We upgrade our recommendation for Liberty Global Inc. (LBTYA) to Neutral based on our assessment that the company’s top line may improve in future due to solid growth in Chile and Australia. Liberty Global is the dominant cable operator in these markets, which are relatively less competitive than the mature North American markets.
The company is aggressively buying back shares, a move that we think will provide downside cushion to EPS. We believe Liberty Global’s earnings will continue to benefit from the ‘triple play’ offerings of video, broadband, and telephony, as it signs up more customers in Europe, and Latin America. Acquisition in Germany will help the company to sustain long-term growth.
Deployment of high-speed EuroDOCSIS 3.0 network will help the company to different its offerings in the industry. Management has undertaken a plan to deploy EuroDOCSIS 3.0 in 80%-90% of all UPC broadband divisions in Western, Central, and Eastern Europe by the end of 2010. The company also decided to give some wideband trial runs at VTR in Chile and at Telenet in Belgium in the second half of 2010.
Nevertheless, we remain concerned regarding the company’s Central & Eastern European operations. In the reported quarter Liberty Global lost 108,000 video customers, mostly in these regions. According to our view, Liberty Global will remain loss making throughout fiscal 2010.
Liberty Global is also suffering from severe foreign exchange rate fluctuations. The company operates in 14 countries all are outside of U.S. Continuing foreign currency rate volatility may further diminish the company’s earnings in future reporting quarters. In the second quarter 2010, Liberty Global incurred a whopping $758.3 million of foreign currency transaction losses.