Media Talk

Liberty Global Growth Acceleration Affirmed

Liberty Global (LBTYK) reported solid 4Q16 results, affirming the acceleration in the company’s growth rate that is critical to our investment thesis.  Using the company’s methodology that ignores foreign exchange fluctuations, M&A, and the new joint venture with Vodafone in the Netherlands, rebased revenues grew 3.3% and operating cash flow grew 7.5%.  Revenues were slightly ahead of expectations, while operating cash flow greatly exceeded Wall Street estimates.  Management guided to 6-7% operating cash flow in 2017 and 7-8% growth beyond that with 2018 potentially exceeding 8%.  This guidance is comfortably ahead of investor expectations.  Finally, the Board unexpectedly boosted the share buyback by $1 billion to $3 billion for 2017.

All of this should add up to good news for LBTYK shares although after an initial 5% move higher, the stock sits unchanged as we write this note.  There seems to be some concern that subscriber counts and revenue fell short of estimates in the U.K, the company’s largest market.  With LBTYK aggressively building out its cable network to hundreds of thousands of new homes in the UK, some worry has crept in that the build-out is not going to be as much of a growth driver as expected.  We accept management’s explanation that a second price increase in 2016 led to increased churn that overshadowed continued excellent returns on the build-out.

We have waited patiently for over a year for LBTYK to show accelerated growth with a strong belief that value in the shares could once again approach $50.  Now that the reported numbers support our view and management’s consistent commentary and promises, we see LBTYK shares continuing their recovery.  Already up 17% this year, we think in a reasonable market environment, the stock can see $38-$40 over the next six months.

LBTYK is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  LBTYK is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

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