Liberty Global (LBTYK) reported another quarter of mixed results.  Headline numbers continue to track to guidance that assumes acceleration in growth in the second half of 2018.  There is evidence in the first half results that the acceleration will occur.  However, there is still quality of earnings issues and the company’s overall growth profile beyond the expected second half improvement is questionable given tougher competitive conditions in the company’s major markets along with potential regulatory headwinds.  We have been very patient with LBTYK the last few years but we are leaning toward selling.  Don’t be surprised if you see a confirmation with a sale in the next week.

Like many traditional media stocks, LBTYK faces slowing growth yet the stock trades at historically cheap valuation on an absolute and relative basis.  Over the last few years, the market has strongly favored growth, while value stocks with decelerating growth have been pressured to previously absurd multiple of operating cash flow, free cash flow, and earnings.  A company like LBTYK historically grew organically at upper single digits supplemented by M&A and high free cash flow to provide leveraged returns for equity holders.  With growth slowing as media consumption fragments amid competition from new entrants like Netflix and Google’s YouTube, investors have begun to question terminal growth rates and values for companies like LBTYK.  Thus, even though the stock trades at 6X EBITDA adjusted for the pending sale of its German and certain Eastern European assets to Vodafone, there is little interest in the shares.

There is a path to upside as upon receipt of the sale proceeds with the stock at current prices, management is likely to aggressively buyback shares and would have the capacity to repurchase almost half of the stock over the next three to five years.

The problem is the growth profile.  Post the divestitures to Vodafone, LBTYK will operate in the UK, Belgium, Switzerland, Poland and a few small Central European countries.  UK is growing thanks to the company building out connectivity to millions of new homes.  The current cable network in the country is barely growing.  Switzerland is facing modest negative growth due to competition and stepped up sports rights costs.  Belgium is currently growing income thanks to synergies from a deal to buy a mobile operator, but growth is barely evident after excluding the synergies.

Unfortunately, the long delay until the receipt of Vodafone proceeds, with no guarantee regulators will allow the deal, offsets even a bullish view on the company’s growth profile.  A view which we no longer share.  Thus, we are likely moving on form LBTYK in search of a better investment opportunity.

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.