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Why I Bought Iconix And Dispatched Directtv

 May 08, 2012 06:26 PM

Author: Yale Bock, Y H & C Investments
Covestor models: Long Term GARP, Concentrated GARP

The Long Term GARP portfolio had six of its companies report their earnings in April: Starbucks  (SBUX), VCA Antech (WOOF), Quest Diagnostics (DGX), Quidel (QDEL), MoneyGram International (MGI) and Unilever (UL). Other companies in the model will report during the first two weeks of May.

[Related -Gold hasn’t lost its allure in my portfolio]

I made a big change in the portfolio by selling Direct TV (DTV) and adding a new holding, Iconix (ICON). I sold DTV because I did not want to have a replay of the situation that I had with AOL (AOL), in which the stock went up and then because of technological inferiority growth fell and customers left.

[Related -DIRECTV (NASDAQ:DTV): Tough Road Ahead As Costs, Competition Escalates]

In buying ICONIX, shareholders of the GARP portfolio now own a company which has grown its revenues from $30 million to almost $400 million over the last 5 years. The company has a non- capital intensive business, even more so than DTV. Management knows how to use debt and to borrow smartly to buy new brands. Just as importantly, I believe that with the stock trading at less than 10 times earnings, the company's shares represent a really good value. If the company can execute its plan to grow in emerging markets, this could really be a nice holding.

And now an update on the existing holdings:

Liberty Interactive (LINTA) is the owner of QVC, Provide Commerce, Bodybuilding.com, Evite.com, Gifts.com, 40% of Lockerz.com, 34% of Home Shopping Network, 26% of Expedia.com, 26% of TripAdvisor.com, 30% of Interval Leisure Group, and 25% of Lending Tree.

There are many strong assets here, and the company generates approximately $1.5 billion dollars per year of EBITDA, and its debt is at low rates with some of it maturing in 2029 and 2030. The business is not capital intensive and generates a great deal of free cash flow. Management has indicated over the next 3 years it will have about $5 billion of cash to buy back shares, to acquire other companies or to invest in existing businesses. (For details, see this Liberty Interactive presentation from last November.)

Liberty Interactive expanded into Italy just last year and is starting to gain traction. Revenue will likely exceed $50 million in only the second year of operations, which is consistent with the development of current large markets like Japan, the UK, and Germany. Growth internationally has been a development focus over the last few years. During the company's latest earnings call, QVC President Mike George said he expected an announcement on that front in the next few months. Target markets include China, France, Brazil, Spain, Canada, and Mexico.

In fact, Liberty Interactive announced a joint partnership between national broadcaster China National Radio and QVC to expand into China. In addition, Liberty Interactive owns four e-commerce businesses which have over one billion dollars of revenue combined and almost $150 million of EBITDA per year.

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