In a combustible telecommunications market, Charter Communications Inc (Nasdaq: CHTR) is holding its ground — and then some.
The Stamford, Connecticut-based communications company serves approximately 27.2 million residential and business customers. While CHTR has experienced growing pains in merging Time Warner Cable and Bright House Networks into the fold, it’s managed to post year-over-year growth across all business segments, with strong growth in the video, internet and voice sectors.
With cable-cutting a legitimate threat to cable providers, can Charter rise above the threat and out-compete big competitors like AT&T ( T), Walt Disney Co. ( DIS) and Comcast Corp. ( CMCSA)? If recent evidence is any indication, CHTR could be plugged in for the short term — but the long-haul view may not be so rosy.
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CHTR stock at a glance. Analyst sentiment pegs the company’s one-year stock estimate at $425 per share. During the fourth quarter of 2017, Charter residential high-speed subscribers rose by 263,000 to 22.545 million; voice subscribers grew 22,000 to 10.43 million and video subscribers increased by 2,000 to 16.5 million.
And while CHTR stock has struggled so far in 2018 — down 0.4 percent since Jan. 1, compared to a 2.2 percent gain for the Standard & Poor’s 500 index, Charter is doing much better than its competitors in the space. AT&T stock fell 4.1 percent so far this year; Verizon Communications ( VX) is down 9.4 percent and Sprint Corp. ( S) has fared the worst of all, down 11.1 percent.
True enough, CHTR began 2018 with a bang, returning 12.3 percent in January. Analysts pegged the stock’s January growth rate to more robust fourth-quarter earnings and momentum gained from the passage of the tax reform bill, which reportedly earned Charter billions in tax savings.
The company’s financial health is in top form, as well. In Q4, 2017, Charter reported revenue growth of 3.2 percent, as total revenues crested $10.6 billion — a number that was squarely in line with analyst expectations. Net income also rose, to $9.6 billion for the quarter (with the vast bulk of that figure coming from deferred tax savings, thanks to the tax reform bill.)
Pros of buying Charter stock. Thanks to mergers, Charter is one of the bigger players in the telecom space. “After its 2016 purchase of Bright House Networks and Time Warner Cable, Charter, as now the second-largest cable pay-TV and broadcast provider, gained significant heft in its bargaining position with content owners for distribution of programming,” says Mary Kelly, assistant professor of economics at Villanova School of Business. “Particularly helpful in those negotiations, despite pay-TV cord-cutting, is the over 2 million net gain in subscribers between the first quarter of 2016 and the third quarter of 2107.”
And perhaps the No. 1 reason why investors may want to plow some cash into CHTR is for its resiliency. Market watchers point to the trend of cord cutting — an estimated 22.2 million U.S. households have cut the cord on cable, satellite or telecom TV service, according to eMarketer.
“Charter did well in limiting cord cutting to just minus 1.7 percent year to year versus the industry average of closer to minus 3 percent, particularly satellite-based cable-bundle services,” says Jim Long, a digital media expert with 25 years of experience in the sector, and founder of LocalBTV, a mobile television app company. “This is particularly noteworthy since they are juggling integrating Time Warner and others and introducing a new platform and streaming options.”
[Read: 5 of the Best Stocks to Buy for March.]
Charter’s business fundamentals are solid, as well. Lou Simpson, one of Warren Buffett’s former investment managers and founder of SQ Advisors, recently purchased 640,000 shares of CHTR, which represents 7 percent of the money management firm’s entire portfolio. Simpson says he looks for “good businesses” with a “high return on capital.” Charter seems to fit the bill there, with a market cap of $98.5 billion and an annual average earnings growth of 10.6 percent over the past five years.
Cons of buying Charter stock. A bearish CHTR investor might look at several reasons why Charter stock deserves a pass, and that’s beside the cord-cutting trend. For starters, the company’s base service is growing more expensive for customers, which only fuels more cord-cutting concerns. “The average price Charter customers pay for telecom service rose 4.92 percent to $255 per year,” Long says. “But even so, residential revenue increased 3.1 percent.”
Charter is being crunched from a margin perspective as programming expenses have risen 10.8 percent, from 58.3 percent of 2106 revenue to 62.7 percent of 2017 revenue, Long says. “Consequently, content owners are benefiting from higher fees from distributors like Charter, but one wonders how raising prices in an era of more consumer television choices and a middle/working class with arguably less disposable income will be sustainable.”
Charter is also working in an increasingly competitive space. Through recent and pending mergers and acquisitions, many of Charter’s competitors are now diversifying their portfolio of assets to be less exposed to the decline in traditional video distribution.
“As owners of content production, broadcasting, TV stations, and/or over-the-top video distribution, Comcast, Disney, AT&T and others are positioned to lean into the challenges and may benefit from the disruption,” Kelly says. “In the year ahead, Charter may need to adopt that model and acquire or partner with content owners that give them that vertical reach and more control over their own destiny.”
Finally, Charter recently received some bad news on the legal front. A New York state judge ruled that the company must face a lawsuit by New York’s attorney general accusing the cable company of slower-than-advertised internet speeds. No matter how that case goes, investors mulling over CHTR aren’t going to like the optics of a telecom provider allegedly short-changing and misleading customers.
[See: 10 Investing Themes to Remember for 2018.]
The bottom line. The cord-cutting issue for Charter isn’t going away, as data indicates younger, millennial consumers will only grow more aggressive about turning to streaming video, and away from traditional cable television.
Even with a solid business structure and some high-powered investors on its side, Charter is facing a sea-tide of change in consumer telecommunications, and how it balances that change will go a long way in determining the company’s long-term financial health.
Still, for the short-term, however, it’s “so far, so good” for CHTR, as the firm’s share price continues to grow.
As Long puts it; “Tax cuts or not, Charter is managing the transition pretty well these days.”
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Pros and Cons for Investing in Charter Communications Inc (CHTR) Stock originally appeared on usnews.com
