Liberty Capital Makes a play for Barnes and Noble

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Liberty Capital (LCAPA) is an asset play. The stock trades with the value of the assets it owns including 40% of Sirius XM (SIRI), a double digit stake in Live Nation Ticketmaster (LYV), and smaller holdings in a variety of publicly traded media and telecom companies. LCAPA also owns a few significant private assets including the Atlanta Braves and TruePosition. LCAPA has traded at anywhere from a 20% to 40% discount to the value of its assets. Over the past 18 months the discount has narrowed and the value of the assets has risen sharply(SIRI has gone for 60 cents to $2.20) leading to huge gains for LCAPA shares.
I see more gains ahead for LCAPA driven by (1) further rises in the price of SIRI due to its favorable fundamentals, particularly free cash flow, and (2) the March 2012 expiration of the standstill agreement with SIRI. I expect LCAPA to tax efficiently unlock the value of SIRI through a transaction similar to what was done with DirecTV (DTV) and Liberty Media Entertainment (LMDIA) a few years ago. Leaving aside other deals within LCAPA, I think these two items can drive LCAPA shares into the $120s or higher.
Of course, when John Malone is involved, leaving aside other deals is not an option. The latest move is last week’s bid for 70% of Barnes and Noble (BKS). BKS would add a large operating asset (worth over $1 billion) to LCAPA. BKS is a value play as Malone believes in the growth of e-readers, economies of scale drive the elimination of hardware losses for the Nook e-reader, and a big near-term boost at the bookstores from market shares gains due to the bankruptcy of Borders. Some analysts think BKS EBITDA could double driving significant free cash flow.
One the one had, I see great value in LCAPA as is and would prefer to just let the asset value build and the trading discount narrow. BKS seems like an unnecessary and potential risky distraction given the downside in print books. On the other hand, the BKS growth story is plausible, the deal is not that large (LCAPA likely putting up just $500 million), and Malone has a good long-term record in acquisition of down and out assets. I think BKS is an acceptable move for LCAPA but I’ll admit there is an element of “In Malone We Trust.”
Disclosure: Liberty Capital is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor. Liberty Capital, Live Nation Ticketmaster, and DirecTV are net long positions in The Entermedia Funds. Sirius XM is a net short postion as a hedge against Liberty Capital in the The Entermedia Funds. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, and has personal monies invested in the Funds.

CBS and Virgin Media Momentum Continues

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CBS and Virgin Media (VMED), two of Northlake’s larger holdings thanks to excellent stock price performance, reported earnings a few weeks ago. Both companies reported good results supporting the higher stock prices and setting the stage for future gains.
Entering the report, I was a little worried about VMED due to strict austerity measures in the UK economy including higher valued added taxes. At the VMED analyst meeting we attended a few months ago, the company warned that early 2011 would be challenging. The quarter has hardly a blockbuster but mid single digit revenue and EBITDA growth built on inline to better than expected subscriber growth and ARPU was an excellent performance in a tough environment. Taking the quarter as a sign that austerity is not crimping growth, VMED’s 2011 outlook looks better than feared. The company is coping well with a tough environment, probably a sign that that its best in the UK broadband network remains a competitive advantage that the focused management team is exploiting. Free cash flow continues to rise rapidly and the Board is exercising an aggressive share buyback program including purchases at the current prices at the 52 week high. VMED is near my low to mid-$30s price target but I think the bias is higher on the assumption 2012 economic growth in the UK improves. The share buyback, free cash flow, and excellent management execution provide downside protection that makes waiting for comparisons to ease the best course of action.
CBS reported blowout results benefiting from strict cost controls and good ratings that limit the need for aggressive programming spend. I have felt for several months that analyst estimates were way too low for 2011 due primarily to overly pessimistic expense assumptions. In addition, the national TV advertising market remains more robust than most observers had predicted. This combination is creating very high operating leverage, driving margins to previously unexpected levels. I see this situation as sustainable through 2012. Analyst estimates rose sharply following the quarter but remain too low in many cases. Free cash flow is being returned to shareholders with aggressive share buybacks and meaningful dividends. Many investors continue to see CBS as a cyclical play. No doubt the high exposure to advertising brings cyclical but overlooked is the rising importance of subscription and retransmission fees, derisking of programming investment via presale of international rights, and permanent cost controls. Along with the aggressive capital allocation strategy, these factors make CBS look more like premium valued cable networks. I think the stock can work to the mid $30s in 2011 assuming the economy remains on a recovery path.
Disclosure: CBS and Virgin Media are widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor. CBS and Virgin Media 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.

Continued Stability as Mid Cap and Value Look Good for May

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There were no changes to Northlake’s Market Cap or Style model signals for May. The Market Cap model continues to favor mid caps and the Style model still prefers Value. The models have been stable for six months now leaving Northlake clients invested in the S&P 400 Mid Cap (MDY) and the Russell 1000 Value (IWD). The stability of the models reflects an economic recovery that is proceeding according to historical norms and low volatility in the major stock market averages.
As usual, there are some changes in the indicators that drive the models. Most notable, in the Style model, the value signal is stronger for May. This is the result of accelerating earnings growth for value stocks which leave them at historically cheap levels compared to growth stocks on the basis of P-E ratios. The economic recovery thus far has been kind to cyclical companies that comprise value indices thanks to big increases in basic materials prices driving commodity stocks and suppliers of products and services to commodity companies.
Last month’s mid cap and value signals did not provide value added to client portfolios. However, there was no material downside either. MDY and IWD each gained 2.6% last month, almost matching the 2.8% return for the benchmark S&P 500. Year to date, the Market Cap remains a winner, producing a return of over 12% against a gain of over 8% for the S&P 500. The Style model has matched the S&P 500 so far in 2011.
Disclosure: MDY and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake Capital Management, an SEC registered investment advisor.