We have been wrong on Liberty Global (LBTYK) for more than two years. The shares peaked at over $50 in 2015 and now sit at $30. The $50 price was fed by takeover speculation but even so the shares have vastly underperformed a bull market. The shares have still returned over 50% from our original purchase, which partly explains why we have been so patient: we know this management team and have had great success with them for a couple of decades. Unfortunately, a series of operational missteps and perhaps strategic errors have hurt management credibility and led to a couple of years of slow and much slower than expected growth. Management has repeatedly promised acceleration in revenue and cash flow only to push out the timeline.
2017 has brought a pickup in growth. Recently reported third quarter earnings show rebased revenue and operating cash flow grow by 2.5% and 3.9%, respectively. These growth rates are higher than the first half of 2017 and much of 2016. However, they are a far cry from the high single digit growth promised just a few years ago. Management reiterated guidance for 5% operating cash flow growth for 2017, implying growth of 6% in the fourth quarter. Acceleration accomplished. For 2018, management has not yet specifically commented but growth above 5% is expected by still bullish investors.
Part of Liberty’s problem is that European cable markets have become more competitive than management and Northlake anticipated. This is likely to continue and has made some the moves to acquire even more assets in certain countries questionable, with the benefit of hindsight, of course.
We sound like a broken record but with some modest improvement in growth and a lot of financial leverage working in our favor if growth accelerates and management credibility is restored, now is not the time to throw in the towel on LBTYK. Other catalysts included the pending spin-off of the company’s Latin American assets and the possibility that highly accretive M&A activity takes place in Germany, Switzerland, or the United Kingdom. Next quarter is probably the last one we can give LBTYK but if our bull case does emerge the upside is substantial: 20-30% within a year.
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.