As we hoped, Liberty Global (LBTYK) reported a modest improvement in its revenue and EBITDA growth rates for 3Q16.  Revenue adjusted for foreign exchange, merger activity, and other one-time items grew 2% and EBITDA gained 3%.  EBITDA excluding the Netherlands (soon to be part of a joint venture) grew a more impressive 5%.  A variety of factors have depressed LBTYK’s growth over the past 18 months but we believe that 3Q16 marked the start of an acceleration to management’s stated goal of 7-9% over the next several years.  Investors remain somewhat skeptical but we are willing to be patient as we have had great success in our career with the management of LBTYK.  IF growth rates accelerate from here over the next several quarters, we think LBTYK can rise to the upper $30s, providing a return of near 30%.

Reinvigorated growth is being driven by the companies buildout of new cable plant in the UK, German, and selected other markets.  So far, the results in the UK are quite good with penetration of new homes passed of 29%.  The company is well on pace to reach its 40% penetration goal.  LBTYK is able to finance the expensive buildout of new neighborhoods by using the cash flow of the new subscribers to fund borrowings.  Presently, this pressures free cash flow as capital spending and interest expenses are elevated.  However, as the buildout matures, free cash flow should rise rapidly to benefit shareholders.

Growth is also being supported by the company’s cost containment and efficiency drive, Liberty Go.  LBTYK is a diverse business, operating cable and wireless service business in Western and Central Europe.  Each market has unique characteristics and in many cases languages.  After years of mergers and acquisitions to expand the company’s geographic reach, it was inevitable that inefficiencies crept in.  Management is no focused on gaining efficiencies to drive cost saves and enhance revenue opportunities.  3Q16 results suggest early success.

Management reiterated the low end of the 4-5% EBTDA growth guidance for 2016 during the conference call.  This should lead to another quarter of higher growth in 4Q, something we expect to build investor confidence in LBYTK.  Admittedly, it is has been a long period of underperformance for LBTYK shares, down around -20% this year.  We think the payoff may be at hand, however.

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.