Near a 3-Year Low, Is Liberty Interactive Group a Buy?

By Leo

Shares of Liberty Interactive Group (NASDAQ: QVCA) have fallen nearly 30% over the past 12 months, and currently hover near a three-year low. The media conglomerate, which generates most of its revenue from the home shopping network QVC, has struggled with slowing sales growth, retail headwinds, and looming competition from Amazon's (NASDAQ: AMZN) new shopping show.

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Can this beaten-down media company bounce back in the near future? Let's examine its core business, growth rates, and valuations to find out.

How does Liberty Interactive make money?

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Liberty's core QVC Group is split into three main units -- QVC US, QVC International, and the flash sale site Zulily, which it acquired lastyear. QVC US generated 59% of Liberty's revenue last quarter, QVC International brought in 26%, and Zulily accounted for the remaining 15%.

QVC reaches over 100 million households in America, and 300 million households internationally in six other countries: the UK, Germany, Japan, Italy, China, and France. Its closest rival, HSN (NASDAQ: HSNI), reaches about90 million US households and has a smaller presence in overseas markets.

QVC's core policy of deploying sales strategies like countdowns and peer pressure from other shoppers on live TV has held up remarkably well against e-commerce challengers like Amazon. QVC's brand recognition also made it fairly easy to sell products through e-commerce channels like mobile devices, which accounted for58% of all orders last quarter. It has also been countering cord cutters by launching its streaming app on set-top boxes like Amazon's Fire TV.

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Buying Zulily for $2.4 billion was a natural way to expand Liberty's business, since its timed "flash sale" strategy was essentially the online equivalent of QVC's countdowns on TV. That acquisition gave Liberty another 5 million active customers, and over 60% of them placed orders from mobile devices last quarter.

The rest of Liberty's revenue comes from its Ventures group, which invests in a portfolio of other e-commerce, media, and cable companies. To streamline that business, Liberty recently spun off CommerceHub, a fulfillment service for online merchants. It's also in the process of spinning off Liberty Expedia, which owns a 16% equity stake and 52% voting stake in online travel giant Expedia (NASDAQ: EXPE).

How fast is Liberty Interactive growing?

Liberty Interactive's total revenue rose 14% annually to $2.56 billion last quarter. However, that gain was mainly attributed to 21% sales growth in the QVC Group from the purchase of Zulily (which closed last October) inflating year-over-year comparisons.

QVC US revenue rose 2% to $1.43 billion, QVC International revenue improved 7% to $635 million, and Zulily added $366 million to Liberty's top line. Excluding the gain from Zulily, QVC's core revenue only rose 3%. Ventures revenue fell 45%, but that was skewed by the CommerceHub spinoff. Looking ahead, analysts expect Liberty to post 14.2% sales growth this year and 4.5% sales growth next year, after year-over-year comparisons normalize. In contrast, HSN's revenue is expected to fall 1.5% this year before rising 3.1% nextyear.

On the bottom line, QVC US and International both posted 4% operating income growth last quarter. Adjusted OIBDA rose 4% at the US business but stayed flat internationally. The company's total net income rose 55% to $376 million, but that was again inflated by Zulily's growth.

Those numbers looked fairly stable, but Liberty warned that "significant headwinds" in theUS due to a "choppy" retail environment could knock QVC US' top and bottom line growth into negative territory during the third quarter. That warning caused the stock to plummet 18% on Aug. 5, and the stock still hasn't recovered.

Earnings outlook and valuations

Analysts expect Liberty to post a 20% earnings decline this year, followed by 29% growth next year. Liberty is expected to post 9% annual earnings growth over the next five years, which gives it a 5-year PEG ratio of 2.4. Since a PEG ratio under 1 is considered "cheap", Liberty stock looks pricey relative to its earnings growth potential.

By comparison, HSN has a PEG ratio of 0.95, which makes it a much more undervalued play at current prices. HSN also pays a forward dividend yield of 3.1%, which should set a floor under the stock, while Liberty Interactive doesn't pay a dividend.

Don't buy Liberty Interactive... yet

QVC's resilience in the face of tough e-commerce competition is admirable, and the Zulily acquisition was a smart move. However, the QVC Group's sales and earnings growth aren't that hot, and there's no guarantee that it can survive Amazon's gradual expansion into connected homes and shopping shows.

To top it off, Liberty's valuations aren't cheap, and there's no dividend to limit its downside. Therefore, I'd keep an eye on this stock, but I wouldn't consider buying it unless it declines even further.

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