Liberty Global (LBTYK) reported a slightly weaker than expected quarter, much as we expected.  Admittedly, with rebased revenue growth of 4% and operating cash flow growth of 2%, the results were a bit less than our low expectations.  But we always have thought that after a rough 12 months, 2Q16 would mark the low point for LBTYK with acceleration in financial performance coming in 3Q and again in 4Q and throughout 2017.  We have faith in management guidance for growth to pick up to 7-9% over the next several years.  If so, LBTYK have major rebound potential, into the $40s.

Our confidence in management guidance is fourfold.  First, despite a tough recent stretch amid more competitive markets throughout its European footprint, LBTYK management has an excellent track record of delivering on its promises.  Second, mergers and acquisitions completed over the last several years In the UK, Netherlands, and Belgium were strategic in nature and thus had near-term costs.  The strategic benefits are now positioned to assert themselves including extending the reach of the cable systems to new neighborhoods and integrating wireless into the bundle.  Third, management is initiating an efficiency program that should keep many operating costs flat as revenue accelerates.  Fourth, management indicated that thus far they have seen no drop off in growth in the UK post the Brexit vote.  This remains a risk, however, given leading indicators of UK economic growth.  LBTYK has flexibility to slow its new build program in the UK if conditions warrant providing some protection to financials although investors would probably be unhappy if a UK recession develops.  We are hopeful that just as we have seen in the U.S., cable TV and broadband are almost utilities these days and hold up well even during a recession.

We have been patient with LBTYK, maybe too patient, but we firmly believe 2Q marks the bottom for financial performance and the stock price.

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.