Liberty Global (LBTYK) reported slightly disappointing 1Q16 earnings.  However, the 2016 was maintained and the long-term story is intact.  Management made a strong case that any shortfalls were not unexpected based on internal budgeting and investors and analysts seemed to buy it as the shares finished positive after starting lower in response to the headlines.

Revenue growth was in line with expectations at 3% adjusted for currency and one-time items.  Operating cash flow fell short of estimates with growth just under 3%.  New subscribers also fell short of expectations as price increases in Germany and Switzerland held back growth.  The United Kingdom, LBTYK’s largest market, had its best first quarter ever for subscriber growth and is seeing early benefits as it extends it cable network into new neighborhoods. Free cash flow also fell short of expectations but this was clearly explained as timing differences and

Despite the slow start, we remain confident that LBTYK will meet its goals for 2016 of 5-7% growth in revenue and operating flow and $2 billion in free cash flow.  This should provide a boost a boost for the shares.  Also helping will be renewed share repurchases that have been prohibited while the company completes the acquisition of Cable and Wireless on behalf of its Latin American subsidiary.  Nearly $4 billion in buybacks should occur in 19 months from June 1 through 2017.  We also expect a spinoff of the Latin American subsidiary to occur later this year.  Already separately traded, the Liberty LiLAC (LILAK) is worth about $5 per LBTYK share.  We think a spin can unlock some incremental value by simplifying the company and enhancing the ability to grow in the fragmented Latin American telecom economy.

Competition has stiffened in Europe for LBTYK making growth harder to come by and keeping investors on the sidelines.  As growth rates pick up later this year and the stock buyback kicks in, we expect renewed investor interest in LBTYK to finally get the stock moving toward our price target in the low $50s.

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.