While Competition is Increasing, we Believe Charter Remains Well-Positioned

Business Strategy & Outlook

The Charter’s aggressive effort to drive customer penetration by limiting price increases, improving customer service, and expanding its offerings to appeal to a variety of preferences. The firm will successfully navigate growing competition from the phone companies, though growth will likely slow in the coming years. Charter’s aggression extends to its capital structure, where heavy share repurchases have bolstered shareholder returns but have also kept debt leverage high, which will likely add volatility to the share price and could limit financial flexibility.

Charter’s cable networks have provided a significant competitive advantage versus its primary competitors–phone companies like AT&T–as high-quality internet access has become a staple utility. The firm now claims about 70% of the internet access market across the territories it serves, up about 9 percentage points over the past five years and still marching higher. Charter has been able to upgrade its network to meet consumer demand for faster speeds at modest incremental cost while the phone companies have largely ignored their networks across big chunks of the country. Phone companies, notably AT&T, are starting to increase fiber network investment, which will hit Charter at the margin–the firm has faced less fiber competition than its major cable peers. However, the Charter will remain a strong competitor even when faced with improved rival networks.

Wireless technology has emerged as a potential new competitor to fixed-line internet access. The skeptical of wireless’ ability to meet network capacity on a wide scale for the foreseeable future. Also, the dense fixed-line networks like Charter’s will play an increasingly important role in powering wireless networks in the future. Charter also faces declining demand for traditional television services, but here again one cannot believe investors should be concerned. The amount of profit the firm earns from television service has been declining for several years. Internet access, now the bedrock of Charter’s customer relationships, delivers the vast majority of cash flow today.

Financial Strengths

Charter operates under a fairly heavy debt load, with net leverage standing at 4.6 times EBITDA, by our calculation, a level that has held steady in recent quarters. Charter’s management team has run with a net leverage target of 4.0-4.5 times EBITDA over the past several years, typical of firms under the influence of Liberty and John Malone. By the firm’s calculation, net leverage was 4.4 times EBITDA at the end of 2021. This debt level is higher than its peer Comcast, which has typically targeted net leverage of around 2.0-2.5 times EBITDA. On the other hand, Charter’s leverage is more modest than Altice USA’s at roughly 5.5 times EBITDA.

Charter typically directs free cash flow and the proceeds from incremental borrowing to fund share repurchases as a means of keeping leverage within its target range as EBITDA grows. The firm believes that it could reduce leverage quickly if its borrowing costs or business outlook change materially in the future. The firm generated free cash flow of about $8.7 billion in 2021 and spent $17.7 billion repurchasing shares and partnership units held by Advance/Newhouse. As a result, net debt increased to $91 billion from $82 billion at the start of the year. Importantly, free cash flow will face headwinds in the coming years as Charter begins paying federal taxes, which are expected to be meaningful starting in 2022. Charter has actively managed its debt load in recent years, trimming interest rates and pushing out maturities. About $7.5 billion of debt comes due through 2024 and its weighted average maturity stands at about 14 years at an average cost of 4.5%.

Bulls Say

Like its cable peers, Charter’s networks provide a platform to easily meet customers’ growing bandwidth demands, which should drive market share gains and strong recurring cash flow.

As the second-largest U.S. cable company, Charter has the scale to efficiently adapt to changes hitting the telecom industry. The firm will be a force in the wireless industry eventually.

Holding prices down to drive market share gains will pay huge dividends down the road, pushing costs lower and cementing Charter’s competitive position.

Company Description

Charter is the product of the 2016 merger of three cable companies, each with a decades-long history in the business: Legacy Charter, Time Warner Cable, and Bright House Networks. The firm now holds networks capable of providing television, internet access, and phone services to roughly 54 million U.S. homes and businesses, around 40% of the country. Across this footprint, Charter serves 29 million residential and 2 million commercial customer accounts under the Spectrum brand, making it the second-largest U.S. cable company behind Comcast. The firm also owns, in whole or in part, sports and news networks, including Spectrum SportsNet (long-term local rights to Los Angeles Lakers games), SportsNet LA (Los Angeles Dodgers), SportsNet New York (New York Mets), and Spectrum News NY1.

(Source: Morningstar)

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