Media Talk

Liberty Media Third Quarter Review

During November, Liberty Media reported third quarter earnings and hosted its annual analyst meeting.  A portion of the Northlake client base owns stock in companies controlled by Liberty Media including Formula One Group (FWONA/FOWNK) and Liberty Sirius (LSXMA/LSXMK).  Liberty regularly creates tracking stocks or spins off companies they control.  We have gradually sold off many client positions in these two stocks, usually when we need to rebuild cash reserves.  Both have good long-term potential but we see each as fully valued in the near-term.  FWON and LSXM trade at premium valuations reflecting their long-term growth.

The 2017 Formula One racing season ended this past weekend.  From the perspective of FWON shareholders it was a successful under the new ownership group led by Liberty Media.  TV ratings improved, a few new races or previous races were added to the schedule for next season, and initial changes to build out the management team and future strategies were implemented.  Formula One is a very popular sport pretty much everywhere in the world except for the United States.  The value of sports rights has grown massively in a fragmented world of TV and digital viewing.  Liberty Media sees an opportunity to dramatically improve the economics and value of Formula One.  Nothing that occurred in the first year of Liberty ownership changes that outlook.  Next year will be another transition year including the important need to negotiate a new deal with the racing teams.  The teams and Liberty share economics of the sport.  Liberty hopes to make changes that can grow the pie considerably but this would require the teams to agree to changes that could lead them to less guaranteed money.  We think Liberty can convince the teams and early moves by Liberty to add more races, staff up the sport’s infrastructure, and sign new, more lucrative TV deals are a good for the teams and for shareholders.  We like the long-term opportunity at FWON but feel the shares already reflect the upside given their premium valuation of 17X 2018 estimated EBITDA.  Northlake remains comfortable owning FWON shares but sees them a source of cash should that become necessary for individual clients.

Liberty Media owns 69% of Sirius XM Satellite Radio, a percentage that goes up as Sirius continues it large and steady repurchase of its own shares.  Eventually, Sirius XM (SIRI) and Liberty Sirius (LSXMA/LSXMK) will merge but that does not appear to be likely in the very near future.  Fortunately, for LSXM shareholders, business at SIRI continues quite strong.  The company beat Wall Street consensus in 3Q17 and raised most of its guidance metrics for 2017.  The story at SIRI is double digit annual growth in free cash flow per share.  While some investors worry about the shift to embedded modems in cars that open up more entertainment opportunities, we see the long implementation cycle for new automobile models providing protection for SIRI for at least several more years.  Additionally, SIRI management is not standing still.  It is upgrading the service to two way communication, aggressively attacking the used car opportunity, and building out its already large opportunity as a supplier and integrator of advanced solutions to automobile manufacturers.  We see few issues for SIRI over the next year or two but the good news is in the stock price that trades at a low teens EBITDA multiple.  Once again, we are comfortable owning LSXM shares but see them as a source of funds for clients that may need cash reserves.

FWONA, FWONK, LSXMA and LSXMK are 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.

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