CHTR - Charter Communications

[scorpioncapital]

I do not think the divergence between world and USA can grow so big in this field,that's why I am strictly limiting percentage of charter in my portfolio. There are risks.

[rogermunibond]

Scorpion - have you heard about US health care? :)

[merkhet]

Scorpion - have you heard about US health care? :)

 

lol :D

[Munger_Disciple]

I think US fixed broadband service is a great value for money. I used to pay $45 per month in 1997 for 10Mbps HSD service from my cable company Time Warner Cable. I live in the same neighborhood in Southern California and I now pay $65 per month for 300Mbps HSD service (and it was only $50 until recently for 100Mbps) and the quality of service is excellent. So the speed went up 30X and the price increased modestly in 23 years. The price increase equates to 1.6% per annum which is well below the inflation rate for this period while data rate went up 30X. During this period the cable company made enormous investments in infrastructure to enable 1 Gbps connections to homes. 

 

If you look at the price increases for all my other utilities, the CAGR is much higher and well above the rate of inflation. The worst is the water utility monopoly 100% owned and controlled by my city government. Closely following the water is electricity and the prices went thru' the roof in the last 20 years. I cannot say I saw improvement in the quality of my water or electricity.

 

Finally the infrastructure cost to deploy HSD services is much higher on average for the US because of geography and the lower density of population compared to Japan or Europe. On my numerous trips to Europe I noticed broadband speeds in general are terrible compared to the US especially once you get away from the city centers.

[scorpioncapital]

"The price increase equates to 1.6% per annum which is well below the inflation rate"

 

But how is this a good thing ? Usually the idea for Investors is to earn a return over inflation. I can't quite figure out how charter is doing so well if your California example suggests over 23 years they had no pricing power  , even negative pricing! If this is true in USA it should end up like Europe but it doesn't. I can't figure this out

[Munger_Disciple]

"The price increase equates to 1.6% per annum which is well below the inflation rate"

 

But how is this a good thing ? Usually the idea for Investors is to earn a return over inflation. I can't quite figure out how charter is doing so well if your California example suggests over 23 years they had no pricing power  , even negative pricing! If this is true in USA it should end up like Europe but it doesn't. I can't figure this out

 

Listen to Tom Rutledge on conf calls. We were in the very early innings of the HSD game in 1997 (most people had only dial up access back then) and now the HSD penetration is 50%. Charter is focused on increasing the penetration thus the maximize the usage of its fixed cost plant. This will allow for better efficiencies across the board and allows for the marginal dollar to fall almost 100% to the bottom line.

[rogermunibond]

Water utilities are a case of deferred capex and increased construction costs and EPA regulations layered on the first two.

 

Most cities with water infrastructure installed pre 1950s are in a world of hurt as old mains and sewers fail, the municipal water works lack the project mgmt skill to hold down costs, and the EPA regulations require sanitation/overflow capex on top of that.

 

A real reverse lollapalooza effect.

 

Privatization isn't the answer either.

[Munger_Disciple]

Water utilities are a case of deferred capex and increased construction costs and EPA regulations layered on the first two.

 

Most cities with water infrastructure installed pre 1950s are in a world of hurt as old mains and sewers fail, the municipal water works lack the project mgmt skill to hold down costs, and the EPA regulations require sanitation/overflow capex on top of that.

 

A real reverse lollapalooza effect.

 

Privatization isn't the answer either.

 

I do know one thing that drives these prices out of control: Public sector pensions & healthcare costs in the US and the fact that in blue states like CA public sector unions "own" local governments. Most of the city workers where I live retire at 50 with over 100% of final year salary as starting pension (due to gaming of overtime, which is almost exclusively allocated to employees about to retire in 1-2 years and this overtime is used to calculate pensions), COLA increases, and zero cost healthcare for life.

 

[vince]

Charter bought back roughly 3 million shares in December and roughly 7 million shares in the quarter, both numbers are highs for the year and at the highest prices by far. That's an amount that probably/possibly tells us their confidence is increasing.  That doesn't necessarily mean the quarter will be sensational but I think it means they think that business fundamentals are improving.

[NotSoWise]

If they bought back so much in Dec, I think the 4Q numbers will be strong or v. strong. They are rational people, plus CEO wants to reach the magic number of USD 560, I guess the sooner the better. After the magic number of USD 560 my focus will move from CHTR numbers to insiders (CEO) trading reports.

[vince]

Well the 4th qtr is always a strong one.  Interesting comment from the CFO on last call when he said the 4th would be strong but to also note that it would be a tough comparison to 4th qtr of 2018.  So it could mean that the qtr comes in strong even when comparing to last year.  In addition a Comcast executive made it very clear on the 3rd qtr call that the 4th was coming in strong.  I have also been patiently waiting for Charter to have the ebitda growth that has been a little hard to see....I calculated that if they hadn't repriced their commercial footprint lower, commercial revenues would be climbing 10%, consistent with unit growth (rather than 10% unit and 4% revs) and that would add around 1-1.5% ebitda growth (the unit and rev growth numbers i just used jump around a bit from qtr to qtr but on an annual basis we are making 300 million ebitda less than we should be).  We also have the mobile costs and the tail end of acquisition integration expense.  When I normalize for these things (not making adjustments for pricing, leaving it at 1% even though we eventually will get more robust prices) I get high single digit ebitda growth.  And now that I think about it, we have some pretty aggressive pricing that kicks in very early in the 4th and this could be something making the quarter look especially good...we'll see.

[rtvinvest]

Charter bought back roughly 3 million shares in December and roughly 7 million shares in the quarter, both numbers are highs for the year and at the highest prices by far. That's an amount that probably/possibly tells us their confidence is increasing.  That doesn't necessarily mean the quarter will be sensational but I think it means they think that business fundamentals are improving.

 

Where are you getting these numbers from? When looking at the A/N filings it seems to me that Q3 was bigger in terms of number of shares and total $ amount (due to the large September purchase)

[vince]

Charter bought back roughly 3 million shares in December and roughly 7 million shares in the quarter, both numbers are highs for the year and at the highest prices by far. That's an amount that probably/possibly tells us their confidence is increasing.  That doesn't necessarily mean the quarter will be sensational but I think it means they think that business fundamentals are improving.

 

Where are you getting these numbers from? When looking at the A/N filings it seems to me that Q3 was bigger in terms of number of shares and total $ amount (due to the large September purchase)

 

Been away on vacation for a while, I will have to go back in and take a look.  You may be right about the third qtr being stronger than the 4th, however, the 4th was strong in terms of shares purchased and when you look at the prices paid, definitely a strong statement

[BG2008]

Since 2016, Charter bought back $27.4bn worth of stock at an average price of $345.  At today's stock price of $532/share, this is a 54% value creation or $14.85bn of value that was created mostly with leveraging up the balance sheet to 4.5x to buy the shares. 

 

Organic growth, good acquisition, good execution, and financial engineering has made this into a 18 bagger in the past decade.  Just wow.  I wish I read cable cowboys way earlier in my investing career. 

[Spekulatius]

Since 2016, Charter bought back $27.4bn worth of stock at an average price of $345.  At today's stock price of $532/share, this is a 54% value creation or $14.85bn of value that was created mostly with leveraging up the balance sheet to 4.5x to buy the shares. 

 

Organic growth, good acquisition, good execution, and financial engineering has made this into a 18 bagger in the past decade.  Just wow.  I wish I read cable cowboys way earlier in my investing career.

 

When organic growth isn’t present, nothing else matters generally. It is the one factor that rules them all, imo.

[BG2008]

Since 2016, Charter bought back $27.4bn worth of stock at an average price of $345.  At today's stock price of $532/share, this is a 54% value creation or $14.85bn of value that was created mostly with leveraging up the balance sheet to 4.5x to buy the shares. 

 

Organic growth, good acquisition, good execution, and financial engineering has made this into a 18 bagger in the past decade.  Just wow.  I wish I read cable cowboys way earlier in my investing career.

 

When organic growth isn’t present, nothing else matters generally. It is the one factor that rules them all, imo.

 

I am starting to really appreciate that.  I think that's why people who bought NYC rental apartments made a killing.  Rent increases coupled with leverage.  Sure, you can buy a 8% cap in the middle of no where, but you'll still collect that 8% in 10-15 years and your apartment is now older and less competitive. 

[glorysk87]

 

I am starting to really appreciate that.  I think that's why people who bought NYC rental apartments made a killing.  Rent increases coupled with leverage.  Sure, you can buy a 8% cap in the middle of no where, but you'll still collect that 8% in 10-15 years and your apartment is now older and less competitive.

 

That's only true if you don't reinvest that 8% cash yield. If you do, results can be outstanding

 

That was basically Sam Zell's entire strategy early in his career. Buy real estate in off-the-beaten-path cities where he could get a mid-teens cash-on-cash yield (vs. primary cities where one could only get a ~4% yield), and reinvest every cent that his properties generated.

[BG2008]

 

I am starting to really appreciate that.  I think that's why people who bought NYC rental apartments made a killing.  Rent increases coupled with leverage.  Sure, you can buy a 8% cap in the middle of no where, but you'll still collect that 8% in 10-15 years and your apartment is now older and less competitive.

 

That's only true if you don't reinvest that 8% cash yield. If you do, results can be outstanding

 

That was basically Sam Zell's entire strategy early in his career. Buy real estate in off-the-beaten-path cities where he could get a mid-teens cash-on-cash yield (vs. primary cities where one could only get a ~4% yield), and reinvest every cent that his properties generated.

 

Obviously big difference when you are arbitraging 15 vs 4.  8 vs 4.5 is a little different and I would actually take the 4.5 in most instances.  Rent increases doesn't cost cap ex.  When you have 30 year fixed mortgages at 3%, it becomes a very different game. But you need to get that 2-3% annual rent increase assessment right. 

[EricSchleien]

 

I am starting to really appreciate that.  I think that's why people who bought NYC rental apartments made a killing.  Rent increases coupled with leverage.  Sure, you can buy a 8% cap in the middle of no where, but you'll still collect that 8% in 10-15 years and your apartment is now older and less competitive.

 

That's only true if you don't reinvest that 8% cash yield. If you do, results can be outstanding

 

That was basically Sam Zell's entire strategy early in his career. Buy real estate in off-the-beaten-path cities where he could get a mid-teens cash-on-cash yield (vs. primary cities where one could only get a ~4% yield), and reinvest every cent that his properties generated.

 

Yeah - that makes a lot of sense. Just purchased a 9.6% cap property, nothing wrong with it, beautiful interior (just redone), easy to fill with high quality tenants, and putting down 25%. With 0 growth in property value, it comes out to around 20% annualized (net).

 

[CookingByTheNumbers]

I’ve got FY20 FCF at ~$37/share (~40% y/y increase and a FCF yield of ~ 7%). At 18x (Which isn’t unreasonable, CABO trades ~ 25x and justifiably so), that’s a base case of $678/share (28% upside from here).

 

I truly believe when capital intensity declines - currently at 15% - to 14% (thats $6.7b in savings flowing straight to bottom line), a warranted multiple like 20x FCF is justifiable given how more efficient Charter will be at turning EBITDA to FCF as overall margins improve and cap intensity declines. Bull case of 20x FY20 FCF is $753/share or 42% upside.

 

I’d like to argue my numbers are pretty conservative. Let’s also consider Charter’s broadband footprint is still approximately 44% underpenetrated. Ample room for growth without any incremental price increases. Just imagine when they begin implementing price increases on broadband segment?

[Liberty]

how more efficient Charter will be at turning EBITDA to FCF

 

Don't forget the tax shield too. Won't last forever, but it helps.

[Munger_Disciple]

A/N Transactions:

 

http://archive.fast-edgar.com//20200205/ABZCQ22CZ22HS2D2222E22Z22LPWZZ28F222/

http://archive.fast-edgar.com//20200205/A4Z2L22CZ22H52D2222822Z2CF5QZZ28F222/

 

Looks like they entered into a collar transaction on 4M Charter shares: sold calls @$643 and bought puts @$445 with Aug-Sept 2024 expiration dates.

[dwy000]

A/N Transactions:

 

http://archive.fast-edgar.com//20200205/ABZCQ22CZ22HS2D2222E22Z22LPWZZ28F222/

http://archive.fast-edgar.com//20200205/A4Z2L22CZ22H52D2222822Z2CF5QZZ28F222/

 

Looks like they entered into a collar transaction on 4M Charter shares: sold calls @$643 and bought puts @$445 with Aug-Sept 2024 expiration dates.

 

They announced they were putting in place a loan facility backed by their Charter shares so I'm guessing the bank wanted some locking in of value during the loan term.

[vince]

Charter share repurchases are very strong again according to their February filing, and at MUCH higher prices than the average of the last few years.  I repeat that I believe this is a strong indicator that the business is now coasting on a high single-low double digit Ebitda earning power growth rate. 

[CookingByTheNumbers]

Charter share repurchases are very strong again according to their February filing, and at MUCH higher prices than the average of the last few years.  I repeat that I believe this is a strong indicator that the business is now coasting on a high single-low double digit Ebitda earning power growth rate. 

 

I believe Cable EBITDA can certainly grow at a high single - low double digit rate. I have 2020E growing at approx ~9.5%. The co's adj. EBITDA figures are being weighted down by mobile (current net loss), which will continue to consume margins at about 120-160bps.

 

That being said, there is also the possibility of management overstating CapEx reduction and understating mobile's eventual break-even point which will impact FCF growth.