CHARTER COMMUNICATIONS INC CHTR
July 31, 2013 - 1:30pm EST by
mitch395
2013 2014
Price: 125.50 EPS $3.71 $6.82
Shares Out. (in M): 108 P/E 34x 18.5x
Market Cap (in $M): 13,550 P/FCF 34x 18.5x
Net Debt (in $M): 14,450 EBIT 2,941 3,317
TEV ($): 28,000 TEV/EBIT 9.5x 8.4x

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  • Malone
  • Broadcast TV
  • Broadband
  • Acquisition
 

Description

Note: FCF/S and EBITDA replace EPS and EBIT, respectively for figures above. 

CEO

Charter Communications (CHTR) is a US-based cable operator run by Tom Rutledge, considered to be the best cable executive inNorth America, and backed by John Malone, the "father of the modern cable system." Tom joined CHTR in February 2012 from Cablevision (CVC) where he delivered ~135% return to shareholders over his seven-year tenure as COO vs. 26% for the S&P 500. During his tenure running cable at CVC, Rutledge drove broadband penetration from 17% to 49%, EBITDA/homes passed from <$250 to >$400 (both industry-leading metrics), and FCF from ($1.1) billion to $550 million; he was also the innovator of the $99 triple-play bundle. Rutledge's success in driving CVC's high speed data penetration, minimizing video subscriber losses, and expanding the company’s commercial services business made him the perfect fit for CHTR. He has upside of 1.3m share and options with a notional value of over $150 million.   


Thesis

  • Broadband penetration – at sub 35%, is the lowest among theU.S.cable companies, and we believe the company could easily get to 40% within the next three years
  • Minimal overlap w/FiOS – under 4% with FiOS (VZ) across geographic footprint vs. CVC/CMCSA/TWC at 45%/15%/12%
  • Operational changes – Rutledge has revamped, simplified, and re-priced triple-play packages to drive product penetration and improve customer value proposition; creates stickiness and better opportunity for ARPU expansion; refocused customer service efforts and added 100 HD channels to top tier package; goal is to increase penetration, extend customer life, further reduce churn, and thereby reduce transaction costs
  • Malone investment – with new $2.6 billion (27% stake) by Liberty Media, market is expecting consolidation of cable industry and future capital return; has recently made public intention to acquire Time Warner Cable (TWC) or other cable assets; in fact, there are at least 15 private cable assets ranging in size from 150,000 subscribers to over 4.5 million that could be viable acquisition candidates; Mediacom, which only has a 1% overlap with FiOS, 1 million customers, and a contiguous network with CHTR's existing footprint looks like a possible candidate
  • Bresnan/Optimum West acquisition – beyond the accretion to FCF/S that Bresnan brings to CHTR, Rutledge's statements around the operational improvements at Bresnan provided confirmation of his plan for CHTR and set a timeline for when performance is set to accelerate, as evidenced below       
 

 

CHTR Today

Bresnan Q4'10

Bresnan Q4'11

Bresnan Q4'12

Broadband Penetration

34.7%

36.8%

39.9%

43.1%

EBITDA per Homes Passed

$224

$227

$220

$261

  • Capex efficiency – current capex spend is 23% of sales, lower cost equipment and exiting investment cycle should lower to peers levels within the next few years
  • Buybacks – in 2011, repurchased $733 million of stock through public and privately-negotiated transactions (~13% of shares in 8 months); focused on deleveraging in 2013/14 to 4.0x-4.5x range, then has ability to do $4.5bn+ of dividends/buybacks over time under new credit agreement
  • Tax assets – will not pay cash taxes until 2017/18, with NOLs per share currently valued at ~$15 ($7bn+ loss carryforwards) and has $9bn+ tax basis


Summary Financial Projections – 2013E includes 1/2 year contribution from Bresnan

 

2012A

2013E

2014E

2015E

2016E

2017E

Sales

$7,504

$8,106

$9,016

$9,570

$10,102

$10,645

EBITDA

$2,694

$2,941

$3,317

$3,564

$3,831

$4,123

FCF

$119

$401

$733

$1,023

$1,383

$1,667

Shares

108

108

108

101

94

86

FCF/S

$1.10

$3.71

$6.82

$10.12

$14.76

$19.42


Risks

  • Competition – telcos, satellites, alternative fiber, over-the-top
  • Programming cost increases – content providers renegotiating contracts at higher rates with escalators
  • Consumer pushback on price increases – programming cost increases flow through to consumers
  • Regulations – will broadband become regulated utility?
  • No M&A transactions – market is pricing in pro forma synergies from combinations
  • Leverage – 5x+ net leverage today
I hold a position with the issuer such as employment, directorship, or consultancy.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

  • Accretive M&A
  • Increasing ARPU
  • Increasing penetration levels
  • Declining capex intensity
  • Buybacks
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    Description

    Note: FCF/S and EBITDA replace EPS and EBIT, respectively for figures above. 

    CEO

    Charter Communications (CHTR) is a US-based cable operator run by Tom Rutledge, considered to be the best cable executive inNorth America, and backed by John Malone, the "father of the modern cable system." Tom joined CHTR in February 2012 from Cablevision (CVC) where he delivered ~135% return to shareholders over his seven-year tenure as COO vs. 26% for the S&P 500. During his tenure running cable at CVC, Rutledge drove broadband penetration from 17% to 49%, EBITDA/homes passed from <$250 to >$400 (both industry-leading metrics), and FCF from ($1.1) billion to $550 million; he was also the innovator of the $99 triple-play bundle. Rutledge's success in driving CVC's high speed data penetration, minimizing video subscriber losses, and expanding the company’s commercial services business made him the perfect fit for CHTR. He has upside of 1.3m share and options with a notional value of over $150 million.   


    Thesis

     

     

    CHTR Today

    Bresnan Q4'10

    Bresnan Q4'11

    Bresnan Q4'12

    Broadband Penetration

    34.7%

    36.8%

    39.9%

    43.1%

    EBITDA per Homes Passed

    $224

    $227

    $220

    $261


    Summary Financial Projections – 2013E includes 1/2 year contribution from Bresnan

     

    2012A

    2013E

    2014E

    2015E

    2016E

    2017E

    Sales

    $7,504

    $8,106

    $9,016

    $9,570

    $10,102

    $10,645

    EBITDA

    $2,694

    $2,941

    $3,317

    $3,564

    $3,831

    $4,123

    FCF

    $119

    $401

    $733

    $1,023

    $1,383

    $1,667

    Shares

    108

    108

    108

    101

    94

    86

    FCF/S

    $1.10

    $3.71

    $6.82

    $10.12

    $14.76

    $19.42


    Risks

    I hold a position with the issuer such as employment, directorship, or consultancy.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    • Accretive M&A
    • Increasing ARPU
    • Increasing penetration levels
    • Declining capex intensity
    • Buybacks

    Messages

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