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P | What's Your Gameplan? (Web IV)

Takeaway: Ruling is out sometime tomorrow. This note is more about P’s model in a post Web IV world than the decision itself (notes on that below)

KEY POINTS

  1. NO BASIS FOR FLAT RATES: The only way to get to down to flat rates is if the CRJs overweight the Merlin deal, which we actually expect to receive the least amount of credence (links below).  The other key benchmarks are advocating for a rate above what P is currently paying today (.16c); including the IHRT-WMG deal that has an effective rate of .17c while offering WMG a terrestrial radio revenue share, which IHRT has no legal obligation to pay for, and is also not covered by the statutory license.  SX is looking for .25c starting next year, which may seem extreme, but is not that far off from what the Web III Remand CRJs (same CRJs in Web IV) ruled for in the 2015 period (.23c).  In short, we can’t see the CRB ruling for a rate below .20c starting in 2016; the structure of the pre-1972 settlement alone suggests P is expecting the same.
  2. WEB IV = POWDER KEG: The issue is not so much that there is a certain rate threshold that would require P to sunset its ad-supported model, but rather the limited flexibility P has to manage any rate increase.  P's revenues are highly dependent on its cost structure (Content + S&M), so it can't really trim expenses without putting more of its revenues at risk.  Rather, P will likely need to spend more in S&M (i.e. salesforce) in hopes of driving enough revenue growth to offset the royalty rate increase; especially since it has yet to show any real improvement in ad revenue/sales rep over the past 2 years (both on a direct & trailing-rep basis).  But more importantly, very small misteps in execution (revenue growth/cost containment) could lead to considerable increases in cash burn (see slides below).  The risk of getting it wrong is too severe to continue prioritizing the ad-supported model.    
  3. WHAT'S YOUR GAMEPLAN? Mgmt will be hosting a call to discuss the Web IV outcome tomorrow at 4:30ET; what mgmt says on this call may be more important than the actual decision.  Mgmt implied on its Strategic Update call that its recent acquisitions/agreements were essentially hedges against the Web IV outcome, but stated that it wouldn't deemphasize its ad-supported model.  Granted, that may just be posturing, but if mgmt continues to devote the bulk of its resources (i.e. its loan) to its ad-supported model that has barely limped along under the Pureplay rates, then P will remain a secular short.  But if P chooses to demphasize the ad-supported model in favor of a dedicated push into the higher ARPU/margin subscription market, then it could be a different story.  

 

See below for supporting analysis on the implications of Web IV on P's business model.  Let us know if you have any questions or would like to discuss further.

 

Hesham Shaaban, CFA


@HedgeyeInternet 

 

 

P | What's Your Gameplan? (Web IV) - P   pre 1972

P | What's Your Gameplan? (Web IV) - P   Web IV benchmarks

P | What's Your Gameplan? (Web IV) - P   Web IV prior rates

P | What's Your Gameplan? (Web IV) - P   Web IV leverage slide

P | What's Your Gameplan? (Web IV) - P   Cost structure slide 2

P | What's Your Gameplan? (Web IV) - P   Web IV fallout 1

P | What's Your Gameplan? (Web IV) - P   Web IV fallout 2

P | What's Your Gameplan? (Web IV) - P   Web IV ARPU slide

 

 

P | Changing Its Tune (Strategic Update Call)
11/17/15 08:35 AM EST

[click here]

 

P: Can We Still Be Friends? (3Q15)
10/23/15 08:14 AM EDT

[click here]

 

P: It's All About the Benchmarks (Web IV)
10/02/15 12:22 PM EDT
[click here]

 

P: Fool's Gold (Web IV)
09/21/15 02:05 PM EDT
[click here]

 

P: Losing the Critical Debate? (Web IV)
04/08/15 08:53 AM EDT
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INVITE | HOW I LEARNED TO STOP WORRYING & LOVE THE MTW BREAK-UP (BEST IDEAS LONG CALL)

Friday, December 18th at 11:00am EST

 

 

Mostly Not Cranes

 

We see few names in the Industrials sector that are as undervalued and underappreciated as Manitowoc.  MTW offers a clear revaluation catalyst with the 1Q 2016 split of the Foodservice Equipment unit from the Cranes business.  We see significant upside potential from the market’s reappraisal of these solid but stunningly mismanaged franchises.  In our experience, investors often get bogged down in Crane segment cyclicality and miss the broader operating improvement and value-unlock opportunity.  While it is common for companies to trade poorly ahead of transformational break-ups, the recent decline in MTW shares provides a straightforward value opportunity in an otherwise challenged sector.   

 

 

Highlights

  • Foodservice Equipment Drives Value:  An independent, better performing Foodservice Equipment segment is alone likely to receive a higher valuation than the current combined companies.
  • Implied Negative Value For Cranes:  Buyers are being paid to take the Crane unit, by our estimates, despite the potential for better performance or a sale of this ‘Cadillac’ of cranes producer.
  • Sabotaging, Weak Management Out:  As we see it, prior management made efforts to undermine the separation, and recent c-suite changes are a significant positive.
  • Long-term View of Metrics, Operating Potential:  We will review crane market cyclicality, currency exposure, and foodservice equipment market drivers.
  • Opportunities For Better Management:  Improved management could execute botched facilities rationalizations, price innovative products more effectively (VPC), or just deliver products & services on time.
  • Valuation Upside:  We value MTW’s two separate companies $20/share or higher.  A sale of either unit is also possible, and we note the current interim CEO is from Bucyrus.

 

INVITE | HOW I LEARNED TO STOP WORRYING & LOVE THE MTW BREAK-UP (BEST IDEAS LONG CALL) - MTW 12 14 15

 

 

We will conclude the call with a live Q&A session.  Industrials subscribers will receive the dial-in and materials link in a reminder email prior to the call.

 


INVITE | How I Learned To Stop Worrying & Love The MTW Break-up (Best Ideas Long Call)

 

Mostly Not Cranes

We see few names in the Industrials sector that are as undervalued and underappreciated as Manitowoc.  MTW offers a clear revaluation catalyst with the 1Q 2016 split of the Foodservice Equipment unit from the Cranes business.  We see significant upside potential from the market’s reappraisal of these solid but stunningly mismanaged franchises.  In our experience, investors often get bogged down in Crane segment cyclicality and miss the broader operating improvement and value-unlock opportunity.  While it is common for companies to trade poorly ahead of transformational break-ups, the recent decline in MTW shares provides a straightforward value opportunity in an otherwise challenged sector.   

 

 

Highlights

  • Foodservice Equipment Drives Value:  An independent, better performing Foodservice Equipment segment is alone likely to receive a higher valuation than the current combined companies.
  • Implied Negative Value For Cranes:  Buyers are being paid to take the Crane unit, by our estimates, despite the potential for better performance or a sale of this ‘Cadillac’ of cranes producer.
  • Sabotaging, Weak Management Out:  As we see it, prior management made efforts to undermine the separation, and recent c-suite changes are a significant positive.
  • Long-term View of Metrics, Operating Potential:  We will review crane market cyclicality, currency exposure, and foodservice equipment market drivers.
  • Opportunities For Better Management:  Improved management could execute botched facilities rationalizations, price innovative products more effectively (VPC), or just deliver products & services on time.
  • Valuation Upside:  We value MTW’s two separate companies $20/share or higher.  A sale of either unit is also possible, and we note the current interim CEO is from Bucyrus.

 

INVITE | How I Learned To Stop Worrying & Love The MTW Break-up (Best Ideas Long Call) - MTW 12 14 15

 

 

We will conclude the call with a live Q&A session.  Industrials subscribers will receive the dial-in and materials link in a reminder email prior to the call.

 


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Cartoon of the Day: A Crude Reality

Cartoon of the Day: A Crude Reality  - oil cartoon 12.14.2015

 

"After crashing another -11.6% to -41.1% year-to-date last week, Oil starts the week up 1.97%," Hedgeye CEO Keith McCullough wrote in a note to subscribers earlier today. 

 

Make no mistake. #Deflation Risk is still present.

 


Is Old Wall Warming Up To Our Late-Cycle Call?

Takeaway: We reiterate our call on deflation and growth slowing.

The Wall Street Journal published an interesting story written by Jon Hilsenrath this morning. Apparently, 58% of WSJ surveyed economists now think it is "likely" that within five years, short-term interest rates will be right back at zero. 

 

Is Old Wall Warming Up To Our Late-Cycle Call? - WSJ article

 

Here's the gist of it from Hilsenrath:

 

"Any number of factors could force the Fed to reverse course and cut rates all over again: a shock to the U.S. economy from abroad, persistently low inflation, some new financial bubble bursting and slamming the economy, or lost momentum in a business cycle which, at 78 months, is already longer than 29 of the 33 expansions the U.S. economy has experienced since 1854..."

 

Is Old Wall Warming Up To Our Late-Cycle Call? - wsj survey

 

Nothing new to us here.

 

In our 73-page Q4 Macro Themes presentation (published in October), we called out the simple fact that the current economic expansion was getting long in the tooth:

 

Click image to enlarge.

Is Old Wall Warming Up To Our Late-Cycle Call? - macro themes dek cycles  

 

Hilsenrath continues:

 

"Among the worries of private economists is that no other central bank in the advanced world that has raised rates since the 2007-09 crisis has been able to sustain them at a higher level."

 

Economists should be concerned. The latest round of U.S. economic data is "unequivocally bearish." Below is a video of our outspoken CEO Keith McCullough on Fox Business just before Thanksgiving discussing whether the U.S. is headed for recession in 2016.

 

Indeed, Old Wall economists have been slow on the uptake all year. Evidence? Our #Deflation call (now 18 months old) is a commonplace argument now, following the precipitous crash in commodities.

 

We continue to think that economists under-appreciate our #GrowthSlowing call (from Q3 2014). Then again, maybe some of them are finally wising up... 

 

Interestingly, one of the economists surveyed by the Wall Street Journal made the astute observation, as summarized by Hilsenrath, that the "U.S. expansion is now at an advanced stage and consumers have satisfied pent-up demand for cars and other durable goods."

 

"I call it late-cycle," the economist said. Sound familar? Thanks for coming out. We called out the "Late-Cycle" nature of the U.S. economy back in July. 

 

Still, what the WSJ surveyed economists seem to miss, even with this seemingly shocking revelation about U.S. growth, is that by raising interest rates the Fed might actually perpetuate an economic slowdown.

 

Is Old Wall Warming Up To Our Late-Cycle Call? - darius bingo

 

Our good friend and best-selling author Jim Rickards points out the Fed's nonsensical rationale for raising rates now:

 

Is Old Wall Warming Up To Our Late-Cycle Call? - rickards


Why Raising Rates (Even One Basis Point) Right Now Is a Really Bad Idea

 

During this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough explains why even a miniscule interest rate hike by the Fed would be a big mistake.

 

Subscribe to The Macro Show today for access to this and all other episodes. 

 

Subscribe to Hedgeye on YouTube for all of our free video content.


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