Here is a small sampling of the 120+ posts seen on the Buzz & Banter this week:
Tuesday, February 18, 2014
Comcast Purchase of Time Warner Looks Good
Comcast's (NASDAQ:CMCSK) pending purchase of Time Warner Cable (NYSE:TWC) improves upon an already positive story for Comcast shares. Assuming approval effective January 1, 2015, analysts are estimating 5-10% accretion in free cash flow per share compared to CMCSK continuing as a standalone entity. Accretion emanates from synergies in operating expenses and capital expenditures, estimated by management at $1.5 billion and $400 million once fully implemented over a two-year period. Analysts are being a little more conservative in their forecasts assuming a three-year implementation period. Management is not assuming any synergies on revenue. This strikes me as conservative, especially for the already rapidly growing business services at each company. With cable lines in 23 of the largest 25 markets in the US, the enlarged Comcast seems particularly well-positioned to accelerate focus and growth in business services.
My experience with Comcast management and large mergers generally is that management synergy estimates are usually conservative in terms of scope and in time-wise. Within the cable industry, synergies are relatively straightforward as the companies do not compete head-to-head, so savings are mostly in overhead and scale purchasing economics.
Presently, combining the companies for 2014 and assuming no synergies, free cash flow per share is projected to be around $2.85 based on analyst estimates. With both of Comcast's (NASDAQ:CMCSA) shares trading at an average price of about $53, that puts the multiple at around 18.5x and the free cash flow yield near 5.5%. Assuming a January 1, 2015 deal close, analyst estimates (admittedly with a wide variation) show free cash flow growth of 16% in 2015, 20% in 2016, and 23% in 2017. Growth accelerates as synergies and share repurchases kick in.
Given this growth outlook, I think CMCSK shares can sustain their current free cash multiple, equating to a price target of $65 on 2015 estimates. This provides about 20% upside, plenty to justify owning CMCSK shares.
CMCSK shares traded a little lower on the deal announcement as arbitrageurs began positioning themselves long Time Warner Cable and short CMCSK. Given that I found CMCSK undervalued even before the merger announcement, I think downside is limited even if the government rejects the merger or imposes even stricter conditions than assumed. I think approval is likely with an extension of the consent decree CMCSK already operates under from its NBC Universal acquisition. The consent decree runs through 2017, and I would not be surprised to see it extended for a few years on the enlarged company.
Wednesday, February 19, 2014
FOMC Minutes Reaction
Watching Canada almost lose to Latvia was about as compelling as the Fed Minutes.
1. The Fed is going to keep rates at zero until inflation is above 2.5% for 3 or more months in a row. Maybe that is an exaggeration, but it is clear the Fed wants inflation and will keep rates low until it get its. The Fed has said in the past that its target is 2%, but it will accept periods above that if it is temporary. Accept that Fed Funds (and therefore LIBOR) will be at zero for the foreseeable future.
2. The Fed is going to reduce its asset purchase program. Many didn't like this to begin with. Many thought it would be over by now; it is unclear what it has done here or in Japan other than increase stock prices, and it is becoming more clear to everyone that the global consequences, particularly of the exit, are difficult to manage. We may see them pause on QE, but only if the data get materially worse (and can't be blamed on the weather). If the economic data get that much worse, I am not sure that risk assets can support current levels, even with more QE.
I think that the separation of interest rate policy and QE will become more apparent. We might see some other policies, but for now, I think the market has to digest the fact that QE is being downplayed.
3. The "trickiest" part is the concern about "risks to financial stability." That could clearly be the creation of an official Yellen put. Some seem to want to interpret this as very supportive for the market. Given the number of Fed members who have been talking about bubbles, those who see them, and those who say they don't exist, this might also be used to "cool down" a frothy market. There has to be someone at the Fed, other than "Beer Goggles" Fisher, who gets a little concerned that markets react positively to every bit of bad news, which seems to indicate that the Fed has created some perverse incentives.
I think we will see selling pressure on both Treasuries and risk assets.
Treasuries will be sold initially on the back of the "treasuries need QE to support these yields" idea, but that should create a very nice buying opportunity as will the growing realization that growth is slowing and may be nonexistent. Even if it was the weather, it has been going on so long that momentum has been lost (if there ever was real momentum).
So, we are sellers!
In the meantime, just like in Miracle on Ice, it looks like the semi-final will be the real gold medal game.
Thursday, February 20, 2014
Facebook: What's Up With WhatsApp?
So Facebook (NASDAQ:FB) bought text messaging service WhatsApp for $19 billion. Wow. It makes its $1 billion purchase of Instagram look like a real bargain.
Throw out your spreadsheets because there's no way to make sense of it using traditional finance.
But there's one big thing to keep in mind: throughout the history of the Internet, when a platform becomes big, sooner or later, monetization comes.
Facebook started out on one college campus in 2004. Back then, not many people would have predicted that in 2014, it would have more than 1 billion users and be on track to generate over $11 billion in annual revenues.
And you could say the same about Twitter (NYSE:TWTR), LinkedIn (NYSE:LNKD), and Google (NASDAQ:GOOG). They had big user bases before they had big revenues.
Incidentally, WhatsApp does have revenues (the app is free for the first year and costs $0.99 a year afterwards) and is profitable.
From a strategic standpoint, WhatsApp would give Facebook a few important things:
1. An absolute mountain of data each day -- Nineteen billion messages are sent, and 600 million photos are uploaded every day on WhatsApp.
2. An enormous foothold in smartphones -- WhatsApp has over 400 million users and is adding over 1 million users per day. It expects to get to between 2 and 3 billion users.
3. Diversification away from the core Facebook platform, which was also a key factor in why the Instagram made sense.
So yeah, $19 billion is a lot of money, but it's worth the risk, especially since Facebook is swimming in money.
Between the Ticks
The market is shrugging off Wednesday's reversal day.
A 10-minute SPDR S&P 500 ETF Trust (NYSEARCA:SPY) chart shows that following a pre-opening snapback to yesterday's breakdown pivot at around 183.60, the SPY pulled back to undercut yesterday's lows. If there was going to be downside follow-through and acceleration, it should have played out from the first snapback, which would have led to a decisive break of yesterday's low rather than just an undercut.
The normal expectation from yesterday's key reversal from record highs in the SPY at a test of a test of the December 31 highs would have been a multi-day give-back at the very least.
In addition, the SPY has retraced more than 50% of yesterday's range. This also suggests higher prices.
It will be interesting to see what happens if the 185 strike is approached again as someone has been protecting that turf with authority since the end of December.
Below, see a 10-minute SPY chart from yesterday and today with pre-opening action.
Click to enlarge
Friday, February 21, 2014
More Info on China
I mentioned in this morning's "News and Views" [subscription required] that there were some serious problems arising in China FX. As mentioned, the CNYCNH is showing a 5-7 standard deviation event (original eyes via Neil Azous at Rareview Macro). The CNY is the "onshore" or domestically traded renminbi (Yuan) while the CNH is the "offshore" or foreign-Hong-Kong-traded renminbi. I've had some more time to chew on the proceedings and look around for additional info.
The People's Bank of China announced early this morning that it was only changing the way companies' cross-border Yuan cash pool. They would only be allowed to use it within the Shanghai free-trade zone. It is my understanding that local companies currently use the carry they earn from being inherently short onshore versus long offshore renminbi (yuan) to finance investments in securities, basic materials purchases, etc. The move by the PBoC, as I understand it, could be enacted to help loosen the Yuan's trading band.
The CNH forwards market is also reacting, which is a sign on the surface that at the least there are some companies -- financial or otherwise -- that are having to scramble. The arb premium has actually declined significantly, which may mean that there is less financing demand there. (This is guessing on my part.)
Is this ultimately actionable for anything? I am not completely certain. For domestic Chinese companies, yes, this is essentially tighter credit and capital controls. Will that spillover into the US? Possibly, but I'm not crying wolf just yet. I think we will need to keep a close eye on Chinese equities today and in the coming sessions.
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