Liberty Global Ready for Liftoff

Liberty Global (LBTYK) had an eventful week. The company closed on its acquisition of Ziggo, giving it nationwide coverage in the Netherlands for its broadband and cable network, reported third quarter earnings, and restarted its share repurchase program. Each item is positive and complements the other which should set the stage for strong performance from LBTYK shares.

Earnings were in line with Wall Street expectations and the company reaffirmed all of its growth guidance for 2014. Revenues grew 3% and operating cash flow growth gained 5%. The best performances were in Germany and the United Kingdom. After a slow start for LBTYK’s acquisition of Virgin Media in the U.K., growth has accelerated with revised promotions and bundles and cost synergies that are running ahead of expectations. Wall Street did not like the Virgin Media acquisition so this should relieve some pressure on the shares.

Ziggo had been the larger cable company in the Netherlands with Liberty as #2. There was no geographic overlap. Netherlands has been a tough market for LBTYK for the past year with negative growth in revenue and cash flow as the national telco, KPN, has been very aggressive with pricing and promotions. The Ziggo acquisitions should yield unusually large synergies and put Liberty on better competitive footing in the Netherlands. Hopefully, in 2015 this should return this important country to growth.

Ziggo was pending before European regulatory authorities for about six months. During this time, LBTYK was unable to repurchase any of its own shares. LBTYK is a prodigious buyer of its own shares, having repurchases $13 billion since 2005. With Ziggo closed, LBTYK has restarted its repurchase program and promised a catch up for the lost six months. This will lead to $2.6 billion in repurchases by year end 2015, representing over 7% of the current shares outstanding.

LBTYK shares had lagged the market’s gains significantly this year until recently. Much of the news just discussed was expected so as closing of the Ziggo deal approached the stock began to firm up. Since earnings were reported the shares have continued to rise and are not up 7% this year. With merger synergies and solid organic growth driving slightly accelerated operating cash flow growth, stable capital spending, and a large share repurchase in place, free cash flow per share is set to explode higher through 2017. I think this can drive LBTYK shares north of $70 in next 18 months making it a very attractive investment.

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.

Liberty Global Growth Acceleration Beginning

Liberty Global (LBTYK) reported improved March quarter earnings after several expected but slower growth quarters. What LBTYK calls rebased revenue grew 2.3% just slightly below estimates of 3%. The upside surprise came in operating cash flow which saw rebased growth of 6%, well ahead of consensus for 4%. An investment cycle, cost related to several large acquisitions, and a few markets with increased competition had slowed revenue and operating cash flow growth to the low single digits. As management has promised, these headwinds are about to give way and become tailwinds. The big pickup was expected in 2H14 so the March quarter surprise was welcome. I do not expect the June quarter to be quite as strong but the new trend is clear and visibility has dramatically increased.

The stock has responded bouncing 8% and recouping almost the entire 10% 2014 decline. One headwind remains: the company is awaiting regulatory approval of its acquisition of the leading cable company in the Netherlands. During this period, LBTYK will be unable to buyback stock, a major part of the investment thesis. This is widely known, however, and during the March quarter, the company accelerated its share buyback into the weakness in the stock giving great confidence that once the acquisition is approved the buyback will comeback at even stronger levels.

Following a series of acquisitions in Germany, England, and the Netherlands, and the subsequent investment cycle to upgrade in those markets and others to enhance the speed and quality of the company’s cable systems and set top boxes, LBTYK should enter a period beginning in 2015 where capital spending drops significantly as a percent of sales. Capex peaked at 23.4% of revenue in 2Q13. In the most recent quarter, capex was 20.1% of sales. This allowed free cash flow to grow 47% in the March quarter. LBTYK should see capex fall into the upper teens as a percent of swales over the next few years. Coupled with mid-single digit revenue growth, margin expansion as acquisition synergies kick in, and continued massive share repurchase, free cash flow per share could explode.

Bullish analysts, with whom I agree, think that free cash flow could be near $7 per share in 2017. Today, LBTYK trades at about a 7% free cash yield. If the company made $7 in free cash flow per share in 2017 and the stock held the same free cash flow yield, the target would be $100 against current prices in the low $40s. There is always something happening at LBTYK on the acquisition front and broadband is a competitive business with tough foes in all countries. It may not be a straight line but the upside along with one of the highest quality management teams I know makes LBTYK a uniquely good 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.

Liberty Global Growth Set to Accelerate

Liberty Global (LBTYK) reported its slowest quarterly growth of 2013 in the December quarter, with low single digit gains in revenue and operating income. The numbers were not a surprise as a difficult competitive environment in the UK and Netherlands and initial dis-synergies form the acquisition of Virgin Media in the UK held back results. With synergies at Virgin Media starting to kick in, Netherlands beginning to stabilize, and German, Belgium and Switzerland continuing to perform well, LBTYK appears poised for accelerating growth in 2014. In fact, management forecast exactly this on its quarterly conference call. This should set the stage for continued good performance for LBTYK (up 43.5% in 2013).

Free cash flow is the key measure for LBYTK and the company appears on track for rapid growth over the next three to five years as capital spending declines as a percent of revenue while core operations grow in the 5-7% range. LBTYK runs a levered equity capitalization strategy with debt at 5X operating cash flow (smart balance sheet management has cost of debt under 7% and 85% of debt due in 2017 and beyond). As long as the numbers come through, this works to the great advantage of shareholders. Excellent management, a long history of success, and basic stability of the cable TV and broadband business provide investors with great confidence in LBTYK. Free cash flow per show should surge over $10 in the next few years, easily enough to justify the shares comfortably over $100 as time goes by.

Beyond operational and financial risk, the biggest issue for investors in LBYTK is the company’s aggressive acquisition strategy. Management clearly sees the low interest environment as an ideal time to build scale and reinforce its competitive person throughout Western Europe. This has led to purchase of Virgin Media and the buying control of Ziggo, LBTYK’s larger cable peers in the Netherlands. Given difficult conditions in these two markets, I believe the acquisitions have added some caution into the LBTYK investment story. This strikes me as a buying opportunity but it will be important for 2014 to show improved results in both countries.

One other thing to keep an eye on is the possible spin-off or sale of LBTYK’s operations in Chile and Puerto Rico. Management has announced a spin-off is under consideration and has taken concrete steps in that direction. This type of transaction could create some hidden value for LBTYK shareholders, especially as Chile is now growing rapidly following a period of intense investment in its mobile operations.

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 General Partners.

Liberty Global Set to Accelerate Growth in 2014

Liberty Global (LBTYK) reported results that matched Wall Street expectations with rebased revenue and EBITDA growth of 3%. New subscriber growth surprised meaningfully to the upside following last quarter’s disappointing growth. Investors have been worried about the second half of 2013 growth due to tough competition in Netherlands and England and last quarter’s modest slowing in Germany. LBYTK shares moved sharply highly following the report, recovering much of their recent losses.

It appears there is one more tough quarter ahead in Netherlands and England before growth accelerates companywide in 2014. Liberty investors also have to deal with a high level of acquisition rumors that raise concerns about balance sheet leverage and the sustainability of share repurchase activity. History suggests a high level of trust in LBTYK management is warranted and patience with the shares recent consolidation will be well rewarded. Free cash flow per share north of $12 in 2017 is not a stretch and if that target is evident as we move through 2014 the shares should trade toward $100, providing 30% upside.

German, Switzerland, Belgium, and Chile drove growth for LBTYK in the latest quarter with revenue and EBITDA rising high single digits in all three markets. These markets also led the way in subscriber growth. Virgin Media grew very low single digits in England although this was better than feared given the highly competitive environment there due to aggressive sports promotions from BT. Virgin faces tough comp in the fourth quarter but management doubled merger synergies which should begin to accelerate growth in early 2014. Netherlands was the gig drag in the quarter with EBITDA falling 10%. Netherlands did see better than expected subscriber metrics, a sign that the bottom may be set in 2H13. KPN, the local telco has been very aggressive with uneconomic promotions and now that the company is going to remain independent rather than selling to Mexican telco behemoth America Movil, there is some hope that competitive intensity eases in 2014.

On the acquisition front, the latest rumors concern a bid for the portion of Dutch cable company Ziggo, of which LBTYK already owns more than 25%. A merger between the two largest cable companies in Netherlands would offer significant synergies and economies of scale.

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. Entermedia is a long/short equity hedge fund focused on media, entertainment, leisure, consumer retail, communications, and related technologies. Steve is portfolio manager of Entermedia, owns a controlling stake in Entermedia’s investment management company, and has personal monies invested in the funds.

Comcast and Liberty Global Remain Leaders in Bullish Cable Industry

Cable stocks have performed well this year due to a combination of steady moderate growth, industry consolidation rumors, and companies returning cash to shareholders via dividend increases and share repurchases. The most recent set of quarterly earnings reports support current bullish trends in these areas. Northlake clients own positions in Comcast (CMCSK) and Liberty Global (LBTYK) and I think plenty of upside remains.

Comcast reported another quarter of better than expected results. Consolidated revenues grew 7% with operating cash flow up over 8%. Comcast gets over 60% of its revenue from its cable business and despite all sorts of doom and gloom about cord cutting, this division reported revenue and cash flow growth of 6%. The company is losing cable TV customers although at a slower pace than a year ago. Growth continues in high speed internet and in small and mid-size business accounts. Comcast’s NBC Universal division enjoyed 9% revenue growth and 21% EBITDA growth as it continues to look that Comcast made a well-timed initial and final investment in NBCU ahead of an accelerating turnaround.

Comcast continues to aggressively buy back its own shares, leveraging the 8% cash flow growth into 30% EPS growth. Leverage continues on the conservative side given the stability of the company’s operating and financial model. This means share buybacks should remain aggressive and the dividend should continue to rise. Comcast shares trade at just 6.5 times 2014 EBITDA, a discount to other cable companies and entertainment companies. I see no reason for the discount to persist given that cable consolidation is being driven by a desire to reach the scale that Comcast already has achieved. Continued steady cable growth and the NBCU turnaround can comfortably propel the stock in the mid $50s.

Liberty Global reported its first quarter since closing on its acquisition of Virgin Media. The report was messy since Virgin was only owned for a few weeks of the quarter. Adjusting for currency, the acquisition, and other one-time items, LBTYK reported rebased revenue and EBITDA growth of 4%. This met street expectations but was a little slower than recent quarters. I thought the conference call was slightly defensive as management defended its move into the UK via Virgin, responded to the tough competitive environment in the Netherlands (negative EBITDA growth), and noted that it was beginning to shift its strategy in Germany from subscriber growth to harvesting the financial benefits of subs added over the last few years. Over the next few years, LBTYK will enjoy very rapid free cash flow growth with which it will continue its multi-decade history of aggressive share repurchase and growth via acquisition. Slowing capital spending as a percent of revenue could allow free cash flow per share to rise to over $10 in the next few years, easily supporting a stock price north of $100. A slight pickup in rebased growth may be necessary for the stock to take the next leg up but I am very confident that a little bit of patience will be very well rewarded.

Comcast and Liberty Global are 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. Comcast and Liberty Global are net long positions in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, entertainment, leisure, consumer retail, communications, and related technologies. Steve is portfolio manager of Entermedia, owns a controlling stake in Entermedia’s investment management company, and has personal monies invested in the funds.

Liberty Global Growth Overshadowed by Acquisition of Virgin Media

Liberty Global (LBTYK) reported another excellent quarter with continued rapid growth in cable, broadband, and telephone subscriptions and accelerating growth in financial metrics. This news was expected. What was not expected was the company’s acquisition of Virgin Media (VMED). LBTYK is a very acquisitive company but expectations for the next big merger were focused on the fast growing German market. Instead, LBTYK bought VMED, the dominant cable company in the United Kingdom. The deal is nicely accretive to earnings an free cash for the next few years but could dilute the company’s growth rate as fast growing Germany is a smaller portion of revenues and moderately growing United Kingdom becomes one of LBTYK’s largest markets.

The growth dilution and the fact that LBTYK is partially paying with its own shares has led to an 8% pullback in its shares. I think this will prove to be temporary. Partially, my opinion is based on trust in LBTK’s excellent management. They have executed flawlessly and been excellent stewards of shareholder capital. I think they deserve the benefit of the doubt on this deal. In addition, I have long followed VMED (Northlake clients use to own it), and I think its outlook is better than many on Walll Street expect.

After digesting VMED in 2013, LBTYK will return to its aggressive share buyback program which combined with mid to upper single digit revenue and EBITDA growth will drive free cash flow share up by about 20% per year. As free cash flow approaches $10 in a few years, I think the shares can trade to $90-100, up dramatcailly form current levels around $60. The VMED acquisition may put a temporary headwind on LBTYK shares but the payoff could be huge and is worth sticking around for.

Both LBTYK and VMED reported good fourth quarter results highlighted by continued higher than expected subscriber gains. In a networked, subscriber-based business, net additions ultimately drive accelerated financial results. LBTYK is already seeing the benefits of its prior subscriber gains with the latest quarter showing 6% gains in revenue EBITDA. Both figures are up from 4-5% earlier in 2012. I see more of the same in 2013 for LBYTK. Investors are likely to come around to my bullish view as these numbers are reported and VMED continues to grow even as the UK economy faces challenges.

Liberty Global is widely held by clients of Northlake Capital Management, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Filings can be found at www.sec.gov. Liberty Global and Virgin Media are net long positions in the Entermedia Funds. Steve is the portfolio manager of the Entermedia Funds, owns a majority stake in the Funds investment management company, and has personal monies invested in the Funds.

Mixed Media Earnings Better Than Stock Reactions

Most major media companies reported earnings this week including those in Northlake’s portfolio of individual stocks. As has been the case with the broader market, earnings reports and guidance from Northlake’s portfolio was mixed. CBS was the clear winner with a solid quarter amid tough circumstances and a confident outlook for the December quarter and 2013. Liberty Global was as expected although the market greeted the results with a sell-off in the shares. Charter Communications and Discovery Communications were a little light on reported numbers and guidance but a lot of the issues were one-time or unsurprising. Liberty Media is an asset value play where earnings mean little.

Here’s a closer look at the results for each company with some thoughts about where the stocks go from here.

CBS reported a slightly disappointing 2% rise in revenue but this was more than offset by a better than expected 7% increase in operating cash flow. Margins expanded again, a hallmark of CBS financial performance the last few years. The biggest takeaway though is the confidence management showed in future performance despite poor ratings so far this fall at the CBS Network. I think the long-term setup remain good and the shares can reach the low $40s but not until confidence in the economic outlook returns and ratings improve.

Liberty Global began to show the acceleration in revenue and cash flow that was predicted by rapid growth in subscribers over the past year. Honestly, I am not sure why the stock sold off 5% on this news. This acceleration is just beginning and 2013 is set up well. Another positive is that the company promised to pick up the pace of its share buyback in the fourth quarter. It seems farfetched but I can easily compile a target for LBTYK shares north of $100 in a few years given the pickup in growth, massive free cash flow that will follow as the cost of obtaining the new subscribers subsides, and the company continues to very aggressively buyback shares.

Charter Communications shares have been selling off for a few weeks as the company has announced its intention to accelerate capital investment and promotions in order to gain new subscribers. Charter has a real opportunity given that its penetration of homes passed severely trials its cable company peers. The new management team at Charter has instituted this strategy successfully before. The story is not unlike Liberty Global – subs first, financial payoff later – and the upside is similar. Charter is a few years behind, however. I think the shares may have a hard time regaining lost ground in the near-term but valuation at current levels provides support. Charter is on the watch list.

Discovery Communications reported a little worse than expected results for revenue and EPS but better than expected gains in operating income. This set up often suggests one-time items and that was the case. Advertising growth of 8% was a good print given Olympic competition. Guidance was the biggest issue for the stock, which sold off several percent on the report. Management forecast December quarter ad growth of 8%, no sequential improvement despite extremely strong ratings and positive seasonality. Discovery remains superbly positioned given its strong ratings, emerging networks (OWN and ID), and especially the growth opportunities abroad for its low cost, non-fiction programing. Discovery remains one of the few real growth stories in media.

Liberty Media is a collection of assets dominated by a t 49% stake in Sirius XM Satellite Radio. The second largest asset is the Starz Encore suite of pay TV channels. Liberty trades at 20% discount to the value of its assets. Those assets also have excellent growth prospects. This quarter management did indicate that Starz, due to be spun off before year end, would have a little less growth in 2013 as contracts with cable and satellite companies are renegotiated. The bigger question though is how the company will close the discount to its asset value while monetizing a portion of its ownership in Sirius. The conference call offered little fresh insight. John Malone, Liberty’s controlling shareholder, has a superb track record of realizing value form his investments. In Malone we trust. I see the shares between $130 and $150 in 2013 as long as business trends at Sirius remain firm. Fortunately, Sirius has been steadily adding more subscribers than expected in 2012, setting 2013 up favorably.

CBS, Charter Communications, Discovery Communications, Liberty Global, and Liberty Media are widely held by Northlake Capital Management LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a long only registered investment adviser. CBS, Charter Communications, Discovery Communications, Liberty Global, and Liberty Media are net long positions in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, entertainment, leisure, communications and related technologies. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in the funds' investment management company and has personal monies invested in the funds

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.

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.

From Virgin Media and England to Liberty Global and Germany

All Northlake client positions in Virgin Media (VMED) have been swapped into Liberty Global (LBTYK). Both companies are leaders in supplying cable TV, telephony, and internet. VMED operates solely in England, while LBTYK operates throughout Northern and Central Europe with a major focus on Germany. I think both stocks have similar upside of 20-30%. However, VMED faces a more competitive and mature market in England, while LBTYK faces less competition and lower penetrated markets, particularly in Germany.

It is an oddity but Germany has been slow to develop its cable TV and high speed internet service. What business has existed there is highly fragmented among service providers due to the regulatory structure put in place by the German government. In the past few years, LBTYK has made two large acquisitions to become the leading cable and broadband provider in Germany. These moves have proved timely as German households are accelerating their move to digital TV and high speed internet. Business trends are also accelerating and LBTYK is poised to see faster growth in 2012 than during the past few years.

LBTYK has grown well despite the crisis in Europe. Thus far, the negative economic impact of the crisis has been largely contained to Southern Europe. LBTYK's markets including Germany, Switzerland, Belgium, and the Netherlands have faced much less impact. I think the taint of the European crisis has held back LBTYK shares providing incremental upside should the recent easing in the crisis be sustained.

A final bullish element to the LBTYK story is the capital allocation program. Management aggressively repurchases shares using the significant free cash flow inherent in the cable and broadband business. With networks mostly built out and upgraded, capital spending as a percentage of growing revenues is falling providing double digit free cash flow growth to finance share repurchases. VMED also buys back a lot of stock but competition is requiring an uptick in capital spending this year and the long-term spending needs could be higher.

Please note that while Liberty Media (LMCA) and LBTYK share common controlling shareholders and Board members, the two companies are completely separate and do not compete with one another. The same shareholder focused approach to managing the business exists at both companies and is a major part of the investment thesis.

Disclosure: LBTYK and LMCA are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, an Illinois-registered investment advisor. Filings can be found at the SEC's website. LBTYK, LMCA, and VMED are net long positions in the Entermedia Funds. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia's investment management company, and has personal monies invested in the Funds. Entermedia is a long/short equity hedge fund focused on media, entertainment, communications, and related technologies.