Liberty Media (LMCA/LMCK) reported a typically quiet quarter.  Over 80% of the value in Liberty is represented by the company’s controlling stake in Sirius XM Satellite Radio (SIRI).  SIRI reported a great quarter a few weeks ago with better than expected subscriber growth and financial results.  Management raised 2015 guidance and we still think the expectations are conservative.

SIRI and in turn, Liberty, have struggled recently as investors fear streaming services like Spotify or Apple Music will lead to SIRI becoming less popular.  Northlake does not share this view for three reasons.  First, streaming in the car requires massive use of data.  Wifi is not wide enough deployed to work yet.  For $14 a month SIRI is a good deal compared to paying for music on your wireless data plan.  Second, SIRI appears to be successfully attacking the used car opportunity.  There are tens of millions of cars out there with a Sirius radio installed but not activated.  The company is making excellent progress on this opportunity as evidenced by several consecutive quarters of better than expected subscriber growth.  Third, it takes years for auto manufacturers to change in dash systems.  Sirius is a player here through its Agero subsidiary but the long profitable history car manufacturers have with Sirius will serve the company well for several more years at least.  Risks exist primarily in slower new car sales or subsidized music in cars.

For Liberty shares the big question is how it trades relative to SIRI and what ultimately happens.  SIRI uses its financial strength to buy back shares but Liberty does not sell.  Liberty has gone from 51% ownership to 59% in a year and will be near 70% ownership in another year.  At some point the companies should combine or Liberty will give the SIRI shares directly to its own shareholders.  In theory, the two stocks should trade very closely together but recently Liberty has lagged the upside in SIRI.

On the Liberty conference call the most important information was that to take advantage of Liberty trading at a discount to SIR, management had tripled the pace of buybacks of LMCA/LMCK shares.  Essentially, Liberty is buying itself at a 15% discount.  Furthermore, management made it pretty clear they were frustrated with the discount and was looking at various ways to narrow it.  Historically, Liberty management, led by john Malone, has been very good at realizing value from the assets it owns.  Acknowledgement of actin to come should allow LMCA/LMCK to catch up to the strong underlying performance in SIRI shares.  Northlake sees upside to the high $40s on a closing of the LMCA/LCK discount to SIRI and further gains in SIRI shares.

LMCA/LMCK 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.   LMCA/LMCK are net long positions 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