CHTR - Charter Communications

[marazul]

The delta between Charter and Comcast EBITDA margins has more to with non-video opex per customer than anything else. Rutledge has invested in personnel (insourcing call centers, service, etc), pushing sales, moving analog subscribers to digital, etc. This will accelerate growth but depress margins at the same time. Eventually, growth will slow down and opex will come down as well, resulting in higher margins...I think eventually Charter will ahve higher than 40% EBITDA margins (that is where Comcast is currently at. Reasons: B2B is a higher margin business and keeps growing at an accelerated pace, video keeps losing relevance and broadband is a higher margin line, once Charter achieves a higher level of penetration they will reduce costs (now they are focused on value creating growth, which is rational but affects margins, etc)...Conclusion, there is no structural reason for Comcast to have higher margins than Charter in perpetuity

[Liberty]

https://www.fiercecable.com/cable/charter-outlines-inside-out-wireless-strategy-urges-fcc-to-adopt-county-sized-geographic

[DooDiligence]

https://www.fiercecable.com/cable/charter-outlines-inside-out-wireless-strategy-urges-fcc-to-adopt-county-sized-geographic

 

Nice (I never would have been interested except that I just read Cable Cowboy a month ago.)

 

This is an oldie from the same source:

 

https://www.fiercewireless.com/tech/fcc-votes-to-adopt-new-3-5-ghz-spectrum-sharing-plan-for-innovation-band

 

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What do you think Masa is doing with $S?

 

Here's an old TMF writeup that goes against what I was thinking re: spectrum for $S.

 

https://www.fool.com/investing/general/2015/10/04/sprint-doesnt-need-more-spectrum-it-needs-this-ins.aspx

 

Are they cooking something up with DIS or is the Hulu thing a fluke?

[BG2008]

Nice (I never would have been interested except that I just read Cable Cowboy a month ago.)

 

Same here, that book was so eye opening

[BG2008]

Has there been any updates on Charter's share buyback?

[Liberty]

Has there been any updates on Charter's share buyback?

 

I haven't done the calc based on the BHN disclosure. I'm just waiting for Q4 to come out, that'll be in there. Wouldn't be surprised if they did a substantial amount during Q4 with the lower stock price.

[BG2008]

During the three months ended December 31, 2017, Charter purchased approximately 13.5 million shares of Charter Class A common stock and Charter Holdings common units for approximately $4.7 billion. - Bought back shares at $348

 

For the year ended December 31, 2017, Charter purchased approximately 38.2 million shares of Charter Class A common stock and Charter Holdings common units for approximately $13.2 billion. - Bought back shares at $345

 

As of Dec 31, 2017 - 238.5mm shares outstanding implies a $81bn MC plus $70.2 bn of debt for a TEV of $151bn.  2017 Actual EBITDA is $15.3 bn, Q4 run rate EBITDA is $16.0 bn.  So the TEV/EBITDA is 9.87x and 9.44x respectively.  Debt/EBITDA is 4.6x and 4.4x respectively. 

 

This company is cannibalizing itself in real time.  Shares trade at less than buyback prices. 

 

 

[BG2008]

During the three months ended December 31, 2017, Charter purchased approximately 13.5 million shares of Charter Class A common stock and Charter Holdings common units for approximately $4.7 billion. - Bought back shares at $348

 

For the year ended December 31, 2017, Charter purchased approximately 38.2 million shares of Charter Class A common stock and Charter Holdings common units for approximately $13.2 billion. - Bought back shares at $345

 

As of Dec 31, 2017 - 238.5mm shares outstanding implies a $81bn MC plus $70.2 bn of debt for a TEV of $151bn.  2017 Actual EBITDA is $15.3 bn, Q4 run rate EBITDA is $16.0 bn.  So the TEV/EBITDA is 9.87x and 9.44x respectively.  Debt/EBITDA is 4.6x and 4.4x respectively. 

 

This company is cannibalizing itself in real time.  Shares trade at less than buyback prices.

 

Apologies, the share counts are much higher than 238.5mm as there are an additional 31.7mm partner units and convertible preferred stocks.  So the fully diluted S/O is closer to 274mm.  This implies a MC of $91.2 bn Plus $70.2bn of debt equates to $161.2 which prices CHTR at roughly 10.1x EV/EBITDA run rate and 10.5x TTM EBITDA.  The thesis of Rutledge and Malone buying back an ungodly amount of shares is still relevant. 

[marazul]

Just wanted to add that Charter will likely buyback less stock in 2018 compared to 2017...Leverage is currently close to 4.5x which is near the high end of the range they feel comfortable. FCF generation won´t be significant in 2018 due to high levels of capex...management has already mentioned that the pace of repurchases will slow down

[BG2008]

I read somewhere that in the M&A projections, they had projected $19.5 bn of EBITDA in 2019. I need to find the source.  On that forward metric the current debt/EBITDA is about 3.5x.  I wonder if Malone has an opinion on skating to where the puck is when it comes to debt/EBITDA ratio.  Using a 4.0x DEBT/EBIDA ratio, this would imply another $9-10 bn of buyback via debt increases in the next 2 years and perhaps another $8-10 bn of buyback via FCF.  Still put us in the range of $17-20bn of buyback on a $93bn EV. 

 

If we think $19.5 bn is the right 2019 EBITDA, then in two years, this could look like $93bn less $17-20bn + $78bn of debt = $154-157bn of EV vs $19.5bn of EBITDA or 7.9x EV/EBITDA in 2 years.  More importantly, the MC becomes about 3.9x EBITDA which would imply higher upside upon further deleveraging etc.  Certainly, these figures are much less than the $13.2 bn they spent this year.  It seems going forward the max run rate of buyback is $8-10bn a year. 

 

I love cannibalism when it comes to companies.   

[marazul]

The problem is that they are running behind the proxy numbers for various reasons, so most likely they won't be able to hit those numbers in 2019...besides, the move into mobile will add costs, which will rsult in even lower cash flow figures...I agree with you on the direction of the company though

[walkie518]

Unless someone can correct me, it seems as though Charter is very attractive here?

 

Increasing capex for mobile initiative plus reduction of debt might be the impetus for downward pressure on the stock?  Mgmt is simply buying less shares back than last year too?

 

This doesn't seem to be a reason to sell, but to build a bigger position? 

 

Of course, the floor is not defined, but does anyone have a feel for how sustainable the $11B cash from operations may be?

[marazul]

Think cash flows are very sustainable, market is probably looking at some of the following:

 

-Rising rates are significant negatives for infrastructure assets given the amount of debt employed and the recurring nature of cash flows

 

-As you mentioned, push into mobile and continued elevated capex will delay the growth in fcf

 

-HSD growth is slowing down as penetration increases, this will put pressure on growth

 

-Other threats include video going to OTT and fixed wireless/5g

[walkie518]

Charter is building the scale needed to do it the right way. 

 

Charter's pricing is good and the company is developing a mobile business to improve customer retention as well as aid in the transition to 5G. 

 

I can't help but accumulate shares here...

 

 

[bonkers]

I'm in fact little surprised that they seem to be so much behind proxy numbers. The business should be predictable, management capable, and the proxy was published not too long time ago. I would also guess they did not have an incentive to overstate the projections. But now both cash flow is weaker and capex higher!  :o

 

I still bet they can increase their FCF, but for me there's a large spread between min and max case. Does anyone have some practical way to go about forecasting the next few years out?

[marazul]

The transaction closed more than 6 months later than they originally thought. This delayed the integration, investment, etc...so it will take longer than expected...also market is a bit worse than in 2015-2016...video has declined at a faster pace than expected and ATT has been a bit aggresive with the buildouts

[Spekulatius]

Unless someone can correct me, it seems as though Charter is very attractive here?

 

Increasing capex for mobile initiative plus reduction of debt might be the impetus for downward pressure on the stock?  Mgmt is simply buying less shares back than last year too?

 

This doesn't seem to be a reason to sell, but to build a bigger position? 

 

Of course, the floor is not defined, but does anyone have a feel for how sustainable the $11B cash from operations may be?

 

Higher interest rates are  the likely reason for downwards pressure. Relatively speaking, VHTR actually had held up very well, way better than CMCSA, despite CMCSA having less leverage.

[Liberty]

Malone ran his levered cable model at much higher interest rates for decades, I don't think the currently historically still very low rates will be a problem. Charter had some M&A premium and every time those expectations deflate a bit, a bunch of M&A focused HFs probably move on...

[scorpioncapital]

Maybe we should ask what makes for a prudent vs an inprudent asset financed with leverage?

 

1. The rates should be fixed as long as possible at a low rate.

2. The asset side - the business - must have ability to grow prices above the rate of inflation (studies show cable companies can raise prices inflation + some positive amount)

3. The leverage ratio overall should not be totally imprudent.

4. Refinancing risk should be eyed in relation to possible cash-flows a few years out.

5. Business should not be in decline or have a risk of being in decline.

 

However volatility is higher no matter what because perception of debt differs from reality of debt. So these assets could very well dip much lower than other stocks along the way. I think if you will invest in stocks that use internal leverage, your own personal leverage - if any - should be very strictly controlled. If you invest in stocks that use no leverage - or float, you can afford perhaps a little more leverage yourself. However I am forewarned by what Buffett said that even Berkshire can go down 50% and they have float, permanent, zero cost leverage...so borrower beware!

[Spekulatius]

Malone ran his levered cable model at much higher interest rates for decades, I don't think the currently historically still very low rates will be a problem. Charter had some M&A premium and every time those expectations deflate a bit, a bunch of M&A focused HFs probably move on...

 

I am guessing that Malone purchased and valued cable assets at lower EBITDA multiples back then when interest rates were higher.I also think that the price increases taper out and are lower than they used to be. just my guess, I have not looked at historical numbers closely.  Cable systems do have competition in most areas. Where I live, FIOS for example eats their lunch.

[Liberty]

Malone ran his levered cable model at much higher interest rates for decades, I don't think the currently historically still very low rates will be a problem. Charter had some M&A premium and every time those expectations deflate a bit, a bunch of M&A focused HFs probably move on...

 

I am guessing that Malone purchased and valued cable assets at lower EBITDA multiples back then when interest rates were higher.I also think that the price increases taper out and are lower than they used to be. just my guess, I have not looked at historical numbers closely.  Cable systems do have competition in most areas. Where I live, FIOS for example eats their lunch.

 

There are many variables. He bought the assets at lower multiples, but they were also much smaller and less developed (scale is the most valuable thing in cable), as he was doing a roll up of the industry...

 

Rutledge said that his whole footprint can pretty inexpensively get to a gig, and has a path to 10 gigs of bandwidth. Fiber is competitive but much much more expensive, and so the ROI for overbuilds doesn't make much sense.

[Spekulatius]

utledge said that his whole footprint can pretty inexpensively get to a gig, and has a path to 10 gigs of bandwidth. Fiber is competitive but much much more expensive, and so the ROI for overbuilds doesn't make much sense.

 

I have got. FIOS Gigbit and cable can’t touch it. I actually tried it and switched it toi cable for a while l because they gave me a good offer with 250Mbit, but the issue is not speed, it is ping and packet losses. I ditched cable fairly quickly.

 

Fiber, where it is available  has high market shares and houses when sold listing the availability as a plus. I think it is also getting cheaper to get fiber to the house.

[Munger_Disciple]

I have Charter's 100 Mbps Spectrum internet service in Southern California, and so far never had any problems with ping or packet losses. I have been very happy with the service.

 

Regarding the cost of connecting homes with fiber, I would point out that both Verizon and Google had abandoned their over-build FFTH plans as they realized that ROI was quite poor. Verizon unloaded their FIOS business in CTF regions (California, Texas and Florida) to Frontier, and Frontier is having a hell of a time getting decent return from these properties.

[jgyetzer]

Has anyone listened to any of the recent Tucows conference calls?  They claim they make back their investment in FTTH in two years with a subscribing customer and expect 20-50% uptake over time.  That translates to a pretty good ROI.  They make it sound like they manage to complete the install at a lower cost than other fiber builds.  Maybe they are able to take advantage of smaller markets where they have an advantage that the national providers find too small, but I wonder why large scale fiber build couldn’t replicate their process.

[WayWardCloud]

Sure they could but why would they?

It seems to me that there's already a very expensive infrastructure laid down in the ground (cable) that will easily be upgraded to 1G speeds within a few years, then for a very reasonable additional cost per home can go up to 10G if need be. The average broadband speed today in the US is only ~70Mbps and most people barely ever use the full extend of their bandwidth (or are even aware of what that means). I don't see the incentive for any company to start over from scratch laying down fiber optics to the home everywhere just so they might have an edge in 50 years, when most households will actually feel a need for speeds >10G... We're barely starting to see people migrating from copper DSL to cable for bandwidth reasons.