The charter sell-off ignores the “fundamental reason to invest in the cable giant,” says Analyst

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Cable companies saw strong broadband growth at the start of the pandemic, but the momentum is weakening and that weighs on Charter Communications Inc. stocks on Friday.

While the company released better-than-expected financial results on Friday morning, it disappointed with its pace of broadband subscriber growth. Charter CHTR, -4.44% gained 265,000 internet customers in the third quarter, compared to 400,000 in the second quarter. The third quarter total fell short of Citi Research analyst Michael Rollins’ 355,000 estimate, and what he said was the consensus view of 358,000.

“We believe the results to date in the broadband category increase the risk that subscription growth in the industry will rapidly slow to pre-pandemic levels, while we continue to expect competition from fiber upgrades over the next several years will accelerate, ”wrote Rollins, who has a neutral rating and $ 764 price target for the stock.

Several analysts downgraded Charter stock in the weeks leading up to earnings reporting, warning of competition concerns in the industry. Rival Comcast Corp. CMCSA, -0.91%,
which released results Thursday morning also lagged with its broadband growth.

Christopher Winfrey, Chief Operating Officer of Charter, noted that based on current trends, the company expects full-year internet subscriber numbers to look more like 2018 rather than 2019 due to the higher loss of sales opportunities caused by the Competitor churn, ”he said on the conference call.

Craig Moffett of MoffettNathanson calculated that flat performance compared to 2018 would mean 251,000 net additions in the fourth quarter.

Charter stocks were down 4.5% in Friday’s trading.

Moffett was one of a group of charter cops who weren’t too panicky about the threat of new competitive dynamics that weighed on broadband growth.

“[W]I understand the more fun thinking about the competitive dramatic narratives – convergence apocalypse! – Than looking for more measured but less exciting factors like household formation and home growth, ”he wrote. “But the evidence suggests that broadband history is much more pedestrian than some”
would have it. “

Over the past year, household start-ups have declined, and given the historic importance of this metric on broadband growth, it is no surprise to him that businesses are seeing a slowdown.

Jeffrey Wlodarczak, of the Pivotal Research Group, tapped management’s comments suggesting that Charter is gaining market share in the markets it operates in, and is also seeing little churn or customer turnover.

“Every three years, investors seem to temporarily forget the main reason to invest in charter: they control a dramatically better network / product than their competitors in the vast majority of their presence,” wrote Wlodarczak.

Charter added 244,000 cellular lines in the quarter, suggesting what some see as a great opportunity for the company. Charter uses Verizon Communications Inc.’s VZ, + 0.36% network for its cellular plans through a mobile virtual network operator (MVNO) structure, and the cable giant recently cut the price of its offerings.

A two-line household can spend $ 200 on cellular and broadband combined, CFO Jessica Fischer said on the conference call, but Charter is currently receiving “a relatively small fraction of that,” which implies plenty of room for expansion.

The company is far more penetrated with its broadband business than this newer cellular business, but one way Charter wants to target customers is with bundles. Charter’s management team found that the company has had particularly low levels of churn among customers bundling broadband and cellular services.

“We also believe that investors have the power of a convergent
Wireline / Wireless bundle that sells wireless at a dramatic discount from the standalone market price, ”wrote Pivotal’s Wlodarczak, who is pricing Charter stock as a buy with a target price of $ 1,000.

Moffett also liked the wireless trends. “We continue to believe there will be a time when wireless, not video, will be the second largest charter revenue stream after broadband,” he wrote, reiterating his purchase valuation and target price of $ 817.

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