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February 28, 2007

Charter Communicaitons: Getting Better But Not Good Enough

Charter Communications (CHTR) final 4Q06 results very closely matched the preliminary results reported on February 9th. Revenues rose 11.7% and EBITDA rose 10.3%. Revenues matched analyst expectations and EBITDA was a little ahead due to better than expected margins. A loss of 43,000 basic subs was an unexpected negative and much of the conference call Q&A was used to explaining the issue. CHTR also used the conference call to expand on its recent balance sheet refinancing activities and hint about future moves.

Overall, CHTR is moving in the right direction. New leadership has made a difference. There is now a plan and better explanation of what is happening now and might happen in the future. The company's financial performance is starting to converge with the cable industry with double digit gains in revenue and EBITDA on the back of accelerating growth in VOIP Telephony and the triple play....

CHTR shares have benefited from improved execution, financial performance, and balance sheet refinancing. CHTR is now fully funded thru 2008. Improving financial momentum and reduced liquidity pressures means that the option value of CHTR's equity has improved sharply. But don’t forget that debt is 10-11 EBITDA above the value of all other cable companies. That means that there is no value for shareholders unless CHTR can eventually begin to pay down debt. The company is on the right track but it won’t happen in 2007 and 2008 and beyond that the competitive environment for the cable industry could stiffen. As a result, I would not be long CHTR unless it declined significantly from recent trading levels.

Regarding the basic sub loss, CHTR explained that it re-priced its TV offerings to much of the subscriber base in 4Q. That is a nice way of saying they raised prices more than usual. Some subscribers defected but CHTR feels they weren't losing valuable customers. It sounded like the losses could continue in 1Q as the remainder of the customer base is notified of the price increase. As long as the losses subside following 1Q, I don’t see this as a problem. CHTR is focusing on its better customers who are willing to take the triple play. That is a good strategy for any company but an especially good one for a company that is overleveraged.

While I remain negative on CHTR at current prices, I want o to reiterate that the outlook has improved substantially as the new management team is executing a well thought out strategy. Everything about CHTR has improved over the past year: communication with shareholders, financial performance, clustering of systems, the balance sheet. Management deserves credit.

One final note…Paul Allen was quoted in the press release discussing his bullishness on CHTR and the cable industry. This was a big deal for the analysts as he has been very quiet leading many to wonder if he still had faith in his large investment in CHTR. I have no idea what to read into Allen's sudden reemergence but it will likely get play in follow-up analyst reports.

Posted by Steve Birenberg at February 28, 2007 01:41 PM in Comcast/Cable TV