure investments. Bel Sept-Q guidance at least inline w/ current street est +3.6% to $145M, helped by conttraction fr MCU prods through MSFT partnership, strgth in vid sales fr VSX line & shipments of IP conference phones throughNT OEM partnership. Key areas to focus during call: update on various partners, increased competition w/ new private plays inspace; outlook for IP vid adoption & VoIP handset traction, backlog & def rev figs; updates on share repurchases.F5 Networks (FFIV, $47.47, 2-Equal weight, Sector Neutral) Expect Solid Jun-Q; Main 2EW/$60 Trgt – Jiong ShaoFollowing our latest checks, we expect F5 to deliver Jun-Q results at least at high end of rev/eps guid of $70-72M/$0.33-0.34 vour/St $72M/$0.34 est. Checks indicate strong momo cont. for app acceleration & for F5 in particular. We main constructive2EW. Call on 7/20/05 @ 4:30 ET; dial-in: 888.942.8131. Bel Jun-Q rev up QoQ in all geos ex Japan(due FQ1 seasonality),led by US w/ grwth in APAC & EMEA; Bel B:B potential>1 & increased def rev. Bel security/Firepass & Buf Jump strong, asBuf Jump 55-60% of rev v 50% LQ, w/ TrafficShield inline w/ lowered expectations. Bel GM flattish v LQ at 76.8% v 76-77%guid & OM up to 26.8% v 25.8% LQ w/ opex of $36M v $35-36.5M guid; Bel mgmt may tweak lt op margin trgt slightly up frcurrent 25-30% goal. W/ respect to guid, bel F5 may potentially provide Sep-Q guid ahead of St. rev/EPS est of $75.9/$0.36,w/ high end at least toward our $77.2M/$0.37 est. Bel DSOs to remain in mid 40s v 46 LQ, w/ inv up to $2-3M v $2M LQ atleast $20M in cash fr ops.News Corporation (NWSA, $16.68, 1-Overweight, Sector Neutral) F4Q05 and F2006 Outlook – Vijay JayantWe remain comfortable with our rev and OI growth ests for News Corps F4Q05 of 6.7% and 34.9%, respectively. In addition,we look for another strong year of growth in F2006 with operating income rising 18%. News Corp remains our top pick amongthe major media companies as it has the best long-term growth prospects and the most attractive valuation. Our rev, OI, andEPS ests for F4Q05 are $5.84B (+6.7%), $909M (+34.9%), and $0.18 (+23.7%), respectively. Sky Italia, Newspapers, andCable Networks are the key drivers in the quarter. Filmed Entertainment is faced with tough Y-Y comps and could see doubledigit OI declines in the quarter. Television remains soft with flattish OI growth likely. We estimate share repurchases of roughly$1.5B in F2006 (employing ~60% of FCF), following the $530M spent in F4Q05. NWS/A trades at 8.4x EV/EBITDA and 13.9xP/FCF based on C2005E. We believe the spread between the NWS and NWS/A shares may widen in the coming months.Walt Disney Co (DIS, $25.71, 2-Equal weight, Sector Neutral) F3Q05 Outlook: Waiting On Catalysts – Vijay JayantWe are modestly lowering our F3Q05 operating income estimates by $27M to $1.4B due to lower expectations at StudioEntertainment and Consumer Products. However, our EPS remains at $0.39 and the growth outlook for the quarter and C2005still remain ahead of all other major media companies except for News Corp. Valuation is becoming more attractive, but thebiggest question that remains is the sustainability and strength of Disneys recovery following F2005, especially in light of aslowing economy. Reducing operating income to $1.40B (+27.5%) from prior $1.43B est. EPS remains at $0.39 (in line withconsensus). All segments are positioned for double digit operating income growth except for Theme Parks, which will beimpacted by Hong Kong pre-opening expenses. Advertising concerns, slowing DVD sales, and a cooling US economy in 2006are weighing on the shares. However, several potential catalysts are looming on the horizon. DIS trades at 9.7x EV/EBITDAand 15.8x P/FCF based on C2005E.Cablevision Systems (CVC, $31.95, 2-Equal weight, Sector Neutral) AMC Litigation Minor Negative – Vijay JayantTWXs recent court victory in its litigation with CVC over the format change at AMC is a minor negative for CVC. We do notbelieve AMCs carriage at Time Warner Cable is at risk, but rather that TWX will use this victory as leverage when negotiatingAMC affiliate fees. Most likely outcome (reduction in affiliate fee) reduces CVC value/share by less than $0.33; worst case,lose/lose scenario (AMC is dropped by TWC) reduces CVC value by $1.96/share. A New York court has ruled that AMCs shiftfrom a classic movie format to carriage of more recent movies breached its contract with Time Warner Cable. CVC plans toappeal the ruling. Current contract expires in 08. We continue to expect a modest bump in the Dolans cash offer for the CVCtelecom assets and that the Rainbow stub will trade at a discount to management estimated NAV of $12.50. TWX mgmt hasmade it clear it does not plan to bid for the CVC telecom assets at this time.Spanish Broadcasting Sys (SBSA, $9.87, 1-Overweight, Sector Neutral) Expansion Into Television – William MeyersWe were surprised by the timing and strategic direction of SBSAs announced purchase of an independent television station inthe Miami DMA for $37.5 million. We are maintaining our estimates pending further analysis of the likely earnings/FCF dilution 2
EQUITY RESEARCHassociated with the initiative. Given previous delays in closing its long-awaited Los Angeles radio station sale to Styles Media,coupled with managements focus on debt repayment, we would have expected SBSA to complete the $120M sale prior toannouncing any acquisitions. We were surprised by SBSAs TV initiative given: 1) its lack of senior management experience inthe business and 2) the highly competitive dynamics of the local TV station business. Management is currently reluctant toreview plans for programming strategies, investments and station projections, but will likely address these issues during its2Q05 earnings call. The acquisition is expected to close in mid-4Q05.Gannett (GCI, $72.95, 2-Equal weight, Sector Negative) Lowering Street-low Ests Further – Craig HuberGannetts 2Q EPS was $1.37 vs. our estimate of $1.38 and $1.30 in prior year. Lowering our 2005 near Street-low and 2006Street-low EPS estimates to $4.97 and $5.30 from $5.05 and $5.40, respectively. Trimming our price target to $68 from $72due to lowered 2006 EBITDA estimates. Maintaining 2-Equal weight rating and 3-Negative newspaper sector rating. Total 2Qrev. of $1.937 bil was up 3.4% vs. our $1.932 bil(E). Pro forma newspaper 2Q ad rev. up 3.1% incl. a weak June, up only 0.8%.2Q retail ad rev. up 2.6%, national down 0.3%, and classified up 4.9%. 2Q help wanted ad rev. up 7.8% and showing signs ofslowing at up only 3.7% in June (up 8.5% YTD). 2Q auto weak at down 5.0%. 2Q real estate ad revenue up 6.5%. USA Todayad rev. down 1.4% in 2Q and down 7.6% in June. Ad revenue has been very volatile in recent months which does not indicatestrong ad front. 3Q05 TV pacings running down 17-19% vs. our prior estimate of down 12.5% (hurts EPS by additional $0.03vs. our prior estimate). 2Q TV margins at 10-yr lows.Happening TodayTelecom & Media C2Q05 Earnings Expectations Lehman Brothers Expectations Consensus Estimates Above / Above / Next Q Earnings Current Q (Below) Current Q (Below) Cons. Next QCompany Report Date Time Call-in Number Revenues EBITDA EPS Cons. Rev. Cons Cons. EPS Cons Rev. Cons EPSTRB 14-Jul-05 9:00 AM 877.847.0401 $1,437.8 $380.5 $0.56 $1,467.6 (29.82) $0.58 (0.02) $1,407.5 $0.50MNI 14-Jul-05 12:00 PM 877.278.1205 $301.7 $90.4 $0.92 $305.2 (3.48) $0.93 (0.01) $298.0 $0.86KRI 14-Jul-05 2:00 PM 800.616.1938 $761.4 $170.7 $0.99 $769.4 (8.03) $0.99 0.01 $741.5 $0.91Source: Lehman Brothers and First CallEconomics:CPI (June), Lehman est. is 0.3% m-o-m.Core CPI (June), Lehman est. is 0.2% m-o-m.Retail Sales (June), Lehman est. is 0.7% m-o-m.Non-auto Retail Sales (June), Lehman est. is 0.7% m-o-m.TSY 10-year TIPS AuctionInitial Jobless Claims (9-Jul), Lehman est. is 315k.Continuing Claims (2-Jul), Lehman est. is 2.525m.Analyst Certification:Each research publication excerpted herein was certified under Reg AC by the analyst primarily responsible for such report as follows: Ihereby certify that: 1) the views expressed in this research report accurately reflect my personal views about any or all of the subjectsecurities referred to in this publication and; 2) no part of my compensation was , is or will be directly or indirectly related to the specificrecommendations or views expressed in this report. 3
EQUITY RESEARCH FOR CURRENT IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS RESEARCH REPORT, PLEASE SEND A WRITTEN REQUEST TO: LEHMAN BROTHERS CONTROL ROOM 745 SEVENTH AVENUE, 19TH FLOOR NEW YORK, NY 10019 OR REFER TO THE FIRMS DISCLOSURE WEBSITE AT www.lehman.com/disclosuresImportant Disclosures:The analysts responsible for preparing this report have received compensation based upon various factors including the Firm’s totalrevenues, a portion of which is generated by investment banking activities.Related Stocks: Ticker Price (07/13) RatingGoogle Inc. GOOG 298.86 1-OverweightYahoo! Inc YHOO 36.23 1-OverweightF5 Networks FFIV 47.47 2-Equal weightPolycom Inc PLCM 16.40 1-OverweightWalt Disney Co DIS 25.71 2-Equal weightNews Corporation NWSA 16.68 1-OverweightCablevision Systems CVC 31.95 2-Equal weightSpanish Broadcasting Sys SBSA 9.87 1-OverweightGannett Inc. GCI 72.95 2-Equal weightTribune Co. TRB 35.40 3-UnderweightMcClatchy Company MNI 67.78 3-UnderweightKnight Ridder KRI 62.41 3-UnderweightGuide to Lehman Brothers Equity Research Rating System:Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2- Equal weight or 3-Underweight (seedefinitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector(the “sector coverage universe”). To see a list of the companies that comprise a particular sector coverage universe, please go towww.lehman.com/disclosuresIn addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or3-Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system.Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.Stock Rating1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-monthinvestment horizon.2-Equal weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a12- month investment horizon.3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.RS-Rating Suspended - The rating and target price have been suspended temporarily to comply with applicable regulations and/or firmpolicies in certain circumstances including when Lehman Brothers is acting in an advisory capacity in a merger or strategic transactioninvolving the company.Sector View1-Positive - sector coverage universe fundamentals/valuations are improving.2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.3-Negative - sector coverage universe fundamentals/valuations are deteriorating.Stock Ratings From February 2001 to August 5, 2002 (sector view did not exist):This is a guide to expected total return (price performance plus dividend) relative to the total return of the stocks’ local market (i.e. the marketwhere the stock primarily trades) over the next 12 months.1-Strong Buy - expected to outperform the market by 15 or more percentage points.2-Buy - expected to outperform the market by 5-15 percentage points.3-Market Perform - expected to perform in line with the market, plus or minus 5 percentage points.4-Market Underperform - expected to underperform the market by 5-15 percentage points. 4