Liberty Global (LBTYK) remains a troubled stock after reporting mixed 1Q17 results and lowering full year guidance for growth in operating cash flow. The shares performed poorly last year but bounced back strongly to start this year. Unfortunately, the sharp down move post the 1Q17 earnings report last week lost all of the year to date gain.
Northlake has a long history with LBTYK and I have followed it back to predecessor companies in the 1990s. Historically, management has executed well and consistently hit or exceeded its targets. Over the last 18 months, however, results have been sloppy even if management could claim to have met its guidance. The first quarter saw a setback in the buildout of the company’s cable plant in the UK. This is a key driver for the company as the UK is the company’s largest market, followed by Germany. The UK also suffered from poorly implemented price increases that led to discounting via a bad mix of new subscribers.
There really is not much to hang your hat on at LBTYK at the moment. However, the stock is down over 10% and near logical support at $28-29. In addition, after an embarrassing stretch of news, management is chastened and has lowered guidance to what should be an achievable level. Furthermore, LBTYK has been subject to periodic merger rumors with Vodafone, a deal which makes strategic and financial sense. This should provide support for the shares.
We had been concerned that LBTYK made too many large acquisitions too quickly as competition from incumbent wireless and wireline telcos in Europe was picking up. We remained patient with LBTYK given our long and successful experience with management and the stock. With expectations lowered, investor skepticism high, and the stock having reacted sharply lower, we think patience is still the best play. It may take a while for the shares to rebound, almost certainly until another quarter or two is reported showing that the new guidance is accurate. The upside is considerable though, so we are going to sit tight, looking for stronger second half 2017 performance to stabilize and then lead to a rally in the shares back to the mid $30s.
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.