3 Reasons Why Liberty Formula One Was Upgraded By Morgan Stanley

Liberty Media Corporation - Series C Liberty Formula One FWONK shares offer a rare opportunity for investors to reap the benefits of the quest for exclusive sports content across TV and online platforms, according to Morgan Stanley.

The Analyst

Morgan Stanley analyst Benjamin Swinburne upgraded shares of Liberty Formula One from Equal-weight to Overweight and increased the price target for $39 to $47.

The Thesis

Liberty Formula One's revenues, EBITDA and FCF growth are likely to accelerate after a flat-to-down 2017, Swinburne said in a Tuesday note. (See the analyst's track record here.)

F1-adjusted EBITDA is expected to grow about 40 percent from 2017 to 2020 in Morgan Stanley's base case scenario.

Even higher media revenue, including a soon-to-be-launched OTT network, and a faster ramp in sponsorship revenues could lead to 55-percent growth in F1-adjusted EBITDA from 2017-2020 in Swinburne's bull case, he said.

Though the shares of Liberty Formula One are up over 20 percent since 2016, excluding its 34-percent interest in Live Nation Entertainment, Inc. LYV, Swinburne said the F1 stub is up less than 5 percent.

Citing more new TV contacts that it had projected, Morgan Stanley raised its average annual value increase in all but one market from 1.3 to 1.3-1.8 times. On a consolidated basis, the firm hiked its 2018 and 2019 Liberty Formula One Group EBITDA by 3-4 percent.

"We see consolidated margins expanding modestly (150-200 bp) from 2017 to 2020, but the structure of team payments (variable with pre-team EBITDA) limits the upside from incremental revenue," Swinburne said.