Liberty Interactive (QVCA) Raised To Buy On Solid Prospects

On Jan 10, Liberty Interactive Corp. QVCA was upgraded by a notch to a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

We believe the rollout and success in online sales, international operations and foray into new markets, and the buyout of zulily were behind the company’s rank upgradtion.

Upsides

We are impressed with Liberty Interactive’s decision to reward its shareholders in the form of interest payments. On Jan 2, 2017, Liberty Interactive LLC, a subsidiary of Liberty Interactive Corporation announced the payment of a quarterly interest in the form of its 0.75% Senior Exchangeable Debentures due 2043. The payment will be given to holders of record at the closure of business on Dec 15, 2016. The amount of the quarterly interest payment is $1.875 per $1,000 original principal amount of Debentures.

Liberty Interactive’s QVC division is benefiting from the surge in online sales. The major thrust is expected to come from the growing adoption of high-end smartphones in the U.S. QVC had also launched synchronized content for its mobile applications. This feature allows smartphone users to get real time information about a product which is broadcasted on a TV show. This is expected to promote online sales even further. QVC is also the second-largest e-commerce retailer in the U.S. after Amazon.com Inc. AMZN.

QVC is gradually expanding its presence in developed international markets such as Japan, Germany, Italy, and the U.K. which should lead to a high rate of growth. Liberty Interactive is also highly optimistic about its operations in China. Moreover, international markets provide over 25% of QVC’s yearly revenues.

The acquisition of Seattle-based e-commerce company – zulily Inc. – for $2.4 billion or $18.75 per share in Oct 2015 also bodes well for long-term growth. We believe this deal opened the door to a much broader audience and should result in significant new customer additions.

Some Downsides to Note

Inspite of such positives, shares of Liberty Interactive gave a below-par performance with disappointing results. The stock witnessed a loss of 23.69% in the past one year, which is worse than the Zacks categorized U.S. Retail - Mail Order & Direct industry’s decline of 17.65%.

Further, persistent global economic crisis, rapid technological changes, foreign exchange risks and intensifying competition remain as headwinds. A strong dollar against other international currencies may have a negative impact on the margins of the company.

Earnings Estimates Revision

Let’s take a look at Liberty Interactive’s earnings estimate revision trend, which is generally a precursor to an earnings release.

The earnings estimates of Liberty Interactiveoutperformed the Zacks Consensus Estimate in three of the previous four quarters, with an average beat of 28.14%.

The Zacks Consensus Estimate declined by 2 cents from 61 to 59 for the fourth quarter, but again rose by 2 cents from 1.69 to 1.71 for 2016, over the past three months. 

However, Liberty Interactive has an Earnings ESP of 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 59 cents.

As we know, a positive Earnings ESP is powerful in both positive surprises and market outperformance. So even though Liberty Interactive’s Zacks Rank #2 which increases the predictive power of ESP, the company’s 0.00% ESP makes surprise prediction difficult.

Clearly, recent earnings estimate revisions have put us in a dilemma as to what to expect from Liberty Interactive in the upcoming fourth-quarter 2016 earnings report, expected to be released on Feb 24.

Other Key Picks

Other well-placed stocks to consider ahead of earnings in the telecommunication sector include Microsoft Corporation MSFT and BlackBerry Limited BBRY, both with a Zacks Rank #2 (Buy).

Microsoft has an Earnings ESP of +1.28%. Moreover, the company’s earnings outperformed the Zacks Consensus Estimate in three of the previous four quarters, with an average beat of 10.55%. The company is expected to report second-quarter fiscal 2017 earnings results on Jan 26.

BlackBerry has an Earnings ESP of +50.00%. Moreover, the company’s earnings outperformed the Zacks Consensus Estimate in all the previous four quarters, with an average beat of 62.50%. The company is expected to report fourth-quarter fiscal 2017 earnings results on Apr 7.

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