There’s no easy way to describe the confluence of tracking stocks that compose the behemoth that is Liberty Media (LMCA). All I can hope to do is report on the earnings of the relevant entities, describe their import and tell you to have faith in John Malone.
The first thing to know about Liberty Media and its mess of stocks is that what matters most to Malone, and to shareholders, is cash flow.
Because Liberty Media has spun off, re-consolidated, swapped shares across entities, and changed names from this to that or the other, it is virtually impossible to do year-over-year comparisons on an earnings per share or net income basis.
Instead, the most prudent way to establish value and performance is to look at Liberty Media’s cash flow and EV/EBITDA ratios, as a business with good cash flows is the type of business Malone buys.
That’s because Malone knows how to leverage that cash flow big-time, using it to get cheap debt and repurchase shares. That makes the overall entity worth more, as these are low-cost accretive acts for the stock.
Liberty Media (LMCA)
Let’s look at Liberty Media — essentially the core company — which includes a group of entities that Malone has cobbled together or launched. (You can find them all here.)
Of these, the most important is arguably Sirius XM (SIRI). Three years ago, I told investors to forget SIRI stock and instead buy LMCA stock and its 60% stake. If you did, you are a happy camper.
As for LMCA stock, revenue climbed 8% to $1.12 billion. However, because of the strange arrangement LMCA has with its operating companies, revenue share and royalty expense increased by $130 million. As a result, operating income decreased to $171 million from $231 million. For the six month period, operating income rose from $386 million to $416 million.
Turning to the all-important cash flow number, however, operating cash flow was $682 million, up from $564 million. How can this big leap happen? It’s part of Malone’s ever-confusing string of deals, which results in changes in realized and unrealized gains or losses on financial instruments and affiliate investments.
Thus, over the last year, Liberty Media’s operating income totaled $971 million. And that, my friends, is what Malone is all about. That bottom-line operating income number was almost a billion dollars.
So if cash flow is king, how exactly do these numbers translate to value?
LMCA stock has an EV/EBITDA ratio of 13.63, while the very similar IAC/InterActiveCorp (IACI) sits at 15.62.
That’s how.
Liberty Interactive Corporation (QVCA)
Now we move to Liberty Interactive Corporation (QVCA). Its ticker should tip you off to its major stake in home shopping entity QVC, but Liberty Interactive also holds a 38% ownership position in HSN, Inc. (HSNI), as well as a slew of online companies.
If you thought shopping via TV was a thing of the past, think again.
QVCA stock was driven by QVC’s reliable single-digit increase in U.S. revenues, generating $2 billion for the quarter. But internationally, the strong dollar clobbered the unit, sending global revenue down 11%. Looking at the more important adjusted operating income number, we see a 3% increase to $445 million.
One surprise I must confess to is that not all of these cool companies that Liberty Interactive holds performed well. There was a time when they did, but now they are kind of a drag. In all, revenues were up 7% to $149 million, but adjusted operating income was only $18 million. They also sold off a few of them in the quarter.
The real value, besides the reliable cash flow of the home shopping entities, are QVCA’s equity stakes in other public companies doing very well, like Expedia (EXPE).
QVCA is a good way to play the Internet commerce arena by buying this stock. With an EV/EBITDA ratio of only 10.37, it gives you another reason to consider buying.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
