Over the past six months, Charter’s shares (currently trading at $216.97) have posted a disappointing 17.6% loss while the S&P 500 was down 1.9%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Charter, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Charter Will Underperform?
Despite the more favorable entry price, we're cautious about Charter. Here are three reasons there are better opportunities than CHTR and a stock we'd rather own.
1. Weak Growth in Internet Subscribers Points to Soft Demand
Revenue growth can be broken down into changes in price and volume (for companies like Charter, our preferred volume metric is internet subscribers). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Charter’s internet subscribers came in at 29.68 million in the latest quarter, and over the last two years, averaged 2.7% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.
2. Projected Free Cash Flow Gains to Pump Profits
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict Charter’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 8.1% for the last 12 months will increase to 9.9%.
3. New Investments Aren’t Moving the Needle
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Charter’s ROIC has stayed the same over the last few years. If the company wants to become an investable business, it must improve its returns by generating more profitable growth.
Final Judgment
We see the value of companies helping consumers, but in the case of Charter, we’re out. Following the recent decline, the stock trades at 4.9× forward P/E (or $216.97 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
Stocks We Would Buy Instead of Charter
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