QVCA - QVC Group

[KJP]

QVC is the home shopping/ecommerce company you've probably heard of.  I won't bother with a full writeup; I'm posting this to flag it for the Malone followers (though I don't know how much of this Malone still owns).  Based on my quick numbers, at $18/share you're getting Malone-style capital allocation for about 9.5x FCF and 10x EV/EBIT. 

 

You're getting those multiples because of (i) the background belief that this is a dying business with old, dying customers; (ii) that's beginning to manifest in y-o-y declines in US sales; and (iii) it's got high leverage, and the equity will always looks cheap as it goes down, down, down as the business unravels. 

 

The counterargument is that the two other segments (zulily and International) are doing well and the trouble in U.S. sales over the last few quarters are just a blip in what has been a long-term growth story.  If the U.S. business can get back to just 1-2% growth, you'll make a bunch of money.  I think the entire investment case comes down to that question.

[Jurgis]

I have some QVCA. It's always been optically cheapest Malone company for the reasons you outlined. And it's getting cheaper still.

 

I'm not sure about its future and I don't plan to buy more. Probably shoulda sold it, but...

[KJP]

I have some QVCA. It's always been optically cheapest Malone company for the reasons you outlined. And it's getting cheaper still.

 

I'm not sure about its future and I don't plan to buy more. Probably shoulda sold it, but...

 

Well, for what it's worth, you're in good company with a "wait and see" approach.  From yesterday's call:

 

John C. Malone - Liberty Interactive Corp.

 

Yeah. I like to defend myself. My comment at the Lionsgate Analyst Meeting really related I think the question related primarily to ESPN and the difficulty that the public market face has in valuing cash cause let's call them businesses that are growing slowly or have modest negative growth to generate an enormous amount of free cash flow. There are lots of private equity firms who have made lots of money on those kinds of businesses.

 

Now I don't think QVC is in that mode yet. We still think QVC is in the modest growth category, but it is one enormous free cash flow generator, and we've been able to create incremental assets as Greg mentioned for instance the investment in ventures, broadband and so on. We're all levered off of the free cash flow generation at QVC.

 

So, beauty is in the eyes of beholder I think that QVC will be an enormous free cash flow generator, whether it's growing at 3% to 5% or shrinking at 1%, it will be generating an enormous amount of cash and its debt leverage is modest and its interest cost is low. So, the real question is what's the best use of that free cash flow. Because we believe what Mike is telling u that he thinks this is a modest inflection point and in my own opinion I think the public has been very preoccupied with the election and the Olympics.

 

And so I think while viewership has still been pretty high, people have been preoccupied and if I look at the cable networks I can see that the news networks are still running 50% higher ratings than they had traditionally prior to this period.

 

So, I still think the public a substantial part of the public is preoccupied. And I think in my own mind that is something that I would want to wait out and see if Mike with managing his product assortment will see a recovery back to what I've always regarded is a slow growth 2% to 5% growing business, domestically in the U.S., higher growth rates outside the U.S.

 

Mark D. Carleton - Liberty Interactive Corp.

 

And higher growth rate at zulily.

 

John C. Malone - Liberty Interactive Corp.

And certainly to zulily we bought expecting that their all figures maybe even double-digit sustained growth rates with the synergies and the focus on mobile. So that's kind of my look at it and frankly, if the public doesn't believe in the business and prices are cheaply, it makes the case for shrink in the equity even stronger.

[no_free_lunch]

QVC is the home shopping/ecommerce company you've probably heard of.  I won't bother with a full writeup; I'm posting this to flag it for the Malone followers (though I don't know how much of this Malone still owns).  Based on my quick numbers, at $18/share you're getting Malone-style capital allocation for about 9.5x FCF and 10x EV/EBIT. 

 

You're getting those multiples because of (i) the background belief that this is a dying business with old, dying customers; (ii) that's beginning to manifest in y-o-y declines in US sales; and (iii) it's got high leverage, and the equity will always looks cheap as it goes down, down, down as the business unravels. 

 

The counterargument is that the two other segments (zulily and International) are doing well and the trouble in U.S. sales over the last few quarters are just a blip in what has been a long-term growth story.  If the U.S. business can get back to just 1-2% growth, you'll make a bunch of money.  I think the entire investment case comes down to that question.

 

I think this is a good summary.  I just find it very hard to predict whether the sales drop is a blip or not.  It is very troubling that revenue is dropping in spite of zu lilly purchase.  My perspective is this "seems" like a dying business and the numbers back that up so I am very hesitant to invest.  Malone ownership is not enough.

[Jurgis]

http://variety.com/2017/tv/news/qvc-hsn-merge-liberty-john-malone-1202488499/

[KJP]

http://variety.com/2017/tv/news/qvc-hsn-merge-liberty-john-malone-1202488499/

 

There's been some useful capital structure changes and now M&A since this thread started, but I think the key investment question remains the same:  Can they return QVC (and now HSN) U.S. to low-single-digit growth? 

[Jurgis]

After they announced full split of LVNTA with some cash (notes? prefs?) going to QVCA, my thinking was that QVCA will become cash-rich part for future investments. This now becomes complicated by the HSN merger and then "spin off its cable-TV operations into an independent company that will be called QVC Group". I'm not very interested in QVC/HSN, but I'm interested in the future-investment-cash-rich part. We'll gonna see what that will be.

 

Disclosure: I own a bunch of Liberties. I was planning to shift some/most LVNTA to QVCA, but not sure for now.

[KJP]

After they announced full split of LVNTA with some cash (notes? prefs?) going to QVCA, my thinking was that QVCA will become cash-rich part for future investments. This now becomes complicated by the HSN merger and then "spin off its cable-TV operations into an independent company that will be called QVC Group". I'm not very interested in QVC/HSN, but I'm interested in the future-investment-cash-rich part. We'll gonna see what that will be.

 

Disclosure: I own a bunch of Liberties. I was planning to shift some/most LVNTA to QVCA, but not sure for now.

 

I don't think the plan is to have QVC, Inc. become a vehicle for future investments.  It already has significant leverage.  Instead, as Malone has said, the game plan appears to be to continue to use free cash flow to buy back shares.  So, if you don't want to own QVC/zulily/HSN, I would sell.

[Jurgis]

After they announced full split of LVNTA with some cash (notes? prefs?) going to QVCA, my thinking was that QVCA will become cash-rich part for future investments. This now becomes complicated by the HSN merger and then "spin off its cable-TV operations into an independent company that will be called QVC Group". I'm not very interested in QVC/HSN, but I'm interested in the future-investment-cash-rich part. We'll gonna see what that will be.

 

Disclosure: I own a bunch of Liberties. I was planning to shift some/most LVNTA to QVCA, but not sure for now.

 

I don't think the plan is to have QVC, Inc. become a vehicle for future investments.  It already has significant leverage.  Instead, as Malone has said, the game plan appears to be to continue to use free cash flow to buy back shares.  So, if you don't want to own QVC/zulily/HSN, I would sell.

 

Maybe you are right. But that's the impression I got. Not that Malone&Co telegraph their moves.

 

If QVCA is not the future investment vehicle, then what is? Other parts have the same issue(s) of leverage and already holding significant businesses that you noted. It might be possible to re-cash something like LBRDA if CHTR buys back the shares it holds (not very likely) or CHTR gets sold (also not very likely).

 

Anyway, thanks for your thoughts, I'll continue to monitor where things are going.

[KJP]

QVC US returned to low-single-digit growth in Q3:  http://www.businesswire.com/news/home/20171109005496/en/Liberty-Interactive-Corporation-Reports-Quarter-2017-Financial

 

HSN, on the other hand, had low-single-digit decline.

 

Consistent with public statements by Malone and Maffei, QVC continued to buy back stock hand over fist.

[Sunrider]

I wondered if anyone is still following this stock - now QRTEA?

 

Any views on performance, or pointers to recent discussions/write-ups (am aware of the VIC one)?

 

Thank you!

[KJP]

I wondered if anyone is still following this stock - now QRTEA?

 

Any views on performance, or pointers to recent discussions/write-ups (am aware of the VIC one)?

 

Thank you!

 

Liberty Investor Day presentation covers QRTEA in detail.  I don't think the overarching question has changed since this topic began:  Is there going to be revenue growth (without GM decline) at QVC US over the next 5-10 years or is this business model slowing dying with its customer base?

 

You can spend a lot of time trying to estimate current steady-state FCF after accounting for increased synergies from the HSN transaction (which appear reasonable if you compare historical standalone HSN operating margins to QVC's historical margins), the tax shield created by the convertible debentures, the interest deduction limits in the 2017 Tax Act, etc.  If you do all of that I think you'll find that QRTEA is trading at a double-digit FCF yield.  But it also has a lot of debt, which will naturally increase as the convertible debentures accrete. 

 

So, at the end of the day, is using today's free cash flow to buy back shares going to benefit shareholders, or will a declining business and large debt load win out in the end?  Nobody knows the answer to that question.

 

Also, is there a natural strategic buyer for this business? 

[Stuart D]

down 70% from this time last year. From the conference call:

 

"Lastly return of capital to shareholders. We repurchased $392 million of QRTEA A shares. Given the volatility of the stock and the results, we remain cautious on the buyback. While the business is experiencing some headwinds now, we still know it generates strong free cash flow and we will prudently and opportunistically allocate it." - Chairman, 26-Feb-2020.

 

I wonder if they are backing up the buyback truck now, or sitting tight, waiting for a lower price.

[KJP]

Regarding buybacks, Maffei commented on them at the March 4 Morgan Stanley TMT conference.  Those comments can be found around the 22 minute mark of the audio recording.  I admit that I don't understand what he's trying to imply with his comments.

 

This is another company that appears to have a large disconnect between its FCF yield and its ability to issue debt.  On the one hand, a few months ago QVC issued $500 million in subsidiary-level 50-year secured notes at 6.25%.  Last month they issued an additional $575 million in 7-year subsidiary-level secured notes at 4.75%.  There is several billion in subsidiary-level secured debt that matures before even the 7-year notes.  I don't know where those notes trade now, but I'd be interested to know. 

 

On the other hand, the equity appears to trade at somewhere around a 25-33% free cash flow yield. 

[Stuart D]

The president/CEO just bought $2.5m worth of shares at $5.50/share.

https://www.sec.gov/Archives/edgar/data/1280367/000122520820004672/xslF345X03/doc4.xml

[Foreign Tuffett]

Regarding buybacks, Maffei commented on them at the March 4 Morgan Stanley TMT conference.  Those comments can be found around the 22 minute mark of the audio recording.  I admit that I don't understand what he's trying to imply with his comments.

 

This is another company that appears to have a large disconnect between its FCF yield and its ability to issue debt.  On the one hand, a few months ago QVC issued $500 million in subsidiary-level 50-year secured notes at 6.25%.  Last month they issued an additional $575 million in 7-year subsidiary-level secured notes at 4.75%.  There is several billion in subsidiary-level secured debt that matures before even the 7-year notes.  I don't know where those notes trade now, but I'd be interested to know. 

 

On the other hand, the equity appears to trade at somewhere around a 25-33% free cash flow yield.

 

Isn't the problem here though that the revenue trend is deteriorating? Looks like constant currency revenue was down 5% in Q4, and 4% for all of 2019. Zulily was supposed to be the growth driver here right? It appears to be performing particularly poorly. Tell me why I'm wrong.

[KJP]

Regarding buybacks, Maffei commented on them at the March 4 Morgan Stanley TMT conference.  Those comments can be found around the 22 minute mark of the audio recording.  I admit that I don't understand what he's trying to imply with his comments.

 

This is another company that appears to have a large disconnect between its FCF yield and its ability to issue debt.  On the one hand, a few months ago QVC issued $500 million in subsidiary-level 50-year secured notes at 6.25%.  Last month they issued an additional $575 million in 7-year subsidiary-level secured notes at 4.75%.  There is several billion in subsidiary-level secured debt that matures before even the 7-year notes.  I don't know where those notes trade now, but I'd be interested to know. 

 

On the other hand, the equity appears to trade at somewhere around a 25-33% free cash flow yield.

 

Isn't the problem here though that the revenue trend is deteriorating? Looks like constant currency revenue was down 5% in Q4, and 4% for all of 2019. Zulily was supposed to be the growth driver here right? It appears to be performing particularly poorly. Tell me why I'm wrong.

 

Not only the revenue trend, but also margins, despite already realizing some cost synergies with HSN (and there should be more of those on the way).  The Zulily acquisition has been a flop, and it's not suprising they took a big write-off of the intangibles arising from the acquisition.  The value (to the extent there is any) comes from QVC/HSN U.S. and QVC international.  The latter had essentially flat revenue in 2019.  The former saw low-single digit revenue declines.  If that trend does not reverse, the equity could be worthless in light of the $7.5+ billion debt pile.  I have no insight into whether or not the revenue will stabilize.  That is why I haven't bought any shares.  At some point though, I would be a buyer.  I haven't decided yet what that price is.