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Liberty Global in Neutral Lane

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We reiterate our long-term Neutral recommendation on Liberty Global Inc. (LBTYA - Free Report) although it missed both the top and bottom lines of the Zacks Consensus Estimates.

Why Remains Neutral?

Strong demand for its digital cable TV service, faster broadband, and triple-play bundled offerings coupled with strong foothold in the European cable MSO market and massive share repurchase plan of $1 billion will together continue to act as tailwinds for the company going forward. 

Liberty Global has recently launched a hybrid IP video gateway called “Horizon TV” in the Netherlands, where customers can share TV shows in multiple devices. Horizon TV also features an in-build application store for YouTube, Wikipedia and Facebook. This service will be extended in Switzerland, Germany and Ireland within the next 3-6 months. Such an innovative product launch coupled with the acquisition of the remaining 50% stake of its MGM Latin America venture and the remaining 49% stake of its MGM Central Europe venture will continue to drive profitability while moving ahead.

However, soft European economy coupled with business integration risk arising from several acquisitions made may act as headwinds for the company in the future.

Moreover, Liberty Global continues to lose customers for its basic video offerings. In the third quarter of 2012, it lost a net total of 90,000 video customers. This was mainly due to huge video subscribers' loss in the Romanian operations. Several European broadband service providers are gradually deploying high-speed DSL and Fiber-to-the-Home networks, making the industry extremely competitive.

In addition, we expect more cash-squeezed consumers to downsize the existing services and churn off the subscriber base. Furthermore, the stock of Liberty Global is currently trading at a 52-week high.

Cable Stocks Outlook in European Region

Liberty Global is predominantly operating in Europe, which at present is economically the most vulnerable region. The company is gradually concentrating in western Europe.

However, we also prefer Liberty Global’s close rival Virgin Media, Inc. and BT Group plc. (BT - Free Report) as both these companies are gaining strong foothold in the European market. Both these companies are Zacks #3 Rank (Hold) stocks.

Currently, BT Group has a Zacks #3 Rank, implying a short-term (Hold) rating on the stock while Virgin Media has a Zacks #2 Rank, implying a short-term (Buy) rating on the stock.

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