Value Investing Charter ($CHTR) DD |
- Charter ($CHTR) DD
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| Posted: 01 Mar 2021 06:19 PM PST Hi guys! Today I'm going to be doing a DD into Charter Communications ($CHTR). They have seen a surprisingly large appreciation for such a large-cap company, so I figured I'd do a bit of digging. Business Charter is an internet service and cable provider operating throughout 43 states. They offer services to both commercial and residential customers through Spectrum on a subscription basis. Spectrum strives at driving synergy across products by selling bundles of mobile, internet, and cable services together. This strategy has paid off as over 56% of customers subscribe to any one of these bundles. The average residential customer spends $111.15 per month and the average commercial customer spends $165.60 per month. Spectrum's operations can be broken up into 3 segments: Internet Services (52%), Video Services (36%), and Other Services (12%). Let's take a closer look. Internet Services (52% of Revenue) This is a fast-growing segment that's seen massive tailwinds due to COVID-19. They saw 11% growth YoY. Most of that growth occurred because of a savvy promotion they did for students. While there is a lot of competition against established giants like VZ and T, I still think they can eke out growth in their commercial and small business internet offerings. Video Services (36% of Revenue) Yikes. It's no secret cable is a dying medium. Fubo, Hulu, Prime Video, and many others take customers from this segment and promise to continue to do so. Spectrum Cable lost 484,000 customers in 2019 and managed to maintain steady revenue from this segment through price increases which will quicken the pace of customer outflow further. If Spectrum doesn't diversify or spin this segment off, it could be nasty. Other (12% of Revenue) This segment includes the newly established mobile internet service product (88% revenue growth YoY), voice services (-6% revenue growth YoY), and advertising sales (8% revenue growth YoY). This segment could see significant growth if Spectrum plays it right. As everyone knows, competition in the mobile service industry is fierce. AT&T, Verizon, and T-Mobile Sprint are all players that promise to force operating margins down and competition up. The same goes for advertising services as well. I think the thing you should take away from this segment is if Spectrum plays their hand right they can have a big success on their hands, and if they don't, this segment's going to be a huge flop. With all the segments covered, let's move on to the fundamentals. Revenues TTM Revenue Growth 12/31/15 -> 12/31/20 Charter has enjoyed positive revenue growth recently. YoY they've grown revenue 4.90%, over the last 3 years they've grown revenue by 15.44%, and have enjoyed revenue growth of 392.31%. In 2016, CHTR closed on their acquisition of Time Warner Cable, so the 5-year number is misleading. Switching over the COGS (cost of goods sold), it's slightly lagged behind revenue which is good. COGS grew 4.39% YoY, 14.15% in the last 3 years, and 759.23% over the last 5 years. Again, this COGS increase is affected by the TWC acquisition. Finally, taking a look at Net Income, we're shown a pretty inconsistent mess. Net Income Growth 12/31/15 -> 12/31/20 We see a lot of spikes and downturns throughout the first 3 years followed by a consistent and large increase in the last 2 years. To quantify that, we've seen 92.14% Net Income growth YoY, 161.78% growth over the last 2 years, and -67.47% Net Income growth in the last 3 years. Margins CHTR currently has a 6.70% current Net Margin. This compares well with the 3.64% margin seen a year ago and poorly with the 23.80% margin seen 3 years ago. Assets/Debt CHTR has total assets of 144.19B, cash on hand of 1.28B, long-term debt of 77.95B, and total liabilities of 110.48B. Subtracting long-term debt from total liabilities, we see that CHTR's COH cannot cover its short-term liabilities. Assets Growth 12/31/15 -> 12/31/20 Liabilities Growth 12/31/15 -> 12/31/20 Looking at trends, we see that both liabilities and assets rocketed following their acquisition of Time Warner Cable. Following that initial spike, assets have slowly decreased and liabilities have slowly increased. Dividends CHTR doesn't currently pay a dividend, however, I can see it paying one in the near future for a couple of reasons. First of all, they have the Free Cash Flow to support one. In Q4 2020, CHTR brought in 1.65B in Free Cash Flow. Comparing this to Comcast which pays a 1.76% dividend and only brought in 1.52B in Free Cash Flow, I think it's not outlandish to say CHTR could easily afford to pay a 1-2% dividend. The other reason is that they're in a defensive sector with poor growth prospects going forward. Cable is declining and the other sectors they're in are low-margin and high-competition. The only way they're going to be able to attract shareholders in these market conditions is to pay a handsome dividend. Price Ratios/Other CHTR has a current PE of 40x, which is higher than the average telecom sector PE of 29.65x. In the same vein, CHTR has a PEG of 2.1x which is decent considering the abundance of frothy valuations in today's market. CHTR has a current ROE of 9.40% implying that they're moderately efficient at generating income. To further put that ROE number in perspective, Comcast has an ROE of 14.40%, AT&T has an ROE of 9.06%, and Dish has an ROE of 14.02%. DCF I calculated 2 scenarios. The first was assuming they continue the current year's revenue growth and grow 4.9% annually. I used a 7.5% Discount Rate for this scenario and, under those conditions, I got a fair value of $682.38 representing a >10% upside. In the second scenario, I used far more conservative, and, in my opinion, more realistic inputs. I assumed a 2.5% revenue growth rate and a 7.5% Discount Rate. Using these new inputs, I got a fair value of $556.87 representing a downside of -10.1% PE Valuation Using a PE Value of 49.95x (the average PE over the last year), I get a fair value of $771.23 which implies a potential upside of 24.63%. Valuation Takeaways Averaging my conservative DCF price target with my more optimistic PE valuation, I get a probable fair value of $664.05 which implies a potential upside of 7.30%. Risks For any business of any size, there are risks. Here are some of the biggest ones for Charter:
Conclusion Despite its size, Charter is far from a safe play. Its large debt and exposure to cable are unappealing. Couple that with no current dividend, slow rates of growth, high competition, and a low margin of safety and you get a stock to stay away from. [link] [comments]  |
| Hindenburg Research - Short Thesis on Ormat Posted: 01 Mar 2021 09:23 AM PST |
| Greensill Capital Discussing Insolvency After Credit Suisse Fund Freeze Posted: 01 Mar 2021 11:20 PM PST |
| Bitcoin: At the Tipping Point - Citi GPS Global Perspectives & Solutions March 2021 Posted: 01 Mar 2021 09:37 PM PST |
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