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October 31, 2005

Charter Communications Third Quarter Preview

Charter Communications (CHTR) shares had a wild ride in the third quarter, falling to less than $1.00 in July, rising to $1.60 in August on the announcement of an exchange offer for company debt, and peaking at $1.80 in September on the announcement that the exchange offer was heavily oversubscribed. Since then, however, the shares have been in a steady decline and now sit at levels last seen just prior to the exchange offer announcement.

The problem for CHTR common is that as public values for cable subscribers have fallen below the multiple of debt to EBITDA on the company's balance sheet. Since the company is unable to sell subs at accretive prices to the current debt level and given that CHTR generates negative free cash flow, there is no scenario for the equity to sustain significant value unless cable valuations head back up....

Comcast (CMCSK/A) trades at 7 times 2006 EBITDA and produces billions a year in free cash flow. CHTR carries debt equal to 9 times its estimated 2006 EBITDA. The sliver of market cap given to the equity places CHTR's total EBITDA multiple at about 9.5 times 2006 estimates. Given the level at which Comcast trades, the market is essentially saying that CHTR has no equity value. I suspect if the company declared bankruptcy that would actually be the case but since bankruptcy doesn’t appear to be a near-term event, CHTR equity is essentially an option value on cable valuations. It is not an option I'd own.

In 3Q05, CHTR is expected to have revenue growth of about 7% to $1.35 billion. EBITDA is projected to grow 4% to just short of $500 million. In the quarter FCF should be a negative $133 million. Full year 2005 FCF is projected at a deficit of $550-600 million.

Basic subs are projected to decline about 25,000, against a gain of 8,000 digital subs, 60,000 high speed data subs, and 20,000 telephony subs. Those sub changes are year-over-year. ARPU per analog video sub is projected to rise 10% to over $75. This growth masks flat video ARPU and is the result of adding data and telephony subs. Investors will closely watch high speed data ARPU which is projected to be flat on a sequential quarterly basis.

Posted by Steve Birenberg at October 31, 2005 02:05 PM in CHTR