January 26, 2022

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After Outperforming Comcast & AT&T This Year, Is Charter Stock Still A Buy?

Charter Communications (NASDAQ: CHTR) , the second-largest U.S. cable services provider, has seen its stock perform well, rising by close to 35% year to date. The stock is also up 80% from its March 2020 lows, as the work from home trend proved a significant tailwind for Charter’s high-speed Internet business with the company also posting stronger than expected results over the last two quarters. Charter’s stock has also outperformed its peers Comcast (which is up about 12%) and AT&T (down -20%). So what are the trends driving Charter performance? Is the stock a buy at current levels? Let’s take a look at the company’s fundamental performance and the broader trends driving the stock.

What Has Driven Charter’s Performance In Recent Years?

Charter’s stock price has increased from $285 per share at the end of 2018 to about $650 currently, a substantial increase of about 130%. Let’s take a look at Charter’s performance over the last few years for a sense of how the company has been faring and what has driven its stock price gains. While Revenues stood at around $43.6 billion in 2018, they have growth to over $47 billion over the last 12 months, driven by higher demand for Internet services. Net Income Margins rose from 3.5% in 2018 to about 5.5% over the last 12 months, with Net Income rising from $1.5 billion to $3.1 billion in the same period, driven by strong Internet subscriber additions, which helped Revenues grow faster than costs. Charter’s EPS has expanded from around $5.30 in 2018 to almost $13 over the last 12 months, driven partly by aggressive share buybacks. Total shares outstanding has decreased from levels of around 285 million in 2018 to 203 million currently. Charter’s trailing P/E multiple rose from around 54x in 2018 to over 85x currently, based on last twelve month earnings. What Has Driven Charter Stock’s 129% Jump Since 2018?

What Are The Key Trends Driving Charter Stock?

With people working and entertaining themselves from home through Covid-19, the demand for high-speed broadband connections has soared. Charter’s total base of Internet users rose 8.8% year-over-year, to 28.6 million as of Q3 2020. The company added 537k internet customers over the third quarter alone, marking a 41% jump compared to last year. While Revenues have expanded due to the growing Internet subscriber base and higher revenue per user, the impact on the company’s earnings has been more pronounced given that the cable business incurs significant fixed costs related to setting up infrastructure, with incremental costs related to adding and servicing new customers being very low. For example, over Q3, EPS came in at about $3.90, up from $1.74 a year ago, and compared to a consensus of about $3.10.

While the current momentum is strong, will Charter sustain this momentum post-Covid? While broadband penetration in the U.S. is already high and the current growth that Charter is seeing is likely to slow considerably post the pandemic, we think the stock could remain a reasonably good bet. As the digitization of the economy gathers pace beyond Covid-19, people are likely to place a higher value on their home Internet connections, benefiting the likes of Charter, and potentially giving them room for price increases. Moreover, cable companies are at an advantage as they can upgrade networks and add speed and capacity relatively more seamlessly and cost-effectively compared to wireless and phone companies. Charter’s stock now trades at roughly 47x 2020 projected 2020 results and about 32x projected 2021 earnings. Even with incremental customer adds, price increases, and continued share repurchases, the company should be able to drive EPS growth, justifying its valuation.

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