Value Investor Daily #42

Charter Communications (NASDAQ: CHTR), a key player in the U.S. broadband and cable market, is navigating turbulent waters.

The company, which operates under the Spectrum brand and services over 31 million customers in 41 states, has seen its stock tumble by more than 68% peak-to-trough. It’s touching price levels seen as far back as 2017.

The decline is primarily attributed to stagnating growth and a daunting debt load. 

Warren Buffett’s Berkshire Hathaway owns 2.68% of the company.

With the stock currently trading at a forward P/E ratio of 9.5x, has the selloff reached its bottom, and is it now undervalued?

Merger Proposal

Charter is mulling a merger with John Malone’s Liberty Broadband (LBRDK). Liberty owns 31% of Charter through a series of previous transactions.

LBRDK stock moved to $72.50 on the news, near a 24% discount to the proposed ~$95 merger value.

From the press release Monday:

The merger could happen, or it could not. It could be three years away, or the deal could close sooner.

Meanwhile, let’s turn our attention to Charter’s business performance. Over the next 12 months, it will drive the stock price much more than the merger news.

Most Recent Quarter Review

In the second quarter of the year, Charter reported EPS of $8.49, beating the Wall Street estimate of $7.99. Revenue also beat estimates, coming in at $13.69 billion versus the anticipated $13.60 billion.

Several hurdles still stand in Charter’s way:

1. Loss of Affordable Connectivity Program (ACP): Charter lost 149,000 internet customers in Q2 2024, with over 100,000 of those losses directly attributed to the end of the ACP. This program had provided a $30 monthly subsidy, which was reduced to $14 in May and ended entirely in June.

2. Increased Competition: Charter faced intensified competition from wireline overbuilds and cellular internet services from T-Mobile, which expanded their footprint in key markets. Despite this, Charter managed to maintain competitive positioning but noted that the expanding competition remains a long-term challenge.

3. Video Subscriber Losses: Charter saw a decline of 408,000 video customers in Q2 2024, driven by programmer rate increases, which were passed through to customers. Additionally, affordability concerns among customers, particularly those affected by the ACP’s expiration, also led to video downgrades and losses.

4. Revenue Pressure: Residential revenue per customer grew by just 0.4% year-over-year, primarily due to rate adjustments and promotional step-ups, offset by a higher mix of lower-priced video packages and retention offers to former ACP customers. The company reported a $30 million revenue headwind in Q2 from one-time ACP-related impacts.

The competitive landscape is intensifying, with new fiber deployments and fixed wireless access (FWA) offerings from rivals threatening Charter's traditional broadband market. Charter's management has acknowledged these immediate market challenges and the likelihood of losing some customers as ACP subsidies end.

Charter has introduced new Internet pricing (as low as $30/month) and speed packages to combat the churn. They also revamped deals to include popular streaming services in their packages, including Disney+, Hulu, Discovery+, Max, and more.

The Debt Dilemma

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