Energy Diversification

Stay Away From Charter Communications: Bankruptcy Filing Looming?

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.