September 11, 2014 Liberty Interactive Corporation (LINTA-NASDAQ) Current Recommendation Prior Recommendation Neutral Date of Last Change 09/11/2014 Current Price (09/10/14) $29.41 Target Price $27.00 UNDERPERFORM SUMMARY Liberty Interactive reported dismal second-quarter 2014 financial results wherein both its top and bottom line missed the Zacks Consensus Estimate. Also, mounting TV carriage costs continue to hurt margins. Moreover, persistent global economic headwinds, higher leverage ratio and stiff competition from other operators may affect the top line in the near future. Furthermore, the company s global operations expose it to volatile foreign exchange rate risks. Meanwhile, the stock price has soared nearly 29% in the last year and is currently trading at the high-end of its 52-week price range. We, thus, downgrade our recommendation on Liberty Interactive from Neutral to Underperform. SUMMARY DATA 52-Week High $30.68 52-Week Low $22.83 One-Year Return (%) 22.85 Beta 1.60 Average Daily Volume (sh) 1,367,448 Shares Outstanding (mil) 481 Market Capitalization ($mil) $14,146 Short Interest Ratio (days) 2.39 Institutional Ownership (%) 90 Insider Ownership (%) 9 Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) 4.9 Earnings Per Share (%) 3.6 Dividend (%) N/A using TTM EPS 30.6 using 2014 Estimate 26.7 using 2015 Estimate 21.0 Zacks Rank *: Short Term 1 3 months outlook 5 - Strong Sell * Definition / Disclosure on last page Risk Level * Low, Type of Stock Large-Value Industry Cable Tv Zacks Industry Rank * 184 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 2,314 A 2,365 A 2,196 A 3,143 A 10,018 A 2013 2,434 A 2,400 A 2,245 A 3,228 A 10,307 A 2014 2,447 A 2,495 A 2,334 E 3,370 E 10,646 E 2015 2,592 E 2,633 E 2,466 E 3,587 E 11,278 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 $0.16 A $0.42 A $0.20 A $0.42 A $1.20 A 2013 $0.18 A $0.21 A $0.17 A $0.36 A $0.92 A 2014 $0.22 A $0.21 A $0.20 E $0.47 E $1.10 E 2015 $0.28 E $0.29 E $0.26 E $0.57 E $1.40 E Projected EPS Growth - Next 5 Years % 19 2014 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Headquartered in Englewood, CO, Liberty Interactive Corp. (LINTA) owns a broad range of businesses, including electronic retailing, online commerce companies and interactive technology services. The company markets and sells various consumer products in the U.S. and internationally, mainly through televised shopping programs on QVC networks and through its domestic and international websites. Liberty Media is an e-commerce paltform of several websites. Liberty Interactive s online commerce sites service several retail categories, namely, Backcountry.com Inc., Bodybuilding.com LLC, Celebrate Interactive Holdings Inc. and Provide Commerce Inc. In addition, the company holds ownership interests in Expedia Inc., HSN Inc., Interval Leisure Group Inc. and Tree.com Inc. On Sep 23, 2011, Liberty Interactive Corp. separated from Liberty Media Corp. On Aug 9, 2012, the board of directors of Liberty Interactive formed two tracking stocks, viz., Liberty Interactive and Liberty Ventures. The Liberty Interactive tracking stocks will follow QVC, the ecommerce companies, a 34% stake in HSN Inc., approximately $500 million of cash and $5 billion of debt and other liabilities. Liberty Venture will look after minority interests of Expedia Inc., Time Warner Inc., Time Warner Cable Inc., AOL, Interval Leisure Group, Tree.com and Liberty s green-energy investments. Liberty Venture will become a subsidiary of Liberty Interactive and will be assigned around $1.25 billion of cash and $3 billion principal amount of Liberty Interactive s publicly traded exchangeable debentures. The tracking stocks of Liberty Ventures started trading on NASDAQ from Aug 10, 2012. REASONS TO SELL The QVC segment's fluctuating growth rate in the last five quarters is a major concern for Liberty Interactive. This segment currently generates approximately 81% of the company s total revenue and 100% of its operating profits. Therefore, any variation in QVC s revenues will significantly affect the company s overall financials. Liberty Interactive exited the second quarter of 2014 with nearly $5.2 billion debt and a debt-tocapitalization ratio of 0.46. Recently, the company raised $1 billion through senior secured note issuance, which is expected to expand its leverage further. Moreover, continuous share repurchases will further dent the company s cash position. Liberty Interactive s businesses are susceptible to rapid technological changes. Large cable TV operators are increasingly deploying digital TV networks, which is gaining huge market traction. This may adversely impact the channel positioning of Liberty Interactive s networks. Spiraling TV carriage costs can be held responsible for the persistent depreciation in margins. Change in distribution technology has resulted in higher TV carriage costs. Moreover, the company is highly exposed to foreign currency exchange rate risks as it has an extensive international presence. Ongoing economic crisis in the European countries and its rippling effect on the U.S. economy may result in a prolonged economic slump, reflecting lower disposable income in the hands of consumers. This situation may significantly jeopardize Liberty Interactive s future financial results. Increasing deployment of personal video recorders, video-on-demand technology, and IPTV network are systematically changing the distribution and viewing habits of the common people. These fundamental changes are taking a toll on the home shopping networks. Moreover, the home shopping and Internet retailing market place are getting more competitive day by day. Meanwhile, the stock price has soared nearly 31% in the last year and is currently trading at the high-end of its 52-week price range. Equity Research LINTA Page 2
RISKS Liberty Interactive s QVC division is benefiting from the surge in online sales. Management stated that its online sales will constitute more than 50% of the total revenue in the U.S. by 2014. The major thrust is expected to come from the growing adoption of high-end smartphones in the U.S. QVC has launched a synchronized content for its mobile applications. This feature allows smartphone users to get real time information about a product which is broadcasted on a TV show. This is expected to promote online sales further. QVC also launched a new social shopping platform called togather. Using this platform, users can track popular products and exchange views with other members of the site. togather will provide an integrated shopping cart, a full product catalogue and trusted recommendations from an active user community. Through 12 different channels in eight countries, the company covers 300 million homes. Such service launches has helped the company improve revenues in the second quarter of 2014. Almost all its segments witnessed revenue growth from the prior-year quarter. Earlier, the board of directors of Liberty Interactive raised a share buyback program by $1 billion under which the company has aggressively repurchased 9.5 million shares for a $274 million from May 1, 2014 to Jul 31, 2014. Such a move will certainly boost shareholders value moving forward. Notably, such frequent buybacks did not exhaust the company s cash flow as it was replenished by $570 million generated from operations in the second quarter of 2014 against $382 million in the year-ago quarter. In Dec 2013, the company s e-commerce business in the U.S. accounted for 50% of the total revenue for the first time. Moreover, in the U.K. and Japan, orders placed through mobile accounts represented more than 50% of the total orders placed during the reported quarter. Exposure to international markets, such as Japan, Germany, Italy, and the U.K., will enable QVC to achieve a high rate of growth. QVC is gradually expanding its presence in these developed markets. In the first quarter of 2014, the company achieved the highest first quarter customer count since 2007. Liberty Interactive is highly optimistic about its operations in China which has generated a healthy 27% revenue growth in the quarter. At present, QVC s services are distributed to approximately 195 million homes worldwide. Currently, international markets provide over 25% of QVC s yearly revenues. The company is expecting this figure to reach 50% within the next 5 years. The company added 7 million households of TV carriage, representing 30% growth, in China. The company also plans to boost its international presence further by foraying into the French market. RECENT NEWS Second Quarter of Fiscal 2014 Financial Results Aug 5, 2014 Liberty Interactive Q2 Earnings Miss Estimates Quarterly net income came in at $105 million or $0.21 per share compared with $109 million or $0.21 per share in the year-ago quarter. However, second-quarter earnings per share of $0.21 lagged the Zacks Consensus Estimate of $0.27. Quarterly total revenue of $2,495 million reflected a year-over-year improvement of 4% but fell below the Zacks Consensus Estimate of $2,512 million. Quarterly total operating income stood at $255 million compared with $268 million in the year-ago quarter. In the reported quarter, consolidated adjusted operating income before depreciation and amortization stood at $452 million against $455 million in the year-ago quarter. In the first half of 2014, Liberty Interactive generated $570 million of cash from operations compared with $382 million in the year-ago period. Free cash flow in the reported quarter was $483 million against $271 million in the prior-year quarter. At the end of the second quarter, Liberty Interactive had total cash and marketable securities of $707 million compared with $602 million at the end of 2013. The company exited Equity Research LINTA Page 3
the reported quarter with $5,234 million of outstanding debt versus $5,083 million at end-2013. Meanwhile, the debt-to-capitalization ratio was 0.46 compared with 0.44 at the end of 2013. QVC Segment Quarterly total revenue at the QVC segment was $2,014 million, up 3% year over year. Adjusted OIBDA was $439 million, up 1% year over year. Operating income stood at $284 million, remaining flat year over year. Quarterly revenues of QVC U.S. inched up 3% year over year to $1,352 million. Gross margin was 37.7% against 37.3% in the prior-year quarter. Adjusted OIBDA stood at $325 million, up 1.6% year over year. Operating income was $203 million, down 1.9% year over year. Quarterly revenues of QVC International rose 2% year over year to $682 million. Gross margin was 38.3% compared with 37.8% in the prior-year quarter. Adjusted OIBDA was $114 million, remaining flat year over year. Operating income was $81 million, up 3.9% from the year-ago quarter. ecommerce Segment Quarterly revenues at the ecommerce segment totaled $481 million, up 10% year over year. Quarterly adjusted OIBDA was $19 million, down 26.9% year over year. Operating loss was $16 million as against an operating loss of $2 million in the year-ago quarter. VALUATION Liberty Interactive is currently trading at 26.7x our fiscal 2014 earnings estimate. This is at a premium to the S&P 500 but at a huge discount to the industry average. With respect to our fiscal 2015 earnings estimate, the stock is trading at 21.0x, again a premium to the S&P 500 but a discount to the industry average. Despite such innovative service launch, the company continues to face strong challenges. Persistent global economic headwinds, higher leverage ratio and stiff competition from other operators may affect the top line in the near future. Also, mounting TV carriage costs continue to hurt margins. Moreover, the stock price has soared nearly 29% in the last year, which may restrict any above-market gain. We, thus, downgrade our recommendation on Liberty Interactive from Neutral to Underperform with a target price of $27, based on 24.5x our fiscal 2014 earnings estimate. Equity Research LINTA Page 4
Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low LIBERTY M INT-A (LINTA) 26.7 21.0 19.0 10.3 30.6 31.9 11.0 Industry Average 276.4 27.2 10.7 9.3 39.0 159.0 19.9 S&P 500 17.0 15.9 10.7 15.4 18.3 27.7 12.0 LIBERTY M INT-B (LINTB) 10.6 31.0 32.3 10.8 ROGERS COMM CLB (RCI) 14.6 13.8-1.9 6.2 14.3 14.6 10.8 CABLEVISION SYS (CVC) 18.9 21.6 2.0 5.3 29.8 59.8 12.4 SHAW COMMS-CL B (SJR) 15.0 14.7 6.3 7.0 16.4 17.8 11.5 TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA LIBERTY M INT-A (LINTA) 1.2 1.6 0.8 4.3 0.6 0.0 8.6 Industry Average 4.2 4.2 4.2 18.1 1.6 1.1 10.3 S&P 500 4.6 9.8 3.2 23.1 1.9 Equity Research LINTA Page 5
Earnings Surprise and Estimate Revision History Equity Research LINTA Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of LINTA. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1116 companies covered: Outperform - 16.0%, Neutral - 77.2%, Underperform 5.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research LINTA Page 7