Liberty Latin America Ltd. (LILAK, Financial)(LILA, Financial)(LILAB, Financial) is generating core free cash flow around 25% of its market value and buying back stock at all-time low prices as investors have sent shares plummeting due to the bear market and the strength of the U.S. dollar.
The telecommunications company headquartered in Denver has operations in Chile, Puerto Rico, the Caribbean and other parts of Latin America. The communications and entertainment services it offers to residential and business customers include video, broadband internet, telephony and mobile services. In most of its operating footprint, Liberty offer a "triple-play" of bundled services of digital video, internet and telephony in one subscription. It is also bundling, where available, mobile offerings with the triple-play products to offer a "quad-play" or fixed-mobile convergence service. Available fixed service offerings depend on the bandwidth capacity of a particular fixed system and whether it has been upgraded for two-way communication.
Liberty Latin America's brands include C&W Business, BTC Everyday, FLOW, Tmovil, vtr.com and Liberty Puerto Rico. Insiders own 29.8% of its common stock. LILA was launched as tracking stock by Liberty Global in July 2015 and was eventually split off from Liberty Global PLC(LBTYA, Financial) in 2017. Michael Fries is the chairman and Balan Nair is the CEO. John Malone controls the company through super-voting B shares. In the last couple of years, it has completed numerous acquisitions, including the mobile business of AT&T Inc. (T, Financial) in Puerto Rico.
The following chart shows the geographical sources of revenue for the company.
Source: Mergent
Malone and TCI's spinoff of Liberty Media
Malone is a pioneering American businessman and investor in the media and telecommunications sector.
The early part of his career is highlighted in the 2002 book, "Cable Cowboy," which documents the growth of TCI (Telecommunications Inc.) from its origination in 1958, when it was controlled by founder Bob Magness. Malone joined TCI as a 32-year-old CEO in 1972, during a period where most of the cable businesses had saddled themselves with huge amounts of debt; TCI's debt at the time was equivalent to 17 times revenue.
The growth story of TCI, where the stock multiplied over 900-fold between 1972 and 1998, prior to its sale to AT&T in 1999, is told in William Thorndike's "The Outsiders." It aslo focuses on three of Malone's levers to generate outstanding shareholder returns, usually to his own (as well as his shareholder's) benefit.
The first of these levers is the strategic use of debt in a thoughtful manner against long-term cash flows, at low interest rates and with lengthy and staggered maturity.
Second, the use of tri-partite capital structures with A, B and C class shares having respectively one, 10 and zero votes per share - Malone invariably retains control through ownership of the B shares, as is the case with Liberty Latin America. The company has three separate classes of common shares, which are traded on the Nasdaq Global Select Market under the symbols "LILA" (Class A) and "LILAK" (Class C), and over the counter under the symbol "LILAB" (Class B).
| Description | Ticker | Outstanding as on 12/31/2020 | Votes per share |
| Class A common | LILA | 49,009,585 | 1 |
| Class B common | LILA B | 1,932,386 | 10 |
| Class C common | LILA K | 181,113,766 | 0 |
Finally, the use of spinoffs and tracker stocks to make transparent the valuation of individual components of the company. This is best seen with Liberty Media, where the entirety of the company's assets are attributed to three tracker stocks: Formula One (FWONA, Financial), Atlanta Braves (BATRA, Financial) and Liberty SiriusXM (LSXMA, Financial). As such, you cannot buy stock in just Liberty Media.
Liberty Latin America is one of seven structures encompassing nine securities, including tracker stocks, within the Liberty empire:
- Liberty Media, noted above, which consists of the three tracker stocks.
- Liberty Global PLC (LBTYA, Financial), providing broadband, TV and mobile services in Europe.
- Liberty Latin America (LILA, Financial), a replica of LBTY across countries in South and Central America.
- Qurate Retail (QRTEA, Financial), a home-shopping entity encompassing HSN and QVC, among other assets.
- Liberty TripAdvisor (LTRPA, Financial), which holds a 21% economic stake but 57% voting position in TripAdvisor (TRIP, Financial).
- LMF Acquisition Opportunities (LMAO, Financial), a special purpose acquisition company.
- Liberty Broadband (LBRDK, Financial), which owns 26% of Charter (CHTR, Financial), the second-largest cable company in the U.S.
Balance Sheet
Like most Malone companies, Liberty Latin America is highly leveraged. Its current balance sheet is illustrated in the chart below.
Total debt is $9.4 billion with a weighted average cost of debt of 5.7% and a weighted average life of debt of five-and-a-half years. Debt maturity is spread out and the management team has proven to be seasoned debt jugglers.
Source: Company presentation.
Cash flow
The following chart shows Liberty Latin America's operating cash flows, free cash flow and net income over the last five years. As you can see, net income is mostly at a loss, operating cash flow is strong, consistent and mostly on an upward trajectory. Free cash flow is erratic but now mostly positive. The company has been booking large non-cash charges due to amortization and depreciation, as well as asset write-offs. The key numbers to focus on at present are the operating cash flow, free cash flow and ore FCF. Core FCF (orange line) is free cash flow minus changes to working capital and stock-based compensation. Core FCF is around $300 million. With a market cap of $1.6 billion, this works out to be around an 18% core free cash flow yield.
Valuation
Given Liberty Latin America's strategy of focusing on operating and free cash flow, it makes sense to try to value the stock through this lens.
GuruFocus has devised a proprietary metric called projected FCF value to deal with situations where free cash flow is erratic. Essentially, the metric takes 80% of the book value and adds it to the present value of free cash flow averaged over six years. The company's current projected FCF value is $10.82. I expect this number to improve in the years ahead, though the region's recovery from Covid-19 has delayed it a bit.
Most of the value buildout is still to come as Liberty Latin America continues to expand its fixed mobile converged network in Latin America. Demand for higher bandwidth, data and mobile communication continues to increase. Eventually the area will settle into a oligopoly-like market and all the major players will be producing lots of free cash flow. You can already see that happening in the chart above with core free cash flow ramping up. Shareholder returns are likely to come from stock buybacks and not dividends. The company is buying back shares, as illustrated in the following table.
| Ticker | Company | 3-Month ShareBuyback Ratio | 6-Month ShareBuyback Ratio | 1-Year Share BuybackRatio |
| LILA | Liberty Latin America Ltd | 2.93 | 3.49 | 5.10 |
Stock-based compensation
One thing to note is that Liberty Latin America is generous with stock-based compensation for its executives as it has been ramping up quickly.
As of December 2021, the company had about 10.4 million outstanding shares granted as stock-based compensation with an average strike price of $17.20 and a life of over three years. The share price has to more than double for executives to make a meaningful profit. As such, I do not think potential dilution is much of an impediment for now and will not be an issue until the stock doubles.
Conclusion
Arguably, Liberty Latin America is a neglected stock. It has been hit by a triple-whammy of the Covid-19 pandemic, a strong U.S. dollar and the recent bear market. The high debt is not really a problem currenty as, in the right hands, it creates enormous leverage for equity holders. Interest paid on debt is tax-deductible and the cost of debt is usually a lot less than the cost of equity.
I do not know what Malone's end game for Liberty Latin America is. The company is still consolidating and building out. Like most telecoms, the business is capital expenditure-heavy but generates a lot of cash. Eventually, it will have to transition from 4G to 5G in its territory, which will require a lot of investment. I expect in the next three to five years, the company will settle into cash cow status, generating steady cash flow and continue to buying back stock and paying the occasional special dividend. A sale or merger with a larger entity is also a strong possibility.
