Tuesday, November 4, 2008

LINTA and PBI Redux

I have written two posts about one of the tracking stocks for Liberty Media called Liberty Interactive (LINTA).  In the first, I mentioned that I took a starter position of 50 shares at 7.73 and that I might buy the other 50 shares between 4 and 6. LINTA  After the release of the 3rd quarter's earning report, and assessing the slowdown in U.S. sales at LINTA's main asset QVC, I then wrote that I would postpone buying the other 50 shares.Notable News 10 30 2008  I have been primarily interested in this company as an owner of its senior debt in TC form, PKK and PIS.  I read last night the report from Barclay's that downgraded the stock from overweight to neutral-a summary is available at yahoo finance.Analyst downgrades Liberty Media on faltering QVC: Financial News - Yahoo! Finance  One reason for this downgrade is that the slowdown at QVC will mean that Liberty, a heavily indebted company with its enterprise value being about 21 times trailing 12 month's free cash flowFearful Stocks for Greedy Investors, will not be able to buy back stock, since it has a covenant in its bank loans, due in 2011, that debt can not exceed 4 times operating earnings.

  An article today highlighted one of my problems with John Malone and the way it runs his Liberty.  Heard on the Street - WSJ.com The convoluted structure of the various tracking stocks of Liberty Media  just creates needless complexities.  I never viewed the debt as entirely serviceable by the cash flow from its operating entities, particularly during an economic downturn.  If it came to a crunch, there was always stock in non-affiliated entities that could be sold, such as LINTA's stakes in IAC/Interactive (IACI) and HSN (HSNI), or Expedia (EXPE). But,  you do not want to sell those kind of assets when there is a crunch.  Personally I would like to see most of those positions sold or reduced when the economy recovers with the proceeds used to pay down debt which to me is the only sensible thing to do.  Malone, however,  is highly addicted to extreme debt levels, far above my comfort level, and this will always cause problems during an economic downturn as witnessed by the recent need to settle certain swap agreements.Yahoo! Finance   The Denver Post  Liberty needs its significant ownership stake in Direct TV to give it the financial flexibility to service its large debt load, including the part linked to QVC,  and it would be a mistake to spin it off as pointed out by the WSJ in its article today.  I would hope that these idiotic tracking stocks would be eliminated with all assets folded into one company, with new management needed in my humble opinion.  Malone just needs to step aside and retire.    If LINTA falls to below 4, I may buy the other fifty shares, but I will reduce my senior bond position when and if Malone takes another step to weaken the overall financial position of Liberty Media by spinning out a valuable asset. 

I did check last night the quotes for Liberty's 8.25% senior bond due 2/1/2030 and it was trading yesterday at close to 50% of its par value, which almost doubles its effective yield.   This is certainly a tempting yield to me, but then I remember that Malone does not exactly manage the business with debt holders in mind.   Malone may have been a innovative cable pioneer but I view him as one of the most over-rated executives currently still holding a position in a large U.S. company. 

I did review the  transcript of the earnings call from Pitney Bowes this morning.Seeking Alpha  Part of the earning's miss was due to the rise in the U.S. dollar and it did have a slightly higher tax rate which cost it 1 cent.  Given the extreme decline in the stock,  I do not view the minor sell-off this morning to be warranted.  On the other hand, I do not see anything yet to cause me to add to my starter position.   

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