MICHAEL WHALEN ON THE FUTURE OF MEDIA (Update)

Last December, I posted excerpts of an IRA interview with Michael Whalen, an award winning composer and new media observer. In this week’s issue of The Institutional Risk Analyst, Michael reviews his predictions of last year and discusses how he sees the future of media. Long excerpts but very interesting and thought provoking. Full IRA interview is here.

  • It seems that about 100% of what we discussed has come to pass or is in process, and then some. We were talking about the eventual end of television networks, film companies and the continued radical upheaval of the music business. It is certainly the case that network television is ending as we know it. While we have not seen any of these media companies fall over and die – the erosion in all of television and broadcast media in general in just 10 months is alarming.
  • I think the biggest single factor that has changed since we spoke last year is that major media companies and especially the television and cable franchises are no longer pretending that things are “OK”. (…) the total number of people watching programmed broadcast television is less than half of what is was just 10 years ago. The level of desperation out there is amazing.
  • In the face of these actions, income streams everywhere are drying up. Look at how new ventures like Oprah’s OWN network (launched just a year ago) has been a financial disaster since day one. News Corp’s (“NWS”) failure in launching their digital magazine “The Daily” and the continued trouble for media institutions like the New York Times (“NYT”) are but single examples of an ocean of trouble for media. (…)

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QUICK READS

Bernanke Not Seen Pledging New Action Fed Chairman Ben Bernanke is unlikely to use his speech Friday at the Federal Reserve’s annual Jackson Hole, Wyo., conclave to unveil new efforts to bolster the U.S. economy—despite financial markets’ lingering hopes that he will.

Gold Tumbles 5.6% In a dramatic reversal after weeks of gains, the precious metal’s price abruptly fell $104.20 a troy ounce Wednesday, leaving the price at $1,754.10 an ounce.

Nomura: U.S. Economy Lost Jobs in August Kicking off what will likely be a series of downgrades to job forecasts in the coming week, Nomura’s U.S. economists said Wednesday they now expect nonfarm payrolls to show a decline of 5,000 in August – far off from their prior estimate of a 100,000 gain – due in part to the strike by Verizon Communications Inc. workers.

Orders for Goods Rebound Demand for long-lasting manufactured goods bounced back in July, but a decline in a key measure of capital spending indicates continued weakness in the U.S. economy.


Europe’s Banks in Lending Squeeze New signs of stress are piling up in the ailing European banking system.Commercial banks boosted their reliance on the European Central Bank, borrowing €2.82 billion ($4.07 billion) from an emergency lending facility on Tuesday, while other banks continue to park unusually large amounts with the central bank, according to data released Wednesday. While the amount of borrowing is tiny relative to the multitrillion-euro European banking system, it, and the increase from €555 million a day earlier, nonetheless suggest that some lenders are struggling to borrow from traditional funding sources, such as the capital markets or other banks.

France Unveils Plan to Lift Revenue France unveiled austerity measures aimed at securing challenging deficit-reduction goals amid stalling economic growth and at reassuring investors about the country’s creditworthiness. The government cut its growth forecast for this year and next to 1.75% this year from 2% previously, and said it expects gross domestic product to expand the same amount next year, down from 2.25% forecast earlier.

Sarkozy Defends Top French Credit Rating With Pre-Election Tax on Wealthy The deficit will be 4.5 percent of gross domestic product in 2012, when Sarkozy seeks re-election, beating the target.

South Korean Consumer Confidence Slides as Global Turmoil Impairs Outlook

U.K. Consumer Confidence Declines to Three-Month Low as Recovery Falters

The CBI reports its U.K August retail sales index falling to -14 vs. July’s -5, slightly lower than expectations and the worst figure in more than a year. The expectations index sinks to -11, the lowest in 18 months.

UBS analysts say the strong Swiss franc has a 20-30% chance of triggering a wave of defaults from eastern European borrowers who took out loans denominated in that currency. As it’s the western banks that hold this paper on their books, such defaults would likely necessitate new bailouts.

Glencore Warns on Volatility Commodities producer Glencore said it is concerned about volatility in the commodities markets but remains optimistic on long-term trends, as it reported sharply higher earnings.

Economy

China may allow FDI in RMB in Sept China’s Ministry of Commerce said Wednesday it will try to formally green light foreign direct investment in the Chinese currency renminbi in September.

Apple’s Steve Jobs Resigns as CEO Steve Jobs, the ailing tech visionary who founded Apple, said he was unable to continue as CEO of the technology giant and handed the reins to COO Tim Cook, marking the end of one of the most extraordinary careers in U.S. business history.

 

DOES CASH ADD VALUE TO STOCK PRICES?

There is a discussion today about whether one should subtract the cash from Apple’s stock price for PE calculation. James A. Kostohryz, in a Seeking Alpha post argues that

Transforming AAPL’s “P” into an “EV” by subtracting AAPL’s cash and marketable securities per share from its price per share does absolutely nothing to bolster AAPL’s investment case based on relative valuation. To the contrary, AAPL’s relative valuation becomes relatively less attractive when AAPL’s EV is properly related to its EBITDA and/or FCF and then compared to peers – even if projected growth rates are factored in.

The facts on Apple are:

Stock price: $380. Trailing EPS $25.27, trailing EBITDA $35.42, cash per share $81.21.

Simple math: PE = $380/$25.27 = 15.0x. EV/EBITDA = $380-$81.21/$35.42 = 8.4x.

Let’s deal with the EV/EBITDA first: 8.4x means that an acquirer paying $380 would have a cash on cash return of 1/8.4 = 11.9% on trailing EBITDA. Not bad at all considering the growth in Apple’s EBITDA.

But the contentious issue is whether one can also say that Apple’s true PE is not 15.0x but rather 11.8x after subtracting the cash from the stock price.

If you subtract the cash from the stock price, you also have to subtract the income from that cash from the EPS. With interest rates so low, this is a mute point since net after tax income on $81 of cash is max $0.40, only 1.5% of total EPS.

It means that if Apple tomorrow distributed all its cash to shareholders, its EPS would only decline to $24.87.  If cash has no real impact on the PE, the stock price would decline to $373 (15.0x $24.87) but shareholders would also receive $81.21 in cash for total value of $454.26, which is $74.26 higher than the current stock price.

Apple’s EV/EBITDA of 8.4x = $297 + cash received of $81.21 = $378.74 (rounding errors).

The reason that cash is so valuable today is that interest rates are so low, almost nil. Effectively, the cash has little impact on EPS. If you do not take it into account, you reduce the true value of the stock by nearly the amount of the cash.

EV/EBITDA is useful when interest rates are higher and have a greater impact on earnings and cash flows. The concept effectively “neutralizes” the impact of net debt and taxation on valuation.

 

     

    QUICK READS

    Stock Futures Rally U.S. futures surged, as a debt deal reached by Congressional leaders sparked a global relief rally in equities.

    Plan Leaves Out Hard Issues After weeks of partisan wrangling, Obama and congressional leaders reached a deal to raise the debt ceiling while cutting spending by about $2.4 trillion, avoiding default but setting up debates over how Washington taxes and spends.

    US deficit: dodging the fundamentals Debt deal avoids default, but is a failure by any other measure

    HSBC to Cut Jobs HSBC said it will cut around 5,000 jobs as part of its plan to cut costs, as the bank reported flat first-half revenue of $35.7 billion. CEO Stuart Gulliver also said the bank could reduce head count in its retail division by 25,000.

    OUTLOOK

    A Nation in Pain

    German Plant Orders Edge Up New orders in June for Germany’s plant and machinery industry rose 1% year-to-year in real terms, the industry group VDMA said.

    U.K. Growth Forecast to Slow The U.K. economy will grow significantly more slowly this year than previously forecast because companies have curbed their activity following a series of shocks around the world. The Confederation of British Industry cut its forecast for U.K. economic growth this year to 1.3% from the 1.7% that it predicted in May, citing the continuing sovereign-debt drama in the euro zone, the U.S. government’s wrangling over its debt problems, and the March tsunami in Japan as factors that have weakened business sentiment and stifled growth.

    India Panel Cuts Growth Estimate An influential advisory panel cut India’s economic growth estimate to 8.2% due to global economic uncertainty and prolonged monetary tightening that has crimped industrial activity and also warned that the central bank will continue raising rates until inflation shows definite signs of trending down.

    RBI: Need to Raise Rates to Tame Inflation India needs to raise interest rates to control inflation, its central bank governor said, firming expectations of continued monetary tightening as authorities grapple with uncomfortably high prices.

    Apple more than doubled its share of the global mobile-phone market last quarter to 5.6%, reports IDC, while Nokia, Samsung and LG Electronics all saw their market share shrink (to 24.2%, 19.2%, and 6.8%, respectively). Overall handset shipments rose 11.3% in the quarter to 365.4M.

    Barron’s Alan Abelson: Mr. Obama suffers from one serious flaw as a negotiator — a tendency to shout “let’s compromise” before he learns what the other side is proposing or, for that matter, whether it’s proposing anything. Had he been president in the early 19th century, in all likelihood, Florida would still be part of Spain (although to be fair, Americans, thanks to his hard bargaining, probably would enjoy beach privileges).

     

    QUICK READS

    Gridlock for Debt Talks Republicans and Democrats on Capitol Hill moved along separate tracks toward a deal to increase the U.S. government’s borrowing authority, setting America’s gridlocked political system on a collision course with jittery markets.

    U.S. Futures Slump U.S. futures dropped while gold hit a record high, as Obama and Congress failed to reach a deal to raise the nation’s debt ceiling.

    Moody’s Cuts Greek Debt Rating Moody’s Investors Service slashed the Greek government’s debt ratings three notches further into junk territory.

    Struggling Indian economy hardens case to end policy India is nearing the end of its credit tightening cycle, as 10 interest rate increases since March 2010 exact a toll on growth in a once-roaring economy, making Tuesday’s expected rate rise potentially the last for the near future.

    [MOBILEHERD]

     

    QUICK READS

    Home Resales Decline Again Existing-home sales in June fell to a seven-month low, and the number of contract cancellations soared, signaling that buyers are rethinking home purchases amid national economic uncertainty. Sales decreased 0.8% from a month earlier to a seasonally adjusted annual rate of 4.77 million. It was the third-straight monthly drop and puts this year’s pace behind last year’s 4.91 million homes sold, which had marked the weakest sales in 13 years. In June, 16% of NAR member realtors reported having a would-be buyer cancel their contract, up from 4% in May.

    John Taylor: The End of the Growth Consensus  America added 44 million jobs in the 1980s and ’90s, when both parties showed they had learned from past mistakes. The lessons have been forgotten.

    taylor

    [COSTCUTS_JUMP]

    Euro-Zone Consumer Confidence Weakens Consumers in the 17 nations that use the euro became less confident about their prospects for the second consecutive month in July, according to a preliminary estimate from the European Commission’s monthly survey.

    Airbus wins lion’s share of huge American Airlines order

    Art Sales Soar in First Half Home sales may be slowing and stocks may be volatile, but the art market is riding high, thanks to a surge of new collectors across Europe and Asia who feel confident about the value of everything from Ming vases to Mark Rothko paintings.

    Medco Deal on Deck for $29 Billion Express Scripts is expected to announce that it has agreed to buy Medco Health Solutions for about $29 billion, a deal that would combine two of the largest U.S. pharmacy-benefit managers.

    [EUROHERD]

    Goldman Sachs: Speaking on the firm’s earnings call Tuesday, finance chief David Viniar said Goldman pulled in its risk-taking horns in the second quarter because “a lot of the uncertainty was caused by political factors that were really, in our view, beyond analysis.”

    Entire Apple stores being faked in China Underlines the slow progress that Beijing is making in countering culture of rampant piracy

    A customer looks at products at an alleged fake Apple store in Kunming, in southwest China's Yunan province. - A customer looks at products at an alleged fake Apple store in Kunming, in southwest China's Yunan province. | BirdAboard/AFP/Getty Images

     

    Is iPad Cannibalizing PC Sales?

    Ever since Apple Computer (AAPL) introduced the iPad almost a year ago, there has been a concern among some that strong sales of iPad would cannibalize sales of PCs.  After all, who needs an extra laptop or netbook if you can just do the same thing on an iPad?  

    While the strength of the iPad may be hurting some PC sales, it’s hard to argue that iPad sales have hurt sales of Macs.  The chart below shows quarterly Mac sales since 2007.  As shown, in the three quarters that AAPL has been selling iPads, the company has also seen its three strongest quarters of Mac sales.  With numbers like that, it’s hard to say that iPads are cannibalizing sales…of Macs at least.

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