The big news at GM is Opel/Vauxhall moving production of its “next-generation” Astra compact car to Ellesmere Port, UK and Gilwice, Poland, which is a low cost facility. According to Opel, the plants are expected to be profitable if fully utilized, which may be in 2015 when the Astra starts the assembly process. This seems to us as a move toward capacity consolidation. Now that the Astra will be built in Ellesmere, we are not sure what will happen to the more modern Russelsheim plant. While we don’t think that Opel will shut it down after the current Insignia finishes production, we suspect that the company is holding out for labor concessions like it got at Ellesmere. It’s the rejiggering of the capacity allocation that we think has potential for big savings. Note that the savings from capacity efficiency will come from a combination of supply decreasing and price alleviation across the industry rather than straight plant shutdowns. We doubt those savings will be enough to offset the European division’s anticipated losses, but this is an important step in GM curbing losses from Opel.
The other salient aspect of GM’s business is just how international it is. From a volume perspective, we believe North America and select emerging markets (BRIC) will materialize as the fastest growing markets and GM’s global footprint is leveraged to both regions. Estimates are that GM’s sales from both regions will grow at an 8% CAGR through 2015. And don’t forget about GM’s deferred tax assets. We don’t think GM will have to pay cash taxes until 2017-2018. Preliminary calculations point to an NPV for the NOLs of $8 to $9 per share. We think from a P/E standpoint, GM can trade at 8.0x 2013 earnings.
VIAB owns a number of well-known networks such as MTV, BET, Nickelodeon, and Comedy Central as well as Paramount Studios (distributes DreamWorks’ animated films). We are a big fan of the company’s business model—about a quarter of revenues are recurring and growing at 10% clip annually and FCF conversion is high. The share repurchases don’t hurt either. VIAB repurchased 14.7 million shares ($700 million) during the quarter and $5.9 billion remains of the authorized $10 billion program. Management continues to expect to repurchase $2.5 billion in stock this year.
Q2 results demonstrate solid fundamentals with a definitive EBITDA & EPS beat. Domestic advertising revenue grew 1%, and management is positive on the advertising market. We think management’s expectation for affiliate fees to grow 10% this year is realizable after the company closed several digital distribution deals, one of which was with Amazon. International theatrical saw strong growth as well, up 13%, and home entertainment revenues were up slightly with the releases animated blockbusters The Adventures of Tintin, Hugo, and Puss in Boots and massive sales over a billion from Mission Impossible: Ghost Protocol.
However, Nickelodeon continues to struggle to raise ratings. The channel’s ratings were down 30% in the quarter. A more favorable advertising market helped mitigate the downward slide but from a content standpoint, VIAB needs to take drastic action to reverse this trend. Interestingly enough, VIAB commented that they do not think Netflix (NASDAQ: NFLX) streaming is causing the decline. While there are some short-term challenges, we would not go so far as to say the cable networks business is in a sort of secular downturn. Rather, if VIAB can turnaround ratings at the MTV/Nickelodeon, we think that would lead to multiple expansion. And seeing as the stock trades at about 10.0x 2013 earnings, we see room for additional upside of 12.0x to 13.0x.
