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The Ratings Game: Charter selloff ignores the ‘basic reason to invest’ in cable giant, says analyst

Cable companies saw strong broadband growth earlier in the pandemic but the momentum is slowing, and that’s weighing on shares of Charter Communications Inc. Friday.

While the company posted better-than-expected financial results Friday morning, it disappointed with its pace of broadband subscriber growth. Charter
CHTR,
-4.48%

added 265,000 internet customers in the third quarter, whereas it had added 400,000 in the second quarter. The third-quarter total fell short of Citi Research analyst Michael Rollins’ 355,000 estimate and what he said was the 358,000 consensus view.

“We believe the category broadband results to date raise the risk that the industry subscription growth is quickly slowing to pre-pandemic levels, while we still expect competition from fiber upgrades to accelerate over the next few years,” wrote Rollins, who has a neutral rating and $764 price target on the stock.

Several analysts downgraded Charter’s stock in the weeks leading up to the earnings report, warning of competitive concerns in the industry. Rival Comcast Corp.
CMCSA,
-0.91%
,
which reported results Thursday morning, also fell short with its broadband growth.

Charter Chief Operating Officer Christopher Winfrey noted that based on current trends, the company expects full-year internet subscriber numbers to look more like what was seen in 2018, rather than what was seen in 2019. “Record low churn of every type has not offset the higher loss of selling opportunities from competitors’ churn,” he said on the earnings call.

MoffettNathanson’s Craig Moffett calculated that flat performance with 2018 would imply 251,000 net additions in the fourth quarter.

Charter shares were off 4.5% in Friday trading.

Moffett was among a group of Charter bulls not overly panicked about the threat of new competitive dynamics weighing on broadband growth.

“[W]e get that it’s more fun to ruminate about the dramatic competitive narratives – Convergence Apocalypse! – than it is to look to more measured but less exciting drivers like household formation and homes-passed growth,” he wrote. “But the evidence suggests that the broadband story is a lot more pedestrian than some
would have it.”

New household formation has fallen over the past year, he said, and given the historical importance of this metric to broadband growth, it’s no surprise to him that companies are seeing a slowdown.

Pivotal Research Group’s Jeffrey Wlodarczak keyed in on commentary from management indicating that Charter is winning share in the markets where it operates and also experiencing low churn, or customer turnover.

“Every three or so years investors seem to temporarily forget the basic reason to invest in Charter: They control a dramatically better network/product than their peers in the vast majority of their footprint,” Wlodarczak wrote.

Charter added 244,000 wireless lines in the quarter, suggestive of what some see as a big opportunity for the company. Charter leverages Verizon Communications Inc.’s
VZ,
+0.36%

network for its wireless plans through a mobile virtual network operator (MVNO) structure, and the cable giant recently lowered the price of its offerings.

A two-line household may spend $200 combined on wireless and broadband, Chief Financial Officer Jessica Fischer said on the earnings call, but Charter is “only getting a relatively small piece of that” currently, implying ample room for expansion.

The company is far more penetrated with its broadband business than with this newer wireless business, but one way Charter hopes to appeal to customers is through bundles. Charter’s management team noted that the company is seeing especially low churn among customers who bundle broadband and wireless service.

“We also believe that investors underestimate the power of a converged
wireline/wireless bundle where wireless is sold at a dramatic discount to standalone market pricing,” wrote Pivotal’s Wlodarczak, who rates Charter’s stock a buy with a $1,000 target price.

Moffett liked the wireless trends as well. “We continue to believe that there will be a time when wireless, not video, is Charter’s second largest revenue stream after broadband,” he wrote, while reiterating his buy rating and $817 price target.

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