Liberty Global (LBTYK) faced a lot of headwinds in 2014 including slower than expected benefits of the acquisition of Virgin Media in the UK, a lengthy period with no buybacks awaiting the acquisition of Ziggo in the Netherlands, foreign currency weakness (100% of operations are in Europe, Chile, and Puerto Rico), and tough competitive conditions in the Netherlands.  Investors we also concerned with the company’s acquisition strategy toward content following several small deals.  The stock still performed well but only due to gains in the final three months of 2014.  Those gains mostly disappeared early in 2015 as investors became especially worried about the impact of foreign currency following a plunge in the Euro.

Against this backdrop, LBTYK’s 4Q14 and 2015 guidance was reassuring.  4Q14 results largely matched estimates with low to mid-single digit growth in revenue and operating cash flow.  Free cash flow came through strongly, allowing the company to slightly exceed its 2014 guidance for this important metric.  Ion a very encouraging note, Virgin Media finally hit its stride with double digit EBITDA growth as synergies kicked in against good subscriber growth.

Looking ahead to 2015, LBTYK provided reassuring guidance for revenue, EBITDA, and free cash flow growth, especially considering foreign exchange pressures.  Free cash flow received a boost from continued refinancing of the company’s large debt balance, which both lowered interest expense and extended the maturity profile.

Management also announced a large expansion of its footprint in the UK, spending about $4.5 billion over the next 5 years to reach an additional 5 million homes.  This is an unusually large build for cable but management presented a good rationale including some results on initial builds and the fact that almost the entire build out extends to homes within 50 meters of Virgin Media’s current footprint.  Analysts supported the high return on capital analysis offered by the company, and although unmentioned, I think there was some relief that LBTYK would spend money in this fashion rather than another large acquisition in cable systems or especially content.

The UK investment does lower free cash flow over the next five years during the build out, which, in turn, lowers the expectations for share buybacks.  A leveraged equity buyback strategy is LBTYK’s hallmark.  Management reassured on this front by authorizing an additional $2 billion buyback for 2016.

Running the lower free cash flow and share buyback through Northlake’s valuation spreadsheet on LBTYK resulted in surprisingly little impact on our price target.  We still see $57 later in 2015 and mid $60s as investors turn their eyes to 2016.  An even bigger payoff comes in future years assuming the Virgin Media expansion is a success.  We have every reason to believe it will be given our lengthy experience with LBTYK’s management team.  LBTYK remains one of the few large cap stocks where we can legitimately model a doubling of the share price over a 3-5 year period.

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 regulatory filings can be found at www.sec.gov.  LBTYK is a net long position in the Entermedia Funds.  Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies.  Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s investment management company.