Liberty Global (LBTYA) reported slightly weak first-quarter results, but we are maintaining our fair value estimate for now, along with our narrow moat rating. We believe the shares are slightly undervalued. The firm’s reported revenue declined 18%, versus our full-year projection of a drop of 16.1%, primarily because of the deconsolidation of Ziggo in the Netherlands, following the creation of its joint venture with Vodafone in the country. Excluding the removal of Ziggo, Liberty Global’s revenue increased 2% year over year.
The firm’s German operations remain its strength, with revenue gains of 5.6%. While its subscriber growth slowed, it successfully implemented a price increase. We expect subscriber growth to resume, as Germany’s pay-TV penetration rate remains far behind that in the rest of Europe. Other Western European countries produced poorer revenue results that were exacerbated by currency movements. We’ve never been as excited as management regarding opportunities in the U.K., but it put up solid numbers last year, which made us wonder if we’d been too pessimistic. However, the first-quarter results were more in line with our long-term assumptions. Our long-term revenue growth rates for the entire firm remain below management’s projections. After Liberty Global’s previous disclosure that it had counted homes passed with Project Lightning before being fully marketable, we are not surprised to see management changes in the division, along with the announcement that the build-out will be slower in 2017. However, we still believe that Project Lightning will provide additional growth opportunities in the long term, and that it is a good use of capital.
Liberty Global’s EBITDA margin was also a bit light at 44.6%, versus our full-year projection of 46%. However, we expect that the firm will continue reducing its costs, and the first quarter is historically one of the lowest of the year. Thus, we anticipate higher margins as the year progresses.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.