For John Malone, It’s All About the Cash Flow

John Malone’s hot mess of stocks that have been spun off from the central core of his Liberty Media Corp. (NASDAQ: LMCA) are all outstanding entities. It is challenging to value them on an earnings per share basis because so many deals have occurred that result in spinoffs and cross-ownership and breakups.
Instead, it is vital to understand that EPS doesn’t interest Malone anyway. His strategy has always been to buy up cash-flowing winners, use that cash flow to draw down super-cheap debt, and then repurchase stock in accretive fashion to shareholders.
Instead, I look at cash flow and enterprise value-to-EBITDA ratios to determine relative value. Since Liberty’s various entities just reported second-quarter earnings, let’s look at two units to see if such relative value exists.

Tune In to Home Shopping

Liberty Interactive (NASDAQ: QVCA) is driven by three components of business. The first is home-shopping, consisting of the always-reliable cash flow generators: QVC and a 38% equity position in HSN Inc. (NASDAQ: HSNI).
Liberty Interactive’s QVC unit has been all over the place from a revenue standpoint, thanks to the fact that it is a truly global company with currency exposure. Thus, when looking at the important “adjusted operating income before depreciation and amortization” number, we see the U.S. business was up 7% to $349 million in the second quarter.
However, Germany and Japan were down 13% and 14%, respectively, while the U.K. managed a 6% gain. Fortunately, German and Japan only account for about 17% of OIBDA (operating income before depreciation and amortization).
The second component of the business is a group of online companies that once made good money and cash flow for Liberty, but don’t do much anymore. Second-quarter revenues were up 6.9% to $150 million, but adjusted operating income was only $17.9 million.
The third component in Liberty Interactive’s business  is its ownership stakes in several other public companies. These include Interval Leisure Group (NASDAQ: IILG), Expedia (NASDAQ: EXPE) and LendingTree (NASDAQ: TREE). They added $538 million of value to Liberty Interactive, or about 13%, thanks mostly to Expedia.
Liberty Interactive  has an EV-to-EBITDA ratio of 10.37. That compares to 13.63 for its sister company, Liberty Media, while the analogous IAC/InterActiveCorp (NASDAQ: IACI) is valued at 15.62. Seems like a bargain to me.
As for Liberty Media, it is also a group of different companies cobbled together, which you can view here.

Malone’s Deals

Sirius XM Holdings (NASDAQ: SIRI) is the crown jewel, so to speak. It is the cash flow driver. Revenue at Liberty Media increased about $63 million to $1.223 billion from $1.16 billion. Now, one must account for some changes in rev-share and royalties that go along with more revenue. Those expenses increased by $129 million. As a result, operating income fell to $169 million from $229 million.
But it’s cash flow that matters! We find, perhaps amazingly, that second-quarter operating cash flow was $681 million, up from $565 million. Huh? The reason is that there’s a complex series of deals John Malone has put together over the years that result in realized and unrealized gains or losses on financial instruments and affiliate investments.
So, in the trailing 12 months, we actually find that operating income was close to a billion bucks. I said cash flow is what we care about, remember? And at an EV-to-EBITDA ratio below that of IAC/InterActiveCorp, I think it’s a buy.

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