Liberty Global, Inc. (LBTYA) is aggressively buying back shares, a move that we think will provide downside cushion to EPS and elevate the stock price for future acquisitions. In the coming years, we believe the company's earnings will continue to benefit from the triple play [Internet, cable and phone] as it signs up more customers in Europe, Japan, and Latin America.
However, in our view, Liberty's top-line and EBITDA growth will begin to decelerate in the second half of 2008, weighed down by the maturing Western European operations (37% of the company's total revenue and 46% of its operating cash flow) and soaring competition in certain markets, including Romania, Hungary, Austria, and other parts of Europe. We rate the shares a Hold.
Liberty Global's valuation is steep. The stock is now trading at 30x our 2009 EPS estimate, a small premium to its peers. However, the company is highly leveraged with gross debt to EBITDA at 4.3x, which will likely remain as it continues to acquire assets and invest in system upgrades. Its goal is to keep its leverage in the 4.0x 5.0x range. High interest expense and cap ex [capital expenditures] are impacting its cash flow.
Moreover, the company is continuously buying and selling operations throughout Europe. We think investors should assign a discount to Liberty's peers to reflect this complexity. Our six-month target price is $34.
Sumit Singh contributed to the report.
Read the full analyst report on LBTYA
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