« Viacom Third Quarter Earnngs Preview | Main | Viacom: Better But Still Too Early »
November 02, 2005
Charter: A Very Expensive Option
Charter Commications (CHTR) reported mixed results for 3Q05 with EBITDA falling short of expectations while subscriber metrics showed better than expected growth in new services. The company also announce settlement of a dispute over some shares held by Paul Allen in a subsidiary. To be completely honest, I was unable to decpiher the press release on this matter and could not follow the analyst questions on the conference call either. If I can figure it out and it is relevant, I'll post separately.
Overall, given the EBITDA and free cash flow shortfall I see no reason for CHTR shares to trade up off the quarter. Debt currently exceeds the public value of subscribers and barely matches the private value. This leaves no value for shareholders beyond option value related to either a turn to free cash flow or a Paul Allen led bailout. There is no hope for enough free cash flow in the next few years to fix the balance sheet. So you are waiting on cable stocks to rise or for Paul Allen. That is not for me as I'd rather own Comcast (CMCSA/K).
CHTR reported revenue of $1.3 billion, up 5.6%, very slightly short of estimates. EBITDA was $463 million, down 1.7%, well short of estimates of $490 million. Margns contracted sharply as expenses rose for customer service (17.3%), programming (8.8%), administration (5%), marketing (18.8%), and advertising (8.3%). CHTR was poorly put together through overpriced acquisitions of generally weaker cable systems. Now it faces above average competitive risk from satellite due to its more rural footprint. The company is finally facing up the fact that it must invest in its systems via current year operating expenses to improves its customer relationships and add new customers. Management noted that some of the spending was "front end loaded" but I suspect that expenses will remain elevated at least through 2006.
On the positive side, there may be some initial benefit to subscriber metrics from the greater expense level. Analog subs fell a less than expected 10,000, while digital, high speed data, and telephony subs rose more than expected. Management discussed an aggressive push for telephony will continue through 2006. Improved subscriber growth is good but I don’t see anyway CHTR can grow its way out of its debt load to create significant value for shareholders.
Negative free cash flow will lessen in 2006 due to some timing issues with working capital that have hurt free cash flow this year. However, free cash flow will still be negative and on the call management would not respond to a question as to when it might go positive.
Posted by Steve Birenberg at November 2, 2005 10:59 AM
