Comments on: Is LNET a bankruptcy candidate? http://www.notananalyst.com/2010/07/28/is-lnet-a-bankruptcy-candidate/ From Chaos Comes Opportunity Mon, 15 Nov 2010 22:59:41 +0000 hourly 1 http://wordpress.org/?v=3.1.2 By: guest01 http://www.notananalyst.com/2010/07/28/is-lnet-a-bankruptcy-candidate/comment-page-1/#comment-36 guest01 Sat, 14 Aug 2010 03:29:33 +0000 http://www.notananalyst.com/?p=1259#comment-36 LNET is a media company like cable companies. They provide TV and entertainment service. Technology is a enabler much like it is for cable companies. True it has cut capex in the downturn to generate free cash flow but debt has stepped down below the 3.5x covenant level giving them plenty of opportunity to start deploying capex for HD upgrades. They have held back upgrades because they want hotels to share in the expense. Hotels are doing it because Lodgenet is the only game in town. The Company is generating $60M in FCF per year to continue paying down debt and keep upgrading the rooms as hotels start to open up the spigot on capex sharing. Upgrade costs have come down to one third of what they were a couple of years ago. The upgrade from HD to 3D does not need to be hardware upgrade (ask your local cable provider they can choose to provide it without upgrading your box. Thats how most cable companies did the 3D world cup soccer). Also look at the 2009 annual report filing. Their interest rate hedges roll off June 2011 which will provide an extra $20 million of free cash flow/yr (thats a 33% increase). Lastly, looking at the book value and saying it is full of goodwill is not the accurate way to value every company (a common example used by Buffett is Coke. The value is in the brand). LNET's value is in the moat they have built with relationships and contracts with the hotel industry and studios and a proven infrastructure to serve entertainment content to hotel guests . A upstart competitor will have to spend a lot of money and incur losses (resulting in negative book value) to starting putting together the elements needed to compete with Lodgenet. The bear thesis on this story has been driven by those who believe that ipad and laptops will kill their guest entertainment revenue (on demand movies and adult content which is a meaningful portion of their revenues and EBITDA). However, the movies they offer are not yet on DVD so it is generally not possible to get it elsewhere legally by downloading it or from DVD. Laptops have been around for a while and may not explain the softness that has accompanied the downturn. While there is likely cannibalization, revenue declines have abated and EBTIDA has already stabilized. They are not completely out of the woods but at 1.2x free cash flow valuation, and what I believe to be sustainable leverage, this thing will be a 2x-3x (stock is at $2.57) if revenue continues to decline modestly, 5x if revenue is stabilized. LNET is a media company like cable companies. They provide TV and entertainment service. Technology is a enabler much like it is for cable companies. True it has cut capex in the downturn to generate free cash flow but debt has stepped down below the 3.5x covenant level giving them plenty of opportunity to start deploying capex for HD upgrades. They have held back upgrades because they want hotels to share in the expense. Hotels are doing it because Lodgenet is the only game in town. The Company is generating $60M in FCF per year to continue paying down debt and keep upgrading the rooms as hotels start to open up the spigot on capex sharing. Upgrade costs have come down to one third of what they were a couple of years ago. The upgrade from HD to 3D does not need to be hardware upgrade (ask your local cable provider they can choose to provide it without upgrading your box. Thats how most cable companies did the 3D world cup soccer). Also look at the 2009 annual report filing. Their interest rate hedges roll off June 2011 which will provide an extra $20 million of free cash flow/yr (thats a 33% increase). Lastly, looking at the book value and saying it is full of goodwill is not the accurate way to value every company (a common example used by Buffett is Coke. The value is in the brand). LNET’s value is in the moat they have built with relationships and contracts with the hotel industry and studios and a proven infrastructure to serve entertainment content to hotel guests . A upstart competitor will have to spend a lot of money and incur losses (resulting in negative book value) to starting putting together the elements needed to compete with Lodgenet.
The bear thesis on this story has been driven by those who believe that ipad and laptops will kill their guest entertainment revenue (on demand movies and adult content which is a meaningful portion of their revenues and EBITDA). However, the movies they offer are not yet on DVD so it is generally not possible to get it elsewhere legally by downloading it or from DVD. Laptops have been around for a while and may not explain the softness that has accompanied the downturn. While there is likely cannibalization, revenue declines have abated and EBTIDA has already stabilized. They are not completely out of the woods but at 1.2x free cash flow valuation, and what I believe to be sustainable leverage, this thing will be a 2x-3x (stock is at $2.57) if revenue continues to decline modestly, 5x if revenue is stabilized.

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