Cable and media magnate John Malone made another big move March 21 when Liberty Global (Nasdaq:LBTYA) acquired Germany's third largest cable operator, Kabel Baden-Wuerttemberg, for $4.5 billion. Liberty will combine Kabel BW with Unitymedia, Germany's second largest cable company, which it acquired in November 2009 for $3 billion. If you can get past the company's unbelievable debt load, here are four reasons why you should own its stock.

TUTORIAL: How To Read Financial Tables

Global Operations

Liberty Global is the world's largest cable company operating outside the United States with operations in 14 countries including Germany, Switzerland, Chile and Australia. Its services - television, telephone and internet - are used by 31.2 million homes worldwide generating $9 billion in annual revenue. It's big and getting bigger.

Europe accounts for more than 80% of its revenue and the Kabel BW deal increases this predominance. Its biggest difficulty is going to be Deutsche Telkom AG (NYSE:DB), whose $39 billion sale of T-Mobile to AT&T (NYSE:T) provides it with plenty of cash to expand its broadband offerings in Europe. The competition is healthy.

Triple Play
The linchpin of Liberty Global's expansion is cable technology itself. Many see cable as a better choice than DSL for providing triple play (television/internet/telephone) bundles to subscribers. The penetration rate of cable in Europe and in most parts of the world is much less than DSL and gives Liberty a real opportunity to get out in front of the market.

In 2010, the number of triple-play subscribers grew by 38% to 3.7 million. At the end of 2010, the average customer used 1.57 products. In a perfect world, I'm sure CEO Mike Fries would like that average to be closer to two, if not higher. The acquisition of Kabel BW will help move the needle.

Operating Margins
In June 2004, Liberty Media (Nasdaq:LINTA) spun-off its international division. Less than a year later Liberty Media International acquired the remaining interest in UnitedGlobalCom that it didn't already own for $3.5 billion, creating Liberty Global. In its first year as a merged entity, its operating margin was 4.9%. Five years later, it's 16.6%. Yet its market capitalization is $11.25 billion, $400 million less than in 2005 and that is after its stock doubled the last two years.

For those who believe its stock is now expensive, consider this: Rogers Communications (NYSE:RCI) revenues in 2006 were about the same as Liberty's today yet its operating margins were 200 basis points less. At the time, Roger's stock traded at 1.56 times sales compared to Liberty's 1.10 ratio.

John Malone
The Colorado billionaire owns 39.3% of its voting shares and is firmly in control. When he's not plotting acquisitions, he's busy buying land. So much so, he's now the largest individual landowner in the United States with 2.2 million acres in Wyoming, New Mexico, Colorado, New Hampshire and Maine.

What does this have to do with cable you ask? Time. Owning cable operations and land require similar patience and nurturing and he clearly has both. You might not like his blunt honesty but his vision goes well beyond the next few quarters - a must for successful management.

The Bottom Line
Liberty's debt is shrinking while its operating income is rising. It may not be at the pace I'd like but it's headed in the right direction. While it's hard to do, I think I can look past its failings to a bright future in Europe and other parts of the world. Patience will pay dividends soon enough. (For additional reading, see Biggest Merger and Acquisition Disasters.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!