On Sept. 2, 2021, Charter Communications Inc. (CHTR, Financial) hit an all-time high: $$818.21. Since then, the share price has melted away like ice cream in August. At the close on April 26, 2023, the stock traded at just $320.63. That’s an awful story for investors who bought at the top.
Despite that dizzying decline, Warren Buffett (Trades, Portfolio) of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) continued to hold the stock as of Berkshire's 13F filing for the fourth quarter of 2022, which ended on Dec. 31. The 13F filing shows Berkshire held 3,828,941 shares of Charter as of the quarter's end, giving it a weight of 0.43% in the 13F portfolio.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Berkshire's Charter investment
Berkshire first established this holding in the second quarter of 2016 by purchasing 9.34 million shares. The average price of the stock during that quarter was $222.75. Berkshire continued growing the holding through the second quarter of 2017 before trimming it steadily ever since, as shown in the following chart:
Between the second quarter of 2017 and when Charter reached its all-time highs, the prices received for the sales were all well above the purchase prices and would have generated significant capital gains. Overall, the position has been a net earner for Berkshire.
At the current price, Berkshire actually remains above water, so if Buffett still believes in the long-term potential, it may be feasible to keep holding. Charter does not pay a dividend, though, so it's not getting anything for waiting.
Is Charter's business in decline?
Whether or not it's a good idea to still be holding this stock depends on whether Charter can recover. First, let’s look at some of the factors that caused the share price to crater so dramatically. We can start with the market-wide price collapse that began in late 2021 or early 2022, depending on the industry. The decline in Charter had begun before the broader dip, but still, I believe Charter’s price would have been affected by it.
Factors unique to Charter also pulled down its share price. For example, its debt has skyrocketed in recent years while cash has remained low, as shown in the below chart, showing Charter is struggling with getting enough cash:
Charter explained in its 10-K for 2022, “We have a significant amount of debt and expect to (subject to applicable restrictions in our debt instruments) incur additional debt in the future as we maintain our stated objective of 4.0 to 4.5 times Adjusted Ebitda leverage (net debt divided by the last 12 months Adjusted Ebitda). As of Dec. 31, 2022, our total principal amount of debt was approximately $97.4 billion with a leverage ratio of 4.47 times Adjusted Ebitda.”
Some investors may be concerned about the amount the company was spending on share buybacks when the price was rising so rapidly. In full-year 2021, Charter spent $17.3 billion to repurchase 25.3 million shares. In retrospect, that doesn’t look good, but even at the time, it must have given pause to some investors. That’s especially true when long-term debt keeps rising. At that point, the only real reason to repurchase shares is to make up for huge stock option compensation packages issued to executives, seeing as it isn't a good use of capital for shareholders.
For broadband and cable operators, investors keep a close eye on metrics such as the number of subscribers and the churn rate. Scanning through the key operating results table in the fourth quarter 2021 earnings release, we see a solid increase in mobile lines, but flat or declining numbers for internet, video and voice lines.
Turning to more recent data, the balance sheet does not look encouraging. The interest coverage ratio is just 2.69. GuruFocus notes, “Ben Graham prefers companies' interest coverage to be at least 5."
On the other hand, one positive is it has a GuruFocus profitability ranking of 9 out of 10, which is very good. It has an industry-leading operating margin of 22.66% and return on equity of 46.81%. The company has been profitable in seven of the past 10 years.
Then, there’s the 10 out of 10 GuruFocus ranking for growth. That’s based on the three-year and five-year revenue growth rates, the predictability of the five-year revenue growth rate and the five-year Ebitda growth rate.
While some investors are concerned about subscriber growth, revenue has grown by an average of 17.10% per year over the past three years. Over the same period, earnings per share without non-recurring items shot up by an average of 60.40% per year.
Valuation
The GF Value chart considers Charter stock to be a potential value trap due to the weak balance sheet combined with the steep sell-off, but I think it's fine because the company is growing its top and bottom lines.
The price-earnings ratio comes in at a modest 10.42, and combined with the five-year Ebitda growth rate of 19.40% per year, we get a PEG ratio of 0.54.
Conclusion
It’s easy to understand why some investors are bearish on Charter Communications given how its price has been ni freefall. It also has a high level of debt, a weak balance sheet and lackluster subscriber numbers, and the way it handles share buybacks combined with the lack of dividend means no concern is given to shareholder returns.
On the other hand, the company still has a lot going for it growth-wise. There is plenty of good news in the fundamentals, profitability and growth. I think the stock has the ability to rebound in the long-term.
