Formula One (FWONA/K) and Liberty Sirius (LSXMA/K) are tracking stocks of Liberty Media. FWON owns the Formula One racing circuit and LSXM owns a controlling interest in SiriusXM Satellite Radio (SIRI) representing approximately 70% of the shares outstanding. Consequently, when Liberty reports earnings and hosts a conference call the discussion is on these separate businesses.
It is early days at FWON but Liberty’s strategy for enhancing the racing and interest in F1 appears on track. The new racing season is only four races old but attendance and TV ratings are up at each race and the competitive situation on the track is improved with three different drivers winning races and Ferrari challenging Mercedes multiyear dominance. More exciting races are important to Liberty’s plans to drive higher sponsorship and TV rights, add new races, and develop alternative income streams from digital media. FWONA and FWONK are small holdings for Northlake clients but we think the potential for meaningful share price increases exists albeit likely over a multiyear time frame. Hanging onto the small holdings gives us a foot in the water while the company navigates the risks of transitioning the sport to a more modern platform. The transition may not be easy given the need to get the teams and drivers to buy in but we are confident in Liberty’s management expertise, particularly the hiring of long-time media executive Chase Carey to lead FWON.
LSXM’s sole asset is its stake in Sirius so LSXM analysis is focused on how well SIRI is performing and the discount at which LSXM trades to the value of the SIRI shares its owns. SIRI reported 1Q17 earnings in line with estimates although net subscriber ads fell slightly short. Management maintained all guidance. It is unusual for SIRI to report a shortfall in any metric and the shares gave back a material portion of their big gains over the past year following the report. Investor concern was exacerbated by several months of slowing new car sales, leading to a sell off recently in most auto related stocks. We think SIRI is in good shape as long as car sales do not plunge. Recent data suggest a plateau rather than a sharp pullback. With SIRI preinstalled on about 80% of new cars sold and tens of millions more cars on the road sold as used vehicles with SIRI installed, the funnel to drive subscribers remains large. In fact, it is still growing even with new car sales off a few percent from their peak. SIRI’s high free cash flow is used primarily to buy back shares, enhancing shareholder value and increasing Liberty’s ownership at the same time. This brings us to the stubbornly high 18% discount at which LSXM trades compared to the value of SIRI shares it owns. One reason we like LSXM is that at some point in the not too distant future the overwhelming majority of this discount will disappear providing a boost for LSXM shareholders. Liberty management recently addressed a similar discount for one its investment vehicles that tracks the company’s ownership in Charter Communications. With Liberty’s ownership of SIRI on a percentage basis rising each quarter as SIRI aggressively repurchases its non-Liberty held shares, it is only a matter of time – this year or within a year or two – for the discount to be resolved. As long as we are comfortable with the underlying fundamentals at SIRI, we are willing to hold LSXM shares as a proxy.
FWONA, FWONK, LSXMA and LSXMK are 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. FWONK is net long position in the Entermedia Funds. LSXMK is held as an arbitraged long position against a short in SIRI 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.