The Best Retail Play You've Never Heard of

Wednesday, August 4, 2010 - 12:35pm

by Frederick M. Steier

One might think that just because the economy stinks and consumers have cut back on spending that any stock described as being "retail" would be in trouble. For the most part, that would be right.

However, there is a relatively unknown retail play doing just fine in this environment. And when the economy picks up, I see it gaining +100% or more.

This stock is not advertised as even being a retail play. It's often confused as an Internet play, partly because of its name, and partly because it is actually a piece of a larger conglomerate.

The parent company, Liberty Media Corporation, has gone through so many incarnations that Wall Street has had difficulty figuring out just what it's worth. The parent company itself has wonderful assets and tons of free cash flow. However, its most attractive assets are consolidated into a "tracking stock" -- the hidden retail play I'm talking about.

It's called Liberty Media Interactive (Nasdaq: LINTA).

First, what's a tracking stock? It's just a way that a large conglomerate chooses to break up its assets so an investor can track how specific portions of its businesses perform.

This tracking stock is chock-full of online retail businesses that the parent company scooped up because they were tops in their fields. The parent company owns 100% of all these businesses that are consolidated into the tracking stock: QVC (the TV shopping network), Backcountry.com (an outdoor equipment retail site), Bodybuilding.com (everything having to do with fitness), BuySeasons.com (costumes), and ProFlowers.com, which is part of ProvideCommerce.com.

That's not all. Liberty Interactive shares also represent a 29% ownership in Interval Leisure Group (Nasdaq: IILG), 33% of Home Shopping Network, 24% of travel website Expedia (Nasdaq: EXPE) and 29% of Ticketmaster.

All of these assets are bundled into one tracking stock.

Liberty Interactive is dominated by QVC -- responsible for $7.3 billion in revenue and $1 billion in operating income. Despite the bad economy and a year in which revenue was up only +1%, QVC provides $1.5 billion in cash flow annually.

The other interactive businesses generated $931 million in revenue and $49 million in net income. Although these businesses have hit the skids thanks to the recession, they were purchased because of their rapid revenue growth, and I expect them to pick up again.

Liberty Interactive represents trusted brands in the field of niche retail plays. You may not be big on the outdoors, but I guarantee that outdoor enthusiasts know Backcountry.com, and that's why Liberty purchased it. Such is the case with the other businesses, many of which investors may be familiar with.

There is one big question to tackle, however. How does one value this conglomerate? The best method I've found is to compare its business on the basis of price and cash flow to other conglomerates. In this economy, a company must have strong cash flow to stay afloat. Let's see how Liberty Interactive stacks up against other conglomerates like Berkshire Hathaway (NYSE: BRK-A), Leucadia National (NYSE: LUK) and Tyco International (NYSE: TYC).
[Note: I'm backing out each company's equity interests in other companies. I'm only interested in cash from actual operations of the companies that these conglomerates hold a majority stake in that are accounted for under Generally Accepted Accounting Principles (GAAP).]

It is pretty astonishing to see how much cheaper Liberty Interactive is compared to these other companies -- almost half as cheap as the nearest competitor.

Action To Take --> Where else can you find a diversified retail play that provides enormous cash flow, net income, and billions in revenue? Buy Liberty Interactive for a well-diversified retail play. It's at a fantastic price right now, down -33% from its recent high.

I believe the market, which has never understood how to properly value this stock, is completely overlooking its assets. The stock is at least a two-bagger from here, and could go higher when cash flow returns to pre-recession levels.

Frederick M. Steier does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.