Liberty Interactive Group (LINTA) is an underfollowed and undervalued company with solid fundamentals and share buybacks to help investors profit with minimal risk. Because the company went through recapitalization in August of 2012, investors are undervaluing QVC's growth prospects and discounting its stake in HSN completely.What is Liberty Interactive Group?In August 2012, Liberty Interactive Corp. went through a recapitalization and created two tracking stocks, Liberty Interactive Group and Liberty Venture Group (LVNTA).Why you might ask? Why did the company have to do this recapitalization? We think the intention behind this recapitalization is so that investors can value LINTA on a standalone basis and also allow the company to repurchase shares. LVNTA owns stakes inAOL, Expedia (EXPE), Interval Leisure Group, Time Warner (TWX), Time Warner Cable (TWC), Tree.com (Lending Tree), TripAdvisor (TRIP) and various green energy investments. So it's fairly easy to evaluate LVNTA, because all that an investor has to do is look up the market price and multiply the number of shares they own.Since the recapitalization, LINTA has performed well, but it's still extremely undervalued.(click to enlarge)What is Liberty Interactive Group?"The Liberty Interactive Group is primarily focused on digital commerce operating businesses. Currently, the Liberty Interactive Group consists of Liberty Interactive Corporation's subsidiariesBackcountry.com,Bodybuilding.com,Celebrate Interactive(including Evite, gifts.com and Liberty Advertising), CommerceHub, MotoSport,Provide Commerce,QVC,Right Start, and Liberty Interactive Corporation's interests inHSNand Lockerz."QVC makes up 85% of LINTA's revenue and 96.4% of OIBDA (operating income before depreciation and amortization). The company categorizes the rest of the subsidiaries into a group called eCommerce.QVC Business BackgroundThe company has a dedicated 24/7 channel that sells all kinds of products ranging from home (including electronics), accessories (including beauty products), apparel and jewelry, which, in 2012, accounted for approximately 43%, 28%, 16% and 13%, respectively, of its consolidated gross revenue. According to Internet Retailer, QVC was the second largest mobile commerce multi-category retailer in 2012, behind only Amazon.The business model is simple and it requires very little capital expenditure. Another statistic that makes QVC different than other retailers is the impressive repeat customer rate. In its 10k, it indicated that 91% of its worldwide net revenue came from repeat customers and reactivated customers (i.e., customers who made a purchase from QVC during the prior twelve months and customers who previously made a purchase from QVC but not during the prior twelve months, respectively). With a sticky customer base, it makes QVC's business model strategically different than that of another retailer.eCommerce Business Background:This segment of the business only contributes to 15% of the revenue and 3.6% of the adjusted OIBDA.Here's a quick chart describing what each of the segments do.(click to enlarge)(click to enlarge)While this segment of the business only represents roughly 15% of the revenue, it's actually growing at an impressive rate of 15%-18% year over year.Why does this undervaluation exist?Now you might be wondering if LINTA has such a sticky customer base, why would it be undervalued? A simple explanation is that Wall Street needs to see at least one year of LINTA's standalone earnings power. Because the recapitalization happened in August of 2012, earnings from the venture group were mixed right in there with that of LINTA's. This mix of operations result could have resulted in a discount for LINTA's actual earnings power due to the negative investments from some of their holdings. Now that the two groups are tracked separately, the market has the opportunity to reassess what LINTA should be fairly valued at.QVC's Hidden Edge:Sticky Customer Base:On a standalone basis, LINTA's primary asset, QVC, is extremely undervalued. The company's sticky customer base is the real bread and butter, and it deserves at least a market multiple. As of 2012, 86% of its worldwide net revenue came from repeat customers (i.e. customers who spent an average of $1,320 in the last 12 months). If we do a demographic breakdown, 64% of its 7.3 million domestic (U.S.) customers were women between the age of 35 and 64. This statistic is amazing because of some of the attributes this group possesses.According to Mindshare/Ogilvy & Mather:1. 22% shop online at least once a day2. 92% pass along information about deals or finds to others3. 171: average number of contacts in their e-mail or mobile lists4. 76% want to be part of a special or select panel5. 58% would toss a TV if they had to get rid of one digital device (only 11% would ditch their laptops)6. 51% are momsFemales also tend to be brand sticky as once they are appealed to a particular brand, they are more likely to become repeat buyers than a male consumer.Growth Prospects:In July 2012, QVC entered into a joint venture with China National Radio. Mike George, the President and CEO of QVC, recently explained at the Goldman Sachs Fourth Annual dotCommerce Day that growth in China is expected to be around 50%-60% over the next few years as the QVC business model gets implemented into CNR's. While the JV is still losing money, we see this quickly reversing due to the rapid consumer acquisition pace.At the end of 2012, CNR Mall reached out to 48 million households, an increase of about 16 million from the prior year. There is one element of weakness in such a rapid acquisition pace, the repeat purchases are low. Unlike the consumer base in the U.S., which is comprised of mostly repeat customers, China is experiencing little to nonexistent repeat purchases. However, we do think that with time, the QVC business model will be strategically implemented, and the repeat consumers will occur.At the end of 2010, QVC also entered into Italy which is growing at nearly 100% per year. The adjusted OIBDA is still negative, and the breakeven point has been delayed till Q2 of 2013. But Mike George expects this market to be a key growth opportunity for QVC. At the Goldman Sachs event, he told the participants that Italy experiences the lowest return rate he's ever seen. This is primarily due to the no refund policy in Italy, and while the return rate has ticked up over the last year, it still remains extremely low compared to other areas.eCommerce and Mobile as Key Drivers in the U.S.:In its Q1 2013 report, QVC's eCommerce (not to be confused with the eCommerce "segment") represented roughly 42% of the total U.S. revenue (U.S. revenue makes up 66% of total QVC revenue). Mike Georgeexpectsthis to be 50% by 2014. Part of the growth comes from mobile purchases, which represented about 27% of the total U.S. revenue up from 16% a year ago.One thing that is pushing this growth is this new feature called synchronization where a consumer can buy a product on their smartphone that is simultaneously being broadcasted on T.V. At the end of last year, the company also introduced a separate app called "In the Kitchen with David." This app allowed users to engage with other viewers, query the host, and participate in a community. The strategy worked and sales tied to the kitchen program grew by about 20% to about $200 million.We think the integration of mobile devices into QVC's business model will greatly enhance the customer experience. Not only will it be easier than ever to buy an item, but it will also help the company track the segmentation of their broadcasting strategy. By taking the data from the mobile purchases, QVC will be able to analyze at what times of the day it should broadcast certain items. Because mobile purchases are real time purchases, this will greatly enhance the company's edge in reaching out to consumers.Not to mention, with the expansion of the eCommerce and Mobile business, margins will and should expand from the current 22.44% to around 25% due to higher inventory turnover rates and lower advertising spending.HSN (HSNI) Stake:Surprisingly, LINTA also owns a 36% stake in the second largest competitor in the market, HSN.QVC leads the market in home-shopping retailers with a staggering 63% market share. HSN, a distant second, holds a 26% market share, while the third competitor ShopNBC has a miniscule 7%. Combined, HSN and QVC command nearly 89% of the market share. That is a staggering amount, and given the high ownership stake, we can conclude that this is favorable for LINTA shareholders.LINTA's current stake in HSN has a market value of $1.05 billion which is nearly 8.5% of the market value of LINTA. The company accounts for HSN's stake as an equity investment, and HSN's long-term earnings growth is expected to be in the high teens.HSN's board also approved a 10 million share repurchase plan in 2011, and as of the end of Q1 2013, the company still has about 3.4 million shares left in the repurchase program. If HSN repurchased the remaining 3.4 million shares, the equity interest will increase to 38.5%, which would result in an increase in equity investment income of about 3.3 million (using 2012 full year net income figures.)The ownership stake in HSN is extremely favorable for LINTA shareholders, as both QVC and HSN command a controlling presence in the home shopping retailing segment; they will possess a durable moat.Valuations:We will be using the OIBDA multiple method and P/E multiple method to value LINTA.OIBDA Multiple Method:In the process of analyzing LINTA, there were multiple assumptions made in regards to QVC and eCommerce's future adjusted OIBDA.Here is the pro-forma OBIDA analysis for calendar 2013:(click to enlarge)We expected QVC US OIBDA margins to remain at 22.44% due to a higher ASP of $60.51. Q2 2013 will see an increase in OIBDA due to favorable seasonal sales, but Q3 2013 will see a drop in OIBDA due to higher overall advertising expenditures and seasonality issues. We expect Q4 2013 to experience an 8% increase from the prior year induced from growth in the mobile and eCommerce side. ASP will be seasonally higher than prior year's, and we expect this to be a record quarter for QVC.For QVC Japan, we expect growth in the division, but due to the currency devaluation, we expect overall OIBDA to drop by about 15% compared to the prior year.For QVC UK and Germany, we expect a decline in OIBDA of roughly 6.6% and 5%, respectively. The decrease in U.K. was partially offset by the growth in the underlying business. The USD strengthened against the U.K. Pound Sterling, but then was also offset by the weakness against the Euro. Overall, we forecasted a decline in OIBDA.For QVC Italy, we expect breakeven to occur in Q3 and Q4 due to the favorable customer acquisition plan in place and higher economies of scale. The OIBDA is expected to continue to increase by a CAGR of around 80% for the next few years as the company continues to expand into this region. We think that QVC Italy will become equivalent to that of QVC Germany and U.K.For the eCommerce division (not to be confused with QVC's eCommerce), we expected adjusted OIBDA to grow at a CAGR of 15% for the next few years. The division's OIBDA, however, is sensitive to holiday timing in various quarters, and seasonally, Q3 is the weakest. Q1 2013 experienced a jump due to the fact that the Eastern holiday was included. We expect Q2 to experience an increase and Q4 being the big homerun quarter for the division.It is to note that we did not include the JV in China or HSN's income into this calculation. While the growth prospects are bright in China, the effects on the consolidated adjusted OIBDA are minimal, and represent no material impact in our 2013 OIBDA valuation. We did not include HSN's income and decided to simply add the market value of the holding to our final valuation.Looking at the closest competitor HSN, we can assess a market multiple to LINTA.

At LINTA's current share price of $23, the market is massively undervaluing the leading market share of QVC and assessing a multiple much higher to HSN which is a distant second. We believe the 11.32 multiple is justified due to the leading market share, sticky customer base, international expansion, and mobile and eCommerce acceleration.However, to be conservative, we also calculated the share price given different multiples.

Price is always the key determinant to investment returns, and we believe that if investors can buy LINTA as a whole at a multiple of a little less than 8, we think the potential upside outweigh the downside significantly.P/E Multiple:While the EV/OIBDA multiple method is subject to various market conditions, we also forecasted LINTA's earnings till fiscal 2017.(click to enlarge)Using the same underlying assumptions as that of the FY2013 forecasts, we projected the ensuing years' total adjusted OIBDA to have a CAGR in the mid single digits due to favorable international expansions, higher margin from the eCommerce segment of QVC, and continued growth in the eCommerce division due to favorable consumer spending.For the income from equity investments section, we forecasted that the China JV will break-even by 2014, and see a CAGR of 40% towards 2017. The 36% stake in HSN represents most of the income which we forecasted to grow at 15% in 2014, 12% in 2015, 5% in 2016, and 3% in 2017. The declining growth is mainly attributed to the lack of international expansion, but the company is experiencing good growth in the current markets.If we assigned a market multiple of 16 to LINTA's forecasted 2014 earnings, then we would arrive at a price target of 28.32 per share. We expect LINTA to grow its EPS in the mid teens till 2017.One element which I will discuss later is notice how the shares outstanding are decreasing by 7% per year. The favorable share buyback program will be a catalyst to realizing shareholder wealth, and we will go over that in the catalyst section.Final Valuation:In determining our price target, we weighed the two methods against one another and attributed the EV/OIBDA multiple method a 60% weighting and the P/E method a 40% weighting.

Catalyst:Now let's talk about the fun part. What's going to make the market value LINTA at its fair value?Share Buybacks:We think the easiest way for shareholders to gain wealth is if the company's management is able to buy back shares at appropriate times. And I think that's just what the management team at LINTA is doing. As a matter of fact, Greg Maffei, the Chairman and CEO of Liberty Interactive Corp., saidthisin the 2012 annual shareholder letter."We still believe that the market undervalues the strength of the QVC business model. QVC's consolidated adjusted OIBDA margins continue to exceed 20% and this has been the case since 2003. Regardless of the peer group - be it retail or eCommerce companies - the efficiency and strength of QVC's operating model is clear, and a significant portion of its adjusted OIBDA converts into free cash flow. So what do we do with this cash? As you can imagine, we get this question a lot. We believe that the primary focus will be on share repurchases at the Liberty Interactive Group. However, it is important to be disciplined about our repurchases. Given the volatility in LINTA's share price we like to be opportunistic and are thinking about capital return for the long term, not the next quarter."Greg also regrets that he wasn't able to buy back nearly as much shares as he wanted in 2012."Reflecting on the LINTA stock price and value in 2012, we would have liked to utilize more capital in LINTA share repurchases. Additionally, due to the recapitalization into tracking stocks we were out of the market for a significant period of time.We especially like the part where Greg states that he wants to be disciplined with the repurchases. Far too many times in corporate America have we seen shareholder value get destroyed because the management buys shares when they are overvalued. This kind of disciplined approach ensures that shareholder value is being consistently reevaluated at LINTA, and not only do we see this as a catalyst, but we also see this as a sustainable long-term wealth creation factor.eCommerce's Issues in 2012:Another catalyst that we think will propel LINTA back to fair valuation is that the eCommerce division will return back to normal profitability in 2013. Greg stated in the shareholder letter:"2012 presented unique challenges for each of our eCommerce companies. Provide Commerce hired a new CEO and as part of the transition we incurred some recruiting and retention costs. Bodybuilding.com had a legal settlement that was expensed in 2012. Backcountry.com has been hindered by multiple warm winter seasons, resulting in the industry holding too much inventory which ultimately negatively affected gross margins. And finally at Celebrate Interactive, we've seen a more aggressive environment with pop-up retail stores taking advantage of the relative glut of available retail space as well as stronger online competitors. All the management teams are focused and driving hard to improve their businesses. We hope we are on the right path for 2013, but there is work to be done."With problems being resolved on the eCommerce side, we believe that the segment will recover to its 2011 adjusted OIBDA and continue its CAGR of 15% per year in the next few years. Looking at past years from the eCommerce division, 2012 was an extremely bad year.

Although eCommerce's impact on LINTA's overall profitability is minimal, we believe that a favorable eCommerce segment will sweep away investor uncertainties and shine light on LINTA's prime asset, QVC.Risks:Sensitive to Economic Cycles:One of the obvious risks for investing in LINTA is its dependency on consumers. While LINTA's primary money generator QVC only had one negative revenue growth year (in 2008), the company's stock is still subject to the violence of market volatility. However, while the business model is cyclical in nature, may I remind the readers that nearly 91% of its worldwide net revenue came from repeat customers and reactivated customers. Not to mention that 86% were repeat customers making this company's consumer base extremely sticky.If the company's stock price does get affected by market turbulence, then investors should feel safe that the company's management team is always on the lookout to buy back shares at attractive valuations. The business model requires relatively low capex, and it can use its surplus cash to buy back a ton of shares.Valuation Dependent on Market Conditions:The multiples used in this analysis are subject to the market's discretion. While we strongly believe that LINTA is undervalued, the market could continue to undermine our analysis and keep LINTA's shares depressed.However, we believe that the share buybacks will be a good catalyst for patient investors, because if the company can leverage the opportunity to repurchase shares at depressed valuations, then patient investors will reap more rewards in the long term.Conclusion:Overall, we think that LINTA is a buy. With the strong QVC operating results and the normalized eCommerce OIBDA, we believe that investors will quickly realize how much earnings power LINTA is capable of. To top all that off, the disciplined share buyback program instilled by the management team gives investors the peace of mind that the management will always act in the interest of shareholders. With all that being said, we believe that LINTA possesses all the right ingredients for both a safe and profitable investment.