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Liberty Global Down to Underperform

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We downgrade our recommendation on Liberty Global plc. (LBTYA - Free Report) to Underperform primarily based on its current valuation. The company posted mixed financial results for the first quarter of 2013. While the total revenue surpassed the Zacks Consensus Estimate, net income fell below the same.  

Why the Downgrade?

The stock price of Liberty Global has soared more than 55% in the last year and is currently trading at extremely high multiples compared to both the S&P 500 and the industry average with respect to several valuation metrics. We believe that the stock is overvalued at this stage and the multiples must converge toward its peer average.

Additionally, the pay-TV market of Germany is expected to become intensely competitive in the near future. Vodafone group plc. (VOD - Free Report) , a global telecom giant, is on the verge of acquiring Kabel Deutschland, the largest pay-TV operator in Germany. Notably, Germany is the major growth region for Liberty Global. Moreover, business integration risk persists as the company has recently acquired several companies either partially or fully.

Liberty Global continues to lose customers for its basic video offerings. In the fourth quarter of 2012, it lost a net total of 92,000 video customers. This was mainly due to a huge loss of video subscribers in the Romanian operations. In the reported quarter, the company added 373,000 organic revenue generating units (RGU), down 16.2% year over year.

Other Stocks to Consider

Liberty Global currently has a Zacks Rank #5 (Strong Sell). While we prefer to avoid Liberty Global until we see reasonable valuation metrics, other Cable TV stocks worth a look are Comcast Corp. (CMCSA - Free Report) and Time Warner Cable Inc. . Both hold a Zacks Rank #2 (Buy).

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