Liberty Latin America's Q2 Results: Puerto Rico Carve-Out Not a Significant Factor

Liberty Latin America has posted its Q2 numbers, with notable takeouts. The stock has risen 30% this year and 14% since November 2023. The company's Puerto Rico carve-out is not expected to be a major driver of growth.

Liberty Latin America (NASDAQ: LILA) has reported its Q2 financial results, with notable developments and a significant rise in stock price. The company's stock has increased by 30% this year and 14% since November 2023, against the S&P 500's (SPY) 46% growth. The Q2 earnings report highlighted several key points, including a planned separation of Liberty Puerto Rico from the parent company, which could take various forms, such as a spin-off [1].

The stock's performance has been driven by several factors, including a 3% year-over-year (YoY) decline in revenue to $1.09 billion, a 7% increase in adjusted operating income before depreciation and amortization (OIBDA) to $415 million, and an expansion in operating margins to 38.2% from 34.8% [1]. Despite these improvements, the company's reported operating loss of approximately $333 million in Q2 was largely due to a $494 million impairment on Puerto Rico spectrum licenses, which was a non-cash charge against earnings [1].

Management has indicated that the separation of Liberty Puerto Rico aims to isolate leverage and capital needs, as well as to surface value for the Caribbean and Central America cluster. The company expects this move to result in a less levered core and a capital return policy, potentially through dividends or buybacks [1]. However, the success of this carve-out remains uncertain, and the company's current credit metrics, including a debt-to-EBIT of 10x and a debt-to-equity ratio of 6.8x, suggest significant financial leverage [1].

Looking ahead, the company's future performance will depend on its ability to continue cost-cutting, maintain capital expenditure discipline, and successfully execute the Puerto Rico separation. Analysts have noted that the equity story hinges on these three factors [1]. However, the business faces significant challenges, including a low-margin, low-capital turnover model, supply excesses, and a large capital base with contracting revenues and billions of debt [1].

In conclusion, while Liberty Latin America has shown signs of improvement in its Q2 results, the planned Puerto Rico carve-out is not expected to be a major driver of growth. The company's high leverage and uncertain execution risks suggest that investors should approach this opportunity with caution. The stock's valuation remains below market value, with the business worth approximately $5 to $7.50 per share based on internal cash flows and reinvestment rates [1].

References:
[1] https://seekingalpha.com/article/4818237-liberty-latin-america-puerto-rico-carve-out-not-a-needle-mover