In discussions of publicly held cable stocks, most of the attention goes to Comcast (NASDAQ:CMCSA), Cablevision (NYSE:CVC) and Time Warner (NYSE:TWX), which is in the process of spinning of its cable business. There’s a lot less equity analysis of Charter Communications (NASDAQ:CHTR), and for an obvious reason: Most of the company’s enterprise value is tied up in debt. The company has about $19 billion in debt outstanding, compared to a market cap of a little over $1 billion.
But maybe ignoring the stock is a bad idea. Today, Citigroup’s Jason Bazinet raised his rating on Charter to Buy from Hold, and lifted his price target on the stock to $3.25 from $1.75. The change comes one day after the company reported third quarter results that were less than stellar: the company reported third quarter revenue of $1.388 billion, and a net loss of $133 million. Bazinet described the results as “mostly on the weak side,” with good revenue performance offset by lower margins and lower-than-expected subscriber growth.
Nonetheless, Bazinet thinks Charter’s future looks bright. “Charter’s results are likely to get better from here, not worse,” he wrote in a note this morning. “Simply put, the company hasn’t yet reached the inflection point that Cablevision and (to a lesser extent) Comcast have already enjoyed. Voice upgrades are still not complete. The marketing efforts are still in the early stages. Bundling is still nascent.”
Bazinet asserts that having a mostly rural coverage area provides some advantages over urban-focused cable providers. “[R]ural firms are less apt to see pervasive fiber deployments by the telcos,” he writes. “That’s because the telcos should deploy most of their fiber where the video and data revenues are robust. That’s in the urban markets. And most of those markets exist outside Charter’s footprint….[W]e think rural cable firms could see better operational results than their urban counterparts as we move into 2007 and 2008.”
Bazinet takes a stab at refuting the bear case on Charter. The primary issue is that great heaping pile of debt and a related lack of free cash flow. “[W]e agree there is a lot of debt. But the real question is whether Charter faces a liquidty crisis.” After a recent debt restructuring, he concludes that the answer is no. “[W]ith the debt re-financings, Charter has enough liquidty to focus on operating results for three or more years.”
One final point: Bazinet’s report notes that he went to a Buy rating from a Hold over the summer with the stock at $1.10, then flipped back to a Hold at $1.55, on the theory that the rally mostly reflected short-covering. But the stock moved up anyway, and he missed the nearly 50% move in the stock through yesterday. “In hindsight, it was a poor downgrade,” he declares. “We would have been smarter to keep our Buy rating.” Kudos to Bazinet for the public confession.
Charter shares today are up 20 cents at $2.50.
CHTR 1-yr chart: