Charter Communications: Down 66% From Its All-Time High, Still Staying Away (NASDAQ:CHTR)

Introduction

On October 17, I wrote an article titled “Pros Vs. Cons – Why I’m passing On Charter Communications.”

Here’s a part of the takeaway I used back then:

[…] challenges lie in the face of higher interest expenses and debt maturities post-2023, affecting its valuation and risk profile.

While analysts foresee modest growth, the risk of prolonged elevated interest rates warrants caution.

In this article, I’ll revisit Charter Communications (NASDAQ:CHTR), as it has fallen roughly 40% since my October article, lagging the S&P 500 by 56 points!

The recent performance of CHTR shares has been so bad that its total return has dropped to 118% since 2014. The S&P 500 has returned 225% during this period, benefitting from its elevated exposure to high-growth stocks like the Magnificent 7.

So, without further ado, let’s dive into the details and assess just how attractive (or unattractive) CHTR is, trading at roughly 12x earnings!

Where’s The Value?

In light of the massive stock price implosion since 2021, I just came across a very interesting headline, that perfectly reflects how some investors may feel right now.

As reported by Yahoo Finance:

But factoring in stocks and incentives, the Charter Communications CEO made more than $89 million in compensation last year, according to documents filed by his cable company Monday with the Securities & Exchange Commission.

However, according to the article, the majority of Mr. Winfrey’s pay is based on a five-year performance-based equity program that was awarded last year.

The performance of Charter’s stock still has to hit new lofty levels in order for Chris Winfrey to enjoy this money.

I’m bringing this up because it may be the perfect segue to discuss where Charter’s potential to generate may be in the years ahead.

Looking at the company’s results, we’re dealing with a mixed bag.

In 2023, the company reported a 1% increase in revenue, which isn’t spectacular in any way.

However, EBITDA saw a more significant uptick, as it rose by 1.3%. It increased by 2.5% when excluding advertising expenses.

Moreover, the company experienced success in expanding its customer base, mainly in Internet services, where it added 155,000 new customers.

Additionally, the company saw robust growth in Spectrum Mobile lines, where it added almost 2.5 million new lines. This translates to a substantial increase of almost 50%.

By the end of the 2023 fiscal year, the company noted that its total number of mobile lines exceeded 7.7 million.

Specifically, in the fourth quarter, the company saw declines in both Internet and video customers, with losses of 61,000 and 257,000 respectively.

However, the company saw growth in mobile lines, adding 546,000, while wireline voice customers declined by 251,000.

The good news is that its Spectrum One product continued to perform well, with no significant churn from promotional roll-offs.

The rural expansion also accelerated, with 295,000 subsidized rural passings added in 2023 and 105,000 in the fourth quarter alone.

Customer growth in the rural footprint also increased, with 34,000 net customer additions.

In my last article, I highlighted the importance of rural customers, based on the company’s experience dealing with these customers and funding from the government.

The Rural Digital Opportunity Fund is the Commission’s next step in bridging the digital divide. On August 1, 2019, the Commission adopted a Notice of Proposed Rulemaking (NPRM) proposing to establish the $20.4 billion Rural Digital Opportunity Fund to bring high speed fixed broadband service to rural homes and small businesses that lack it.

With these developments in mind, the company used its 4Q23 earnings call to acknowledge that it is dealing with challenges in Internet growth.

Internet growth in our existing footprint has been challenging, driven by admittedly more persistent competition from fixed wireless and similar levels of wireline overbuild activity. – CHTR 4Q23 Earnings Call

Based on the quote above, these challenges primarily come from tougher competition, mainly from fixed wireless providers and similar levels of wireline overbuild activity.

As one can imagine, this kind of competition posed significant hurdles to achieving consistent growth, leading to growth volatility, as the company’s numbers just proved.

However, the company is upbeat, as it believes in the ability of the quality and pricing of its products to compete in this environment.

Nonetheless, the company is working on strategies to boost growth.

Growth initiatives include a major footprint expansion to reach new markets and penetrate existing markets even deeper.

Additionally, investments in infrastructure and technology are prioritized to enhance service quality and customer satisfaction – on top of supporting the footprint expansion, as the company mentioned during its earnings call.

Our footprint expansion is beating our pacing, penetration, ARPU and ROI targets. New construction will help drive Internet customer growth despite the temporary challenges I mentioned within our existing footprint. – CHTR 4Q23 Earnings Call

The company is also investing in ways to improve customer satisfaction. While comments always differ, some readers have told me in the past that they are somewhat dissatisfied with Charter’s services.

With investments made in employee retention and digitization efforts to streamline processes and improve operational efficiency, the company hopes to solve these issues and support margins.

Adding to that, the company benefits from a few product/service leaders.

For example, Spectrum One, which is its flagship, continues to perform well, as it benefits from fast connectivity and features like mobile speed boosts and competitive pricing that set it apart.

Interestingly enough, a recent CNET test of Spectrum One confirms the aforementioned points, as it has straightforward pricing, no data caps, no contracts required for internet service, and other benefits.

However, it lacks competitiveness compared to some other fiber providers and does not do well when it comes to customer satisfaction.

If the company focuses on price competition versus fiber providers and customer satisfaction, it could see faster growth in the quarters ahead.

Adding to that, the company is seeing benefits in video, thanks to the launch of its Xumo platform and partnerships with streaming services like Disney+ and ESPN+.

Xumo is a partnership with Comcast (CMCSA), another giant that is trying to find its way in a changing environment.

Speaking of partnerships, during Morgan Stanley’s Technology, Media & Telecom Conference earlier this month, the company noted that exploring strategic partnerships or acquisitions in complementary industries can provide opportunities for growth and diversification.

This could involve partnering with technology companies to develop new solutions or acquiring companies that offer synergies with Charter’s existing business.

I agree with this, as the traditional model the company has used for decades is rapidly changing, forcing companies to stay on top of the latest trend while doing a better job than their peers in this competitive industry.

Where’s The Shareholder Value?

Starting with capital spending, the company expects total capital expenditures for 2024 to range between $12.2 and $12.4 billion, including line extensions and network evolution spending.

In general, network evolution expenditures remain consistent, as the company aims to offer multi-gigabit speeds, while core capital expenditures are expected to decline below 2022 levels post-network evolution.

So, that’s definitely good for long-term free cash flow generation.

As a result, analysts expect the company’s free cash flow to rise from $2.9 billion in 2024E to $5.4 billion in 2026. That would imply a 13.5% free cash flow yield in 2026!

Having that said, there’s a reason why the implied free cash flow yield is so high. Investors do not seem to trust the debt load.

If they did, CHTR would likely trade higher, which would reduce the implied free cash flow yield.

While the company has a weighted average life of its debt of 12.8 years, which is a long time, there is still a lot of debt that will require refinancing in the years ahead.

This year, it will have to refinance $2.4 billion, followed by $5.2 billion in 2025. In 2027, it’s looking at $11 billion in debt maturities.

It also has a BB+ credit rating, which is a “junk” rating.

Hence, I believe the company has spent too much on buybacks instead of lowering debt. It is expected to end this year with roughly $99 billion in gross debt, which is expected to rise to $104 billion by 2026.

Meanwhile, over the past five years, it has bought back 35% of its stock – at much higher prices than its current stock price.

This is not great, as it adds a whole new layer of complexities on top of its journey to remain competitive.

I’m not making the case that CHTR will go bankrupt. However, I do not like this balance sheet at all, especially because I expect a prolonged period of sticky inflation and elevated rates.

As we can see below, CHTR started to tank the moment short-term rates (U.S. 2-year yield) accelerated.

Valuation-wise, we are seeing the same. There is no trust.

Currently, CHTR trades at a blended P/E ratio of just 12.8x, which is way below its longer-term multiple of 25.3x.

The good news is that analysts expect EPS growth to pick up. This year, EPS growth is expected to be 13%, potentially followed by 7% growth in 2025 and 11% growth in 2026.

If the company were to return to a 25x multiple, it could trade above $800, which is way above its current price of less than $280. I’m not even going to calculate what the return in % would be.

However, I’m not making the case that CHTR should rise that far.

It could, but it likely won’t.

Competition is fierce, economic growth is not in a great spot, and most free cash flow will be needed to support the balance sheet in the years ahead, as I do not expect that aggressive buybacks are sustainable.

The upside here is if the Fed achieves a no-landing scenario, cuts rates quickly, and allows CHTR to refinance at low rates. If that comes with success in growing its customer base, the stock could fly and make me look like a fool.

However, as I’m all about buying healthy companies with subdued risks, I just cannot get myself to turn bullish. Not even 66% below the stock’s all-time high.

Please feel free to disagree with me!

Takeaway

Despite optimistic growth initiatives and potential partnerships, challenges like increased competition and an elevated debt load make CHTR look like an unattractive stock.

While analysts expect elevated EPS growth, there are risks that come with an uncertain economic landscape and substantial debt refinancing requirements.

Although the stock trades at a discounted P/E ratio, investors simply do not trust the bull case.

While there’s a chance for a rebound under favorable conditions, I remain cautious, as I will have to prioritize safety and consistency over speculative opportunities in this market.

Pros & Cons

Pros:

• Potential for growth: Despite recent challenges, CHTR has shown resilience in expanding its customer base, particularly in internet and mobile services.
• Investment in infrastructure: The company’s focus on infrastructure and technology investments bodes well for service quality and customer satisfaction.
• Partnerships and diversification: Strategic partnerships with streaming services and potential acquisitions offer opportunities for diversification and growth.

Cons:

• Debt concerns: CHTR’s significant debt load raises red flags, especially considering upcoming refinancing requirements and its “junk” credit rating.
• Intensified competition: Increased competition, notably from fixed wireless providers, poses challenges to consistent growth.
• Uncertain economic outlook: Given my expectations of prolonged economic uncertainties and potential inflationary pressures, maintaining financial stability becomes key. Charter has too much debt for my taste.