Why Passport Capital Likes Liberty Interactive (LINTA) ~ market folly

Wednesday, March 7, 2012

Why Passport Capital Likes Liberty Interactive (LINTA)

In their year-end letter, John Burbank's hedge fund firm Passport Capital talked about their investment thesis on one of John Malone's companies:

Liberty Interactive (LINTA)

Passport writes,

"Liberty Interactive returned 9.9% during the fourth quarter. Having successfully resolved bondholder litigation that had constrained its ability to return capital to shareholders, the company split from parent corporation Liberty Media Corp. in late September. We view this split as the first step in a shareholder- friendly metamorphosis of LINTA reminiscent of those undergone by other Liberty entities which became Liberty Global, Discovery Communications, and DirecTV. Key strategies include equity shrink, sale/spin-off of non-core assets, and a consequent broadening of the shares’ market constituency.

In October, the company repurchased shares at a 12% annualized rate. We expect this pace to accelerate given the company's significant liquidity and minority equity stakes, which amount to approximately 57% of market capitalization as follows:

- Value, partially taxed, of minority equity positions in Expedia, TripAdvisor, and Home Shopping Network: approximately 28% of market capitalization

- Cash in excess of operating needs: approximately 8% as calculated by Passport

- 2012 FCF yield (before impact of share repurchase): approximately 8% as calculated by Passport

- Additional debt expected on QVC bank credit line: approximately 13% as calculated by Passport

The company’s primary operating asset, QVC, is a high-quality cash generator which has performed in line with our expectations. While the primary bear case on the business is online competition, we note that 35% of QVC’s U.S. sales and about 30% of total company sales transact online, that over half of QVC’s new customers have been arriving online, and that QVC’s customer repeat rates have generally been steady for many years. QVC’s franchise is rooted in its ability to move incremental volumes for manufacturers and consistently please its loyal consumers, and for this QVC receives differentiated merchandise and pricing that represent a significant moat around the business. QVC’s 20% operating (OIBDA) margins and its recent shipping and handling price increase support this point."

Other Hedge Funds That Own LINTA

John Malone's various Liberty entities have always seemingly been owned by hedge funds. Liberty Interactive (LINTA) in particular is owned by numerous other managers besides Passport.

However, what's interesting is that in the fourth quarter, LINTA was one of the stocks most actively reduced or sold by the 50+ prominent hedge funds we track. Despite this, a plethora of well known managers still own the stock.

Here are some of the top owners of LINTA in descending order: Empyrean Capital Partners, Highbridge Capital, SAC Capital, JANA Partners, Carlson Capital, Third Point, Senator Investment Group, and Ivory Investment Management.

For more from Burbank's firm, we've also posted up why Passport Capital likes Marathon Petroleum (MPC).

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