Charter: Fears of Slowdown in Core Broadband Business Overblown

Patrick Brennan of Brennan Asset Management presented his in-depth investment thesis on Charter Communications (Nasdaq: CHTR) at Wide-Moat Investing Summit 2018.

Thesis summary:

Charter Communications is the second-largest U.S. cable company with 27+ million customers at the end of Q1 2018. The shares have sold off in 2018 as investors fear a slowing in the core broadband business, the impact of video cord-cutting, and the arrival of 5G fixed wireless, which some worry could be a potential competitor to cable’s core broadband business. Considering the nearly 50% DSL overlap in CHTR’s market, the core broadband business still has multiple years of growth.

While video losses could negatively impact top-line growth, the FCF impact will likely be more muted given the lower gross margin profile, higher cost to service video customers and larger amount of video capex spend. While there are questions about whether there is a reasonable business case for 5G fixed wireless, at worst its impact is likely to be most acute in the largest metropolitan markets where CHTR is underrepresented.

Investors may be underestimating the leveraged equity return that ultimately transpires from a business that will likely generate 7-8% EBITDA growth over the next 3-5 years, maintain leverage at 4-4.5x, pay little in cash taxes, and conceivably repurchase 40-50% of outstanding shares.

By purchasing shares in Liberty Broadband (LBRDK) and GCI Communications (GLIBA), investors can conceivably generate 20+% IRRs by buying already-cheap CHTR shares at “double discounts” as the two Liberty names trade 10-20% below net asset value.

About the instructor:

Patrick Brennan is the founder and portfolio manager of Brennan Asset Management, a Registered Investment Advisory firm based in Napa, CA, which utilizes a concentrated value investing strategy. Patrick has given presentations at multiple value investing conferences, including presentations to The New York Society of Security Analysts (NYSSA), The Nebraska Society of Securities Analysts and presentations on various names at the VALUEx Vail Conferences. Patrick coauthored an article on tracking stocks with Lawrence Cunningham for The Financial History Magazine and Patrick was featured in a write-up of Liberty LILAK in The Private Investment Brief. Prior to founding Brennan Asset Management, Patrick managed portfolios and led research efforts at two value investing firms in California: Hutchinson Capital Management and RBO & Co. Previously, Patrick worked at Mark Boyar & Company, where he led the firm’s research team and helped manage $800 million of assets across individual portfolios, institutional accounts and a mutual fund. Patrick also worked for six years in investment banking and equity research with Deutsche Bank, CIBC World Markets and William Blair & Company. Patrick graduated summa cum laude from the University of Notre Dame with a degree in economics and was inducted into Phi Beta Kappa. Patrick received the Chartered Financial Analyst (CFA) designation in 2002 and is a member of the CFA Institute (formerly AIMR). Patrick is originally from Omaha, Nebraska.

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