LEVEL 3 (LVLT)

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April 19 2011 Share1 inShareEmail This


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According to analyst Michael Pachter at Wedbush Morgan, Netflix (NASDAQ:NFLX) is going to beat consensus earnings estimates Monday April 25.

Here’s Pachter’s bullet points for his preview of Netflix earnings:

Netflix will report its Q1 2011 (March) results after market close on Monday, April 25 with a call at 3:00pm PT (http://ir.netflix.com).
We expect Q1 results in-line with our estimates for revenue of $715 million, ending subs of 23.7 million, and EPS of $1.13, compared with consensus for revenue of $704 million and EPS of $1.07.
Continued subscriber growth remains key to achieving top-line guidance. Webelieve Netflix will offset declining ARPU through its very popular $7.99/month streaming-only plans, and increasing penetration of video game consoles and CE devices. Netflix should also benefit from Blockbuster’s proposed sale to Dish Network. Dish is expected to liquidate Blockbuster’s assets, with customers moving to Redbox and Netflix, particularly Blockbuster’s ~1 million By Mail customers.
Netflix (NASDAQ:NFLX) is unlikely to provide detailed FY:11 guidance. In our view, Netflix’s reticence to provide detailed guidance reflects its unwillingness to provide visibility into the cost of new content deals. We think that the cost of these deals is rising rapidly, far outpacing postage and DVD savings, and think earnings growth, while impressive, will be far slower than the current share price implies.
We expect streaming content costs to increase by at least $500 million in 2011. In this note, we have estimated the cost of each current streaming content deal, and estimate that the cost of these deals has risen from around $180 million in 2010 to a likely case of $1.975 billion in 2012. Netflix (NASDAQ:NFLX) has not confirmed financial terms of studio deals, but it is clear that streaming costs will rise significantly in the near future (although likely after Q1:11), more than offsetting declining fulfillment, marketing, DVD purchase and postage expenses.
Maintaining our UNDERPERFORM rating and our 12-month price target of $80, which reflects 20x our FY:11 EPS estimate of $4.00. This multiple is at Netflix’s (NASDAQ:NFLX) expected long-term earnings growth rate to reflect positive execution.
Based on these views, we recommend reviewing shares of content distribution networks Level 3 Communications (NASDAQ:LVLT)