Stay Away From Charter Communications: Bankruptcy Filing Looming?

The total value of your stock is wiped out when a publicly traded company files bankruptcy. Companies file bankruptcy for various reasons. They include the ability to renegotiate loan terms with creditors while continuing business operations (Chapter 11) or just to sell all of its assets and go out of business (Chapter 7).

For shareholders, bankruptcy spells disaster. Shareholders are the last in sequence to receive any portion of the company assets, if any exist. The secured creditors, usually the bondholders, are paid first followed by the unsecured creditors. When the company exits bankruptcy, new shares are issued and the previous shares are cancelled. This means that the previous shareholders loose the value of their entire investment.

Some of the most notable bankruptcy filings include Enron, WORLDCOM, Global Crossing (GLBC), United Airlines (UAUA), and Delta Airlines (DAL).

One company on our watch-list as a potential candidate for filing bankruptcy is Charter Communications (CHTR). Charter is a communications company specializing in cable, high-speed internet, and phone services. They compete with Comcast (CMCSA), Time Warner Cable (TWC), Verizon (VZ), and the satellite companies.

Charter’s 52-wek high stock price was at $4.93. The company now trades under $1.00 per share. The most critical part of the company’s balance sheet is its debt level. Charter carries $20 billion in debt, with only $541 million in cash. Their debt grade is low which means they pay a substantially higher interest rate as the potential of default is high. Although Charter generates about $6 billion in annual revenues, most of this money goes to service this debt and company expenses. This leaves very little for research and development in new products and services.

Although the largest shareholder in Charter is Microsoft (MSFT) co-founder Paul Allen, he does not seem to be adding new equity into the company nor purchasing additional shares. Charter refinances its debt frequently, but I believe this practice will not prove fruitful much longer. Charter faces new competition in an already crowded digital consumer market. Traditional phone companies are now able to provide cable and other digital services.

If not for the debt load, Charter may be seen as an attractive takeover target. However, the company serves the less dense populated areas in the United States. Charter also sold some of its assets about two years ago. The asset sale was thought to help reduce its debt load. Their debt level has increased since that time.

I would not recommend purchasing Charter. The debt load leaves this company with limited options for growth. Charter also received a notice of delisting from the NASDAQ this past April.

Disclosure: none

Comments

[Julio]

This "article" reads like a paper for a freshman business class at a C level college and is too simplistic for Seeking Alpha's target audience.

[EnergyDiversification]

Charter has high leverage levels and high interest payments. If there are near term dangers of Charter not making debt service requirements, they should be discussed.

Short of that, the author is correct to point out the risk of refinancing in this market environment. However, to put this in perspective, we also need to discuss the strong asset values of cable operators - both physical assets and relatively permanent customer lists.

The history of the cable television industry over the past 15 years is rich in examples of highly leveraged companies. In a few cases, bankruptcies have occurred. We should also point out that as growth has occurred and markets recovered, some cable stocks have realized massive returns. In the 1990s, firms like Cablevision Systems, Adelphia, Charter and others incurred high levels of debt, drew the wrath of conservative equity analysts - and proceeded to deliver multiple 100% returns for investors.

Adelphia and Charter were victims of overly aggressive financing strategies. CVC however did well.

Mediacom Communications (MCCC) currently had high levels of debt - but also trades at a single digit EBITDA multiple (trailing) and has very high levels of insider ownership (50%). This company has been buying back stock and has no near term liquidity risk.

A relatively small increase in cable asset values could yield a huge return on the current stock price. If there is a near term risk at Charter, MCCC would trade down as a reaction - at which point I would be buying more.

Moreover, Mediacom operates in areas with no fiber competition from Verizon and AT&T. Its only high speed internet competition is DSL - and we believe DSL prices will trend higher in the wake of FCC decisions deregulating the pricing of network elements by phone companies, resulting in a more expensive operating enviroment for DSL resellers. This will result in higher DSL pricing, making cable's internet offering more attractive in areas where they compete.

[EnergyDiversification]

Charter has high leverage levels and high interest payments. If there are near term dangers of Charter not making debt service requirements, they should be discussed.

Short of that, the author is correct to point out the risk of refinancing in this market environment. However, to put this in perspective, we also need to discuss the strong asset values of cable operators - both physical assets and relatively permanent customer lists.

The history of the cable television industry over the past 15 years is rich in examples of highly leveraged companies. In a few cases, bankruptcies have occurred. We should also point out that as growth has occurred and markets recovered, some cable stocks have realized massive returns. In the 1990s, firms like Cablevision Systems, Adelphia, Charter and others incurred high levels of debt, drew the wrath of conservative equity analysts - and proceeded to deliver multiple 100% returns for investors.

Adelphia and Charter were victims of overly aggressive financing strategies. CVC however did well.

Mediacom Communications (MCCC) currently had high levels of debt - but also trades at a single digit EBITDA multiple (trailing) and has very high levels of insider ownership (50%). This company has been buying back stock and has no near term liquidity risk.

A relatively small increase in cable asset values could yield a huge return on the current stock price. If there is a near term risk at Charter, MCCC would trade down as a reaction - at which point I would be buying more.

Moreover, Mediacom operates in areas with no fiber competition from Verizon and AT&T. Its only high speed internet competition is DSL - and we believe DSL prices will trend higher in the wake of FCC decisions deregulating the pricing of network elements by phone companies, resulting in a more expensive operating enviroment for DSL resellers. This will result in higher DSL pricing, making cable's internet offering more attractive in areas where they compete.

[matti]

this has been known for years. give me somthing new. don't just regurgitate what others like douglas mcintyre have been saying for years. yet it has not happened. disclosure: i do not own the stock.

[msubobcats]

I worked for a Charter system from 1998 until 2004, had been at the system since 1982.
I had literally put my life into this small, rural system attempting to give them the best service possible with very limited resources. In 2003 I needed a partial knee replacement and 11 months after my surgery was given 1 day to clean out my truck and never return to work. After 20+ years, I did not feel my punishment equalled my crime. As a sideline, as I was unable to do my job in their opinion, I run daily and compete in 5Ks and 10Ks so there never a question of ever finishing each job.
They do not have management that in my opinion have a respect for the customer as many of us in the field have and had. I put in many years trying as hard as possible to do the best for each customer as we were able to do.
The system has since sold to Wave Broadband and in the short time they have owned the plant not alot has changes. The Satellite service (Charter Digital Direct) that complimented the service has gone bankrupt so all the additional channels are no longer available.
Enough of the rant, I just do not believe Charter has credible management. I wish them luck but do not hold out hope they can keep the ship afloat.

[EOTNOCMAN]

Charter has debt, and Charter is performing well Quarter after Quarter. Revenues are growing as is profit and cash flow, chart them! Charter is the least exposed MSO from FiOS with about only 5% of its foot print exposed to that service. But the RBOCs are going to find it difficult to win the MSO vs. RBOC smack down. The MSO's are adding high margin Voice and data, they already have the low end video and the RBOCs are spending Billions upon Billions, I would watch them. If you are worried about MSOs like Charter watch their performance and as they say in business the KEY is "EXECUTING" and they are. The direction is good, and as they improve that financing rate should get better and the debt drain should diminish.

If Charter reports another 9+% increase in revenues again this quarter and again closes the gap on their losses, keep an eye on them to get much healthier, and their stock to get back to $5-6 and stay there. To pass judgment with our evaluating the business, their performance history and the direction of the company, and how it impacts them financially you are not doing your homework, I give you a C- for that article and will tell you that you don't get the whole story by reading Cliff Notes! Charter is not a quick make a ton of money unless you ride the wave of Shorters and brokers who can make a lot of money on this stock because it can be sold either way. But for the long term 12 months or better I say buy until they stop performing.

Guess you got to run a business to understand how a business runs.