Liberty Media Third Quarter Review

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During November, Liberty Media reported third quarter earnings and hosted its annual analyst meeting.  A portion of the Northlake client base owns stock in companies controlled by Liberty Media including Formula One Group (FWONA/FOWNK) and Liberty Sirius (LSXMA/LSXMK).  Liberty regularly creates tracking stocks or spins off companies they control.  We have gradually sold off many client positions in these two stocks, usually when we need to rebuild cash reserves.  Both have good long-term potential but we see each as fully valued in the near-term.  FWON and LSXM trade at premium valuations reflecting their long-term growth.

The 2017 Formula One racing season ended this past weekend.  From the perspective of FWON shareholders it was a successful under the new ownership group led by Liberty Media.  TV ratings improved, a few new races or previous races were added to the schedule for next season, and initial changes to build out the management team and future strategies were implemented.  Formula One is a very popular sport pretty much everywhere in the world except for the United States.  The value of sports rights has grown massively in a fragmented world of TV and digital viewing.  Liberty Media sees an opportunity to dramatically improve the economics and value of Formula One.  Nothing that occurred in the first year of Liberty ownership changes that outlook.  Next year will be another transition year including the important need to negotiate a new deal with the racing teams.  The teams and Liberty share economics of the sport.  Liberty hopes to make changes that can grow the pie considerably but this would require the teams to agree to changes that could lead them to less guaranteed money.  We think Liberty can convince the teams and early moves by Liberty to add more races, staff up the sport’s infrastructure, and sign new, more lucrative TV deals are a good for the teams and for shareholders.  We like the long-term opportunity at FWON but feel the shares already reflect the upside given their premium valuation of 17X 2018 estimated EBITDA.  Northlake remains comfortable owning FWON shares but sees them a source of cash should that become necessary for individual clients.

Liberty Media owns 69% of Sirius XM Satellite Radio, a percentage that goes up as Sirius continues it large and steady repurchase of its own shares.  Eventually, Sirius XM (SIRI) and Liberty Sirius (LSXMA/LSXMK) will merge but that does not appear to be likely in the very near future.  Fortunately, for LSXM shareholders, business at SIRI continues quite strong.  The company beat Wall Street consensus in 3Q17 and raised most of its guidance metrics for 2017.  The story at SIRI is double digit annual growth in free cash flow per share.  While some investors worry about the shift to embedded modems in cars that open up more entertainment opportunities, we see the long implementation cycle for new automobile models providing protection for SIRI for at least several more years.  Additionally, SIRI management is not standing still.  It is upgrading the service to two way communication, aggressively attacking the used car opportunity, and building out its already large opportunity as a supplier and integrator of advanced solutions to automobile manufacturers.  We see few issues for SIRI over the next year or two but the good news is in the stock price that trades at a low teens EBITDA multiple.  Once again, we are comfortable owning LSXM shares but see them as a source of funds for clients that may need cash reserves.

FWONA, FWONK, LSXMA and LSXMK are 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.  FWONK is net long position in the Entermedia Funds.  LSXMK is held as an arbitraged long position against a short in SIRI 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.

No Surprises From Liberty Media’s Second Quarter

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Another fairly quiet quarter is in the books at Liberty Media which controls tracking stocks in Formula One (FWONA/K) and Liberty Sirius (LSXMA/K).  LSXM controls nearly 70% of SIRI and SIRI had already reported strong second quarter results so there was very little discussion on that front.  FWON was the primary subject although there were many questions regarding recent takeover rumors about Charter Communications (CHTR) which is owned by a separate Liberty Media company in which Northlake clients are not presently invested.  The CHTR takeover rumors do support our long-standing investment in Comcast (CMCSA) as they justify the good outlook for the cable industry even as cord cutting, cord shaving, and cord nevering has accelerated in 2017.  Cable is well protected from disruption in its video business as the provider of the leading broadband internet network – you need great internet service to take advantage of internet-delivered over the top video.

Results at FWON were largely in line with estimates, showing very modest growth.  Approximately 1/3rd of the Formula One (F1) racing season was completed as of 2Q17.  While it is too soon for Liberty’s vision for enhancing F1 to be implemented, there are some positive signs with race sponsorship up modestly, TV ratings and attendance up vs. last season, and positive steps to reduce leverage and interest costs on the balance sheet.  F1 has great potential as a global sports business that has been undernourished and undermanaged.  We expect Liberty to boost the prospects of FWON over the next several years as it brings its expertise in media and sports media to company operations.

FWON shares are currently valued similarly to other trophy sports assets that trade publicly like the Atlanta Braves (via Liberty controlled BATRA/K), Manchester United (MANU), and the New York Knicks (via MSG).  The next leg up in FWON shares may be a ways off as it will take Liberty time to make significant changes to the F1 racing competition and business.  However, we think it is worth the wait even if at some point there is a little profit taking among less patient investors.

We still see modest upside in SIRI that will boost LSXMK but are closely watching the economy and auto sales that could trip up the growth story.  LSXMK trades at more than a 15% discount to the value of the SIRI shares it owns, providing some support over the next six to twelve months.

FWONA, FWONK, LSXMA and LSXMK 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.  FWONK is net long position in the Entermedia Funds.  LSXMK is held as an arbitraged long position against a short in SIRI 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 Media: On Track at F1 and Sirius

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Formula One (FWONA/K) and Liberty Sirius (LSXMA/K) are tracking stocks of Liberty Media.  FWON owns the Formula One racing circuit and LSXM owns a controlling interest in SiriusXM Satellite Radio (SIRI) representing approximately 70% of the shares outstanding.  Consequently, when Liberty reports earnings and hosts a conference call the discussion is on these separate businesses.

It is early days at FWON but Liberty’s strategy for enhancing the racing and interest in F1 appears on track.  The new racing season is only four races old but attendance and TV ratings are up at each race and the competitive situation on the track is improved with three different drivers winning races and Ferrari challenging Mercedes multiyear dominance.  More exciting races are important to Liberty’s plans to drive higher sponsorship and TV rights, add new races, and develop alternative income streams from digital media.  FWONA and FWONK are small holdings for Northlake clients but we think the potential for meaningful share price increases exists albeit likely over a multiyear time frame.  Hanging onto the small holdings gives us a foot in the water while the company navigates the risks of transitioning the sport to a more modern platform.  The transition may not be easy given the need to get the teams and drivers to buy in but we are confident in Liberty’s management expertise, particularly the hiring of long-time media executive Chase Carey to lead FWON.

LSXM’s sole asset is its stake in Sirius so LSXM analysis is focused on how well SIRI is performing and the discount at which LSXM trades to the value of the SIRI shares its owns.  SIRI reported 1Q17 earnings in line with estimates although net subscriber ads fell slightly short.  Management maintained all guidance.  It is unusual for SIRI to report a shortfall in any metric and the shares gave back a material portion of their big gains over the past year following the report.  Investor concern was exacerbated by several months of slowing new car sales, leading to a sell off recently in most auto related stocks.  We think SIRI is in good shape as long as car sales do not plunge.  Recent data suggest a plateau rather than a sharp pullback.  With SIRI preinstalled on about 80% of new cars sold and tens of millions more cars on the road sold as used vehicles with SIRI installed, the funnel to drive subscribers remains large.  In fact, it is still growing even with new car sales off a few percent from their peak.  SIRI’s high free cash flow is used primarily to buy back shares, enhancing shareholder value and increasing Liberty’s ownership at the same time.  This brings us to the stubbornly high 18% discount at which LSXM trades compared to the value of SIRI shares it owns.  One reason we like LSXM is that at some point in the not too distant future the overwhelming majority of this discount will disappear providing a boost for LSXM shareholders.  Liberty management recently addressed a similar discount for one its investment vehicles that tracks the company’s ownership in Charter Communications.  With Liberty’s ownership of SIRI on a percentage basis rising each quarter as SIRI aggressively repurchases its non-Liberty held shares, it is only a matter of time – this year or within a year or two – for the discount to be resolved.  As long as we are comfortable with the underlying fundamentals at SIRI, we are willing to hold LSXM shares as a proxy.

FWONA, FWONK, LSXMA and LSXMK 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.  FWONK is net long position in the Entermedia Funds.  LSXMK is held as an arbitraged long position against a short in SIRI 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.