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Morningstar | Liberty Global's 1Q Results a Bit Weak; Shares Undervalued

Liberty Global reported first-quarter results that were a bit light, but we don’t expect any significant changes to our $38 fair value estimate. Our narrow moat rating is intact, and we believe the shares are undervalued.

Liberty Global counts its operations in Germany, Romania, Hungary, and the Czech Republic as discontinued operations on the expectation that its deal to sell these businesses to Vodafone will be approved. We continue to model Liberty Global as if the deal doesn’t close, so our results aren’t fully comparable. The firm reported that revenue declined 0.6% year over year, but this would have been even worse including discontinued operations. Our full-year projection is for growth of 1.7%. However, the majority of the decline was due to lower sales of equipment, which carry low margins, and currency issues, as the dollar, which is the company's reporting currency, strengthened against almost all European currencies. Liberty generated decent broadband subscriber growth, particularly in the United Kingdom, where it added 59,200 customers in the quarter and continues to benefit from Project Lightning, its cable network expansion program. The wireless side didn’t perform as well, as prepaid customer losses offset about two thirds of postpaid subscriber gains. We expect Project Lightning will enable revenue growth to continue for several years.

Liberty was also a bit short on the margin side. While its EBITDA margin for continuing operations, which we calculate as operating cash flow minus share-based compensation, was 38.9%, the firm’s total EBITDA margin was 43.5% as discontinued operations carry much higher margins. However, even this was a bit below our full-year projection of 44.4%. That said, the firm’s successful history of cost-cutting keeps us encouraged for longer-term improvement.

We think the likelihood of Liberty’s asset sales to Vodafone has increased as Vodafone on May 7 announced a deal to wholesale capacity to Telefonica Deutschland if the Liberty deal closes. For more on this, please see our May 7 note on Vodafone. We think this deal could add some value to Liberty, which would offset any shortfall from the first quarter.