August 16, 2012
Liberties Still Shining and Charter Plots Growth
Last week saw the final three holdings in Northlake's individual stock portfolio report their latest quarterly earnings. The news was good across the board, rounding out an excellent earnings season for Northlake's portfolio that has been well received by investors.
Liberty Global continues to grow its subscriber base in Europe at a rapid clip. Good cost management is allowing modest growth in operating cash flow despite the added expense of bringing new subscribers aboard. Importantly, several quarters of better than expected sub growth means that financial results will accelerate later this year and in 2013 as the new subs begin paying for their services and subscriber acquisition costs decrease. Just as in the U.S., cable TV, broadband, and telephony services in Europe are proving resilient to economic pressures. This is especially the case in Germany where Liberty Global made timely acquisitions right as German households were finally beginning to spend significant money for cable TV and broadband. It is an odd quirk but Germany has always significantly trailed other wealthy nations in the use of higher end cable TV packages and high speed broadband. Liberty Global is riding the wave now as household penetration accelerates. I see upside to $65-70 for the shares in the next 12 months.
Liberty Media (LMCA), unrelated to Liberty Global, except for having John Malone as its controlling shareholder, also continues to make good progress. LMCA is an asset value story composed of three big pieces. Sirius XM Satellite Radio represents over half of the asset value. The Starz Encore pay TV business is about 25% and the balance is a portfolio of publicly traded securities, a few private investments, and cash reserves. LMCA trades at a 20% discount to its asset value which has been growing steadily thanks mostly to Sirius. Over the past six months, LMCA has taken increasing steps to unlock and increase the value. When it reported earnings, LMCA announced it would spin-off Starz, further simplifying the remaining LMCA and setting up an end game for its investment in Sirius. Subsequently, LMCA has increased its stake in Sirius and now has a direct path to taking control. It is not clear exactly what the next steps will be but driving the value of Sirius higher, closing the gap to net asset value, and massively buying back its own stock could create value of $150 or more in LMCA.
Charter Communications reported very slightly weaker than expected results but the big news was the decision by its new, highly regarded CEO to accelerate the company's transition to an all-digital network. This will lift capital spending for the next six to eighteen months but seems certain to accelerate growth as Charter's penetration of its more rural and mid-size markets is quite low. The opportunity is especially large in high speed internet. The shares initially traded lower as the story for cable companies is falling capital spending, growing free cash flow, and rising share repurchases and dividends. Confidence in the CEO and the realization that Charter is merely delaying the inevitable explosion in free cash flow and likely increasing the free cash flow capability turned the shares around quickly. I think another 20% upside remains with share repurchases and dividends kicking in during 2014 making Charter shares a solid long-term holding.
Disclosure: Liberty Global, Liberty Media, and Charter Communications 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. Regulatory filings can be found at SEC.gov. Liberty Global, Liberty Media, and Charter Communications 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.