Barclays: The Charter Bull Case Is Based On Misplaced Assumptions

The U.S. cable story may be souring, as the sector is likely to face increasing headwinds from growing competitive pressure on video, a slowdown in broadband growth, levered balance sheets, M&A options becoming uncertain in terms of payoffs, optimistic estimates and valuation, according to Barclays.

The firm downgraded the U.S. Cable & Satellite Communications industry to Neutral and downgraded Charter Communications, Inc. CHTR shares as well.

The Analyst

Barclays analyst Kannan Venkateshwar downgraded Charter fromEqual-Weight to Underweight.

The Thesis

The static competitive environment on which the bull case for Charter was based on looks like a misplaced assumption, analyst Venkateshwar said in a note. Outyear growth expectations, buybacks and potential M&A are part of the bull thesis for Charter, the analyst said.

Despite the company standing to gain from about $1 billion in synergies, Venkateshwar said forward estimates have come down consistently in the last year. 

"In fact, relative to the company's own estimate for 2017 EBITDA in its proxy, we estimate 2017 EBITDA is likely to come in $675 million short," Barclays Venkateshwar said. 

Barclays expects the gap to grow in out years, as the degree of operating leverage estimated for the company could be difficult to achieve, given double-digit programming cost growth, wireless launch cost and reluctance to raise broadband prices.

Barclays indicated that Charter's capital intensity is higher than that of Comcast Corporation CMCSA, as it strives to catch up with past underinvestments. Though Charter's aggressive levered buybacks drive a multiple premium over Comcast, Barclays said this source of strength could come under pressure as the industry structurally changes. 

M&A options have challenging economics, especially given Charter's potential ask, Venkateshwar said. Despite these factors, Charter is two turns more expensive than Comcast, the analyst said. Charter's cash flow growth in the coming years is unlikely to be much different from Comcast's, according to Barclays. 

The Price Action

Charter shares are up over 17 percent year-to-date.

At the time of writing, shares of Charter were up 0.51 percent at $338.

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