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Sports Subside as a Focus and Earnings Take Center Stage


Sports programming is likely to remain a growth and value driver for media companies. Off the court, market eyes are on Google.

Congratulations to the University of Kentucky and Bubba Watson for winning the big sporting events of the spring. Congratulations also to Magic Johnson and Guggenheim Partners for buying the Los Angeles Dodgers for a record price. Wall Street has a lot of sports fans, and attention was riveted on the competitions that led to each of these winners.

Coincidentally, the sale of the Los Angeles Dodgers for over $2 billion has some implications for the major media and entertainment companies. The massive price reflects the value of a storied franchise in the nation's second largest market. To the buyers, the tradition of Jackie Robinson, Roy Campanella, and Kirk Gibson is probably secondary to the TV rights. Those rights come up for bid in a couple of seasons and could easily justify the $2 billion price tag for the team.

Time Warner Cable (TWC) and News Corporation (NWS) have been positioning for the TV rights contract for months. The new team owners could also launch their own regional sports network, most likely in partnership with one of these media giants. Sports have become the most valuable programming in the last few years as ratings have surged and live events are not impacted by cord cutting, cord shaving, or over the top viewing. Ad rates and affiliate fees are way up. Chatter about sports tiers has subsided since ESPN and Comcast (CMCSA) reached an agreement on a long-term renewal.

I think sports networks and programming are likely to remain growth and value drivers for media companies with significant exposure including Disney (DIS) (ESPN), News Corporation (RSNs), Comcast and Time Warner Cable (RSNs), Madison Square Garden (MSG) (team ownership and RSN), and Liberty Media (LMCA) (owner of rumored for sale Atlanta Braves). DirecTV (DTV) owns several RSNs which could be a value driver if they were sold. CBS, News Corporation, Comcast, and Disney benefit from their ownership of NFL TV rights. CBS (CBS) and Time Warner own the rights to March Madness. Keep in mind that affiliate fees are negotiated over time so while the value exists, the cash flow benefit may be delayed. Time Warner may be an example of this with its NCAA hoops contract already helping ad sales and viewership but affiliate fees for TNT not up for renegotiation for a couple of years.

Now, however, it is time to turn our attention to earnings beginning with Google (GOOG), which reports after the close on Thursday.

Google does not have any sports exposure but the game surrounding its quarterly earnings is always a great competition. Google shares are down this year since December quarter earnings were greeted rudely when they were reported in mid-January. Besides explainable headline misses, the big issue for Google last quarter was cost per click, or CPC, or the price search advertisers are paying. Last quarter the CPC fell unexpectedly. This was attributed to a dramatic shift toward mobile searches that have lower CPCs. Overall, volume of clicks was up, driven by mobile.

Normally, Wall Street likes unit volume growth but in the case of Google, investors worry that growth and profitability will suffer due to the shift toward mobile. I disagree as the mobile trend is in its early stages driven by smartphone penetration, tablets, and ultrabooks. Mobile broadband is one of the great growth engines in business and mobile search, dominated by Google, that is going to benefit.

The price action in Google shares suggests expectations are low and worries are high heading into earnings. I think this is a good setup for bulls. I have my money where my typing is as Google is the second largest long holding in my hedge fund. I also own Google for my long only clients. Besides CPC and other search metrics, investors will look closely at display advertising, which is growing faster than search and becoming material for Google's overall growth. Any commentary surroundings the soon-to-close Motorola Mobility (MMI) acquisition will also be welcome. The dilutive impact of this deal is another worry for investors.

I think Google merely has to print an inline quarter with constructive guidance commentary to ignite a big catch-up move in its shares. The stock is remarkably cheap at 10 times earnings adjusted for cash given that 20% plus growth looks likely for the foreseeable future. Good news could easily drive the stock to $750-800.

This column was previously published by SNL Kagan on
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Disclosure: CBS, Google, Comcast, News Corporation, Liberty Media, and DirecTV are net long positions in the Entermedia Funds.
Entermedia is a long/short equity hedge fund focused on media, communic= ations, and related technologies. Steve Birenberg is co-portfolio manager o= f Entermedia, owns a stake in the Funds' investment management compan= y, and has personal monies invested in the Funds. CBS and Discovery Communi= cations are widely held by Northlake Capital Management, LLC, including in = Steve Birenberg's personal accounts. Steve is sole proprietor of Nort= hlake, a long only registered investment advisor.

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