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May 14, 2012

Liberty Global: Sunshine in Stormy Weather

Liberty Global (LBYTK) reported another solid quarter despite having virtually all of its cable operations in Europe. The company operates primarily in the stronger Northern European countries of Germany, Netherlands, Belgium, and Switzerland. However, the real secret to another quarter of solid growth is the well-timed acquisition in German over the past few years. For many years, German household adoption of digital cable TV and high speed internet severely lagged other European countries and other wealthy industrialized countries. Liberty saw the shift toward more rapid adoption by Germans coming and astutely shifted its asset based toward German with the acquisitions of Unity Media and KBW. Liberty also sold its Japanese and Australian businesses.

The shift is working. In the latest quarter, Liberty had rebased revenue growth of 6% and rebased EBITDA growth of 3.5%. For the second consecutive quarter, new customer additions soared past estimates. Liberty has added about 900,000 new revenue generating units ( a subscription to cable TV, high speed internet, or telephony). This is about double the pace Wall Street expected and quite remarkable considering the economic situation in Europe.

The new subscribers come at a cost which explains the slower EBITDA growth relative to revenue gains. Marketing and customer premised equipment and setup pressures margins. However, in subsequent quarters as subscribers additions moderate, Liberty has locked in future growth in revenue, operating, and free cash flow.

With the free cash flow, Liberty will continue to aggressively buyback its shares and keep the balance sheet in shape should another acquisition opportunity arise. Recent business trends, top notch operating management, and a shareholder friendly management team and Board of Directors should let Liberty shareholders see 20-25% upside in the next six to twelve months.

,b>Disclosure: 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. LBTYK is a new long position in the Entermedia Funds. Entermedia are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia's investment management company, and has personal monies invested in the Funds.

Posted by Steve Birenberg at May 14, 2012 01:55 PM in LBTYK