We initiate coverage for Liberty Media Corp. (LINTA) with a Neutral recommendation, which means the stock will perform mostly in line with the broader market. The company declared mixed financial results for the second quarter of 2010. Although revenue beat the Zacks Consensus Estimate, EPS fell short.
Liberty Media’s QVC sector continues to enjoy strong brand value and operating efficiency that helped QVC to expand operating margin. QVC is the leading home-shopping retailer with a 63% share of the market, far ahead of its largest competitor HSN, which holds a 26% share, and ShopNBC, which has a 7% share. QVC’s channel positioning is a major competitive advantage.
Liberty Media’s Internet operations are a primary growth engine. We expect QVC.com to continue leveraging the QVC brand to rapidly grow its Internet operations. QVC.com’s margins are higher than Internet retail competitors because its advertising spending is almost nil, compared with 15%–20% for most online retailers – the company leverages the QVC home shopping network’s brand and generates customers from among those who view the TV channel.
On the other hand, the emergence of new technologies like video-on-demand, digital video, and IPTV may hinder the growth of Liberty Media’s TV home shopping business in the future. Increasing deployment of personal video recorders, video-on-demand technology, and IPTV are systematically changing the distribution and viewing habits of people.
These fundamental changes are taking a toll on home shopping networks. Furthermore, home shopping and the Internet retailing market place are getting more competitive day by day. Starz Entertainment is also facing challenges as cable operators are trying hard to offer more bundled services and new pay-TV services.